C.	U.S. and Private Sector Monitoring and Bilateral Approaches to Address Issues

1.	Bilateral mechanisms for addressing issues

In addition to US efforts through the WTO to encourage China's WTO compliance, the US maintains an active bilateral relationship with China involving both formal high-level meetings as well as informal discussions.  The United States and China maintain three formal vehicles for bilateral discussion: (1) the Joint Commission on Commerce and Trade, (2) the Joint Economic Commission, and (3) the Trade Dialogue.  Charles Freemen, Deputy Assistant U.S. Trade Representative, has described the framework of US-China bilateral discussions on trade and economic matters as follows:

The Administration maintains three formal dialogues with Chinese ministries.  The Commerce Department chairs meetings of the Joint Commission on Commerce and Trade; the Treasury conducts meetings of the Joint Economic Commission with the Chinese Ministry of Finance; and USTR chairs an interagency Trade Dialogue with counterparts from the Ministry of Commerce and relevant other Chinese agencies.  Like many of the informal contacts, these formal occasions are opportunities not merely to discuss bilateral and multilateral trade and economic matters, but are themselves action-forcing events at which significant progress can be achieved.  They also act as an early warning system on trade problems – providing an opportunity to resolve issues before they become broader bilateral irritants.

In addition to these formal processes, the Administration meets frequently on both the Cabinet and sub-cabinet level with senior Chinese officials, and uses such meetings to press the importance of economic issues with Chinese counterparts.  In the case of USTR, Ambassador Zoellick meets or speaks via telephone with PRC Minister of Commerce Lu Fuyuan on a regular basis, has been to China twice since December 11, 2001, and plans to travel to China again for bilateral discussions next month.  Ambassador Josette Sheeran Shiner recently confirmed as Deputy USTR, plans to continue an active dialogue with her counterparts, and other USTR officials meet regularly with Chinese officials on bilateral trade concerns, whether in Washington, Beijing, or at the WTO.  These exchanges are critical opportunities to advance bilateral and multilateral trade and economic matters, and have proven effective in making progress on key U.S. concerns.[1]

Joint Commission on Commerce and Trade

As noted above, the US-China trade dialogue that is chaired by the Department of Commerce is the Joint Commission on Commerce and Trade (JCCT).  The Department of Commerce describes the purpose and activities of the JCCT as follows:

· The US-China Joint Commission on Commerce and Trade (JCCT) was established in 1983 as a forum for high-level dialogue on bilateral trade issues and a vehicle for promoting commercial relations.

· The JCCT works to resolve problems affecting US companies and serves as an umbrella for trade events and World Trade Organization (WTO) technical assistance programs.

· The JCCT is co-chaired by US Secretary of Commerce and China's Minister of Commerce and enjoys strong interagency support on both sides.

· The Commission consists of three working groups covering trade and investment issues, business development and industrial cooperation, and commercial law, as well as a side dialogue on export controls.

· Cabinet-level plenary sessions typically are held annually, while sub-cabinet sessions and subgroup meetings are more frequent and ongoing.

· The Department of Commerce (DOC) consults closely with US industry prior to each session to ensure that companies' most pressing concerns are addressed.[2]

As noted above, the JCCT has three working groups covering trade and investment issues, business development and industrial cooperation, and commercial law.  In addition, the US and China maintain a side dialogue on export controls.  These groups are involved in the following bilateral activities:

· The Trade and Investment Working Group (T&IWG):   The T&IWG is co-chaired by the DOC Assistant Secretary for Market Access and Compliance and China's Ministry of Commerce (MOFCOM) Director General for the Americas.  The T&IWG covers issues related to market access, trade finance, and investment and business facilitation.  T&IWG also provides an important venue where outstanding commercial dispute cases are reviewed and addressed. 

The last T&IWG meeting convened at the directorial level in Washington, DC on August 11, 2003.  The US side raised a number of issues including establishing further cooperation on standards development and stronger intellectual property rights protection.  The US side also proposed strengthening and reinvigorating the T&IWG mechanism by designating a coordinator on each side, regularizing meetings, and maintaining a direct line of communication between working group meetings.[3]

· The Business Development and Industrial Cooperation Working Group (BDICWG):   The BDICWG is co-chaired by DOC Assistant Secretary for Trade Development and MOFCOM Director General of the Department of Science and Technology.  The BDICWG promotes greater commercial cooperation on an industry sector basis.  Industry sub-groups in environmental technologies, medical and pharmaceuticals, information industries, aviation and airport infrastructure, electric power technologies, and motor vehicle and allied products provide an ongoing policy forum for sector-focused discussion of market access and regulatory issues, and commercial cooperation.  US Government agencies such as the EPA, FDA, and the FAA are important partners in supporting sub-group activities.

The BDICWG last convened in Washington in April 2003 to discuss industry sector-specific issues, review industry subgroup progress, and agree upon new priorities and principles for bilateral cooperation. The co-chairs agreed that all subgroups should undertake stronger cooperation on standards as a part of their overall efforts.[4]

· Commercial Law Working Group (CLWG):   The CLWG is co-chaired by the Department of Commerce General Counsel and MOFCOM Director General for Treaty and Law.  The CLWG works to improve commercial relations between the United States and China through discussion of legal issues of mutual interest.  The CLWG has proven a useful forum for seeking reform of China's commercial law system in areas of concern to US companies.  Through the CLWG there have been successful discussions on measures to enhance the recognition and enforcement of arbitral awards in China and the inequitable application of China's border trade policy to goods that compete with US products.

The CLWG last convened in April 2002 in Beijing, where the US raised several concerns including lack of transparency in Chinese regulatory practices, problems with the method of promulgation and content of measures regulating foreign law firms issued by China's Ministry of Justice, and the process of granting marketing approval for generic drugs.

The CLWG also sponsors the US-China Legal Exchange, a series of joint legal seminars that foster mutual understanding of the legal regimes governing trade and investment in both countries.  The seminars offer US audiences the opportunity to learn about the legal reforms taking place in China and provide Chinese participants the chance to learn about US practices.  Under this program, the United States and China send delegations of legal experts to speak on topics of current interest.  Both private sector and government attorneys have been featured at the seminars, which are open to government officials and academicians as well as the local business and legal communities.  In December 2002, Vice Minister of Foreign Trade Long Yongtu led a delegation of Chinese legal experts to the United States to talk about the legal changes necessary for China to implement its WTO accession commitments.  General Counsel Kassinger reciprocated, leading the most recent Legal Exchange delegation to China in November 2003 to discuss both recent developments in corporate governance practices in the United States as well as to discuss a variety of trade remedy measures used to safeguard fair trade between the United States and its trading partners, including China.[5]

· Export Controls Dialogue:   The Bureau of Industry and Security (BIS) meets with officials from MOFCOM's Department of Science and Technology under the Export Controls Side Dialogue of the JCCT.  BIS has generally used the regularized exchange of the JCCT forum to encourage more cooperation from MOFCOM on end-use checks for US strategic goods licensed to China.

The Bureau of Industry and Security co-hosted the Sino-U.S. Export Control Outreach Seminar in Shanghai, China with China's Ministry of Commerce on September 17-18, 2003.  The conference highlighted basic elements of US and Chinese export controls, regulations, and enforcement and was attended by 275 business and Chinese Government participants.  Presenters at the conference consisted of both US and Chinese export control government representatives.  Speakers from both governments were able to share their experience and knowledge of export controls with industry attendees.[6]

Joint Economic Committee

The China-US Joint Economic Committee was established in 1979 and generally has met on an annual basis.  The most recent meeting of the China-US Joint Economic Committee, the 15^th Session, occurred in the United States in September 2002.  The meeting discussed issues related to macroeconomic developments, financial sector issues (including transparency and financial service liberalization pursuant China’s WTO commitments), cooperation on terrorist finance, anti-money laundering and other issues, and international financial institutions.  US participants at the 15^th JEC meeting included representatives from the Treasury, Federal Reserve, Office of the U.S. Trade Representative, Council of Economic Advisors, Securities Exchange Commission, Department of State, and Department of Commerce.  Chinese participants included representatives from the Ministry of Finance, People’s Bank of China, Ministry of Foreign Affairs, Ministry of Public Security, State Development Planning Commission, Ministry of Justice, China Securities Regulatory Commission, China Insurance Regulatory Commission and the Legislative Affairs Office of the State Council.[7]

The Trade Dialogue

In October 2002, the United States and China established a new structure for bilateral trade discussions termed the US-China Trade Dialogue.  As described by the USTR:

The U.S.-China Trade Dialogue is a new bilateral forum designed to bring U.S. and Chinese officials from throughout their governments to discuss bilateral trade issues, resolve potential disputes and foster cooperation on issues within the ongoing Doha global trade negotiations.[8]

The United States and China decided to launch the Trade Dialogue in order to give senior trade officials a chance to meet and discuss trade issues on a regular basis.  Press reports indicated that, under the new initiative, the US and China intended to convene on a quarterly basis.[9]  To date, there have been two Trade Dialogues.  The first occurred in February 2003 when USTR Zoellick traveled to Beijing and the second occurred in November 2003 in Beijing with the US delegation led by Deputy USTR Shiner.

Given China's shortfalls in meeting WTO commitments, bilateral relations, including the Trade Dialogue, have taken on increased importance as a vehicle for addressing China WTO compliance problems.  The Deputy USTR Allgeier described the value of bilateral channels as follows:

When confronted with compliance problems, the Administration uses all available and appropriate means to obtain China’s full WTO compliance, including intervention at the highest levels of government.  The Administration has worked closely with the affected U.S. industries on compliance concerns, and has utilized bilateral channels through multiple agencies, at all levels, to press these concerns.  *  *  *

In furtherance of these efforts, Ambassador Zoellick has met with his Chinese counterparts on numerous occasions.  Most recently, in February of this year, he was in China and raised key WTO implementation and other concerns with Wen Jiabao, who is now China’s Premier, and with the Trade Minister.  This past February, USTR also launched a new trade dialogue with China, led on the U.S. side by then-Deputy U.S. Trade Representative Huntsman. Meanwhile, U.S. Embassy personnel in Beijing, including Ambassador Randt, continue to maintain close contacts with Chinese trade officials at all levels, and Deputy U.S. Trade Representative Deily has developed a good working relationship with her Chinese counterpart at the WTO in Geneva.

These varied efforts are not merely designed to resolve current bilateral trade problems, but also to pre-empt future problems through an early-warning system.  In general, the level of discourse has been quite high, and China’s responsiveness has been satisfactory.  As with any relationship as complex as that of the United States and China, however, resolving problems takes time and energy.  At USTR, we are spending the maximum amount of time and energy on this task.[10]

In its 2003 China compliance report, USTR highlights the following US-China bilateral efforts in 2003.

· 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.[11]

2.	Monitoring programs

(a)	Government

Monitoring of trade agreements generally

Since the 1980s, the United States has entered into more than 400 trade-related agreements.  It is important to the success of these agreements in achieving their goals of liberalized trade and opening market access for U.S. companies that the agreements be effectively monitored and enforced.  Meaningful monitoring and enforcement are also essential to maintaining public support and confidence in the benefits of trade agreements.  Generally, within the federal structure, the Office of the US Trade Representative bears the primary responsibility for monitoring and enforcing trade agreements, but at least 16 other US Government agencies also are active, to varied degrees, in monitoring and enforcement activities, as the diagram below shows.

The President

____

National Economic Council

|

US Trade Representative

Department of Commerce

Department of Agriculture

Department of State

|

Department of Treasury

Department of Labor

|

Other agencies

|

Department of Justice

Department of Interior

Department of Energy

International Trade Commission

Office of Management & Budget

Council of Economic Advisers

|

Department of Defense

Department of Transportation

Department of Health & Human Services

Environmental Protection Agency

Agency for International Development

Source:     US General Accounting Office, International Trade: Strategy Needed to Better Monitor and Enforce Trade Agreements (GAO/NSIAD-00-76, March 2000) at 9 (figure 3).

After USTR, the US agencies with most involvement in monitoring trade agreements are the Departments of Commerce, Agriculture, and State, which conduct their own monitoring and enforcement efforts while also coordinating with USTR.  The Departments of Commerce and Agriculture "have certain statutory monitoring responsibilities for trade agreements," and the Department of State "has an important role in monitoring and enforcing trade agreements because of its foreign policy expertise."[12]  A brief summary of the functions of these primary monitoring agencies is presented below.

USTR:

· primarily responsible for developing and coordinating U.S. international trade, commodity, and direct investment policy.

· leads or directs negotiations with other countries on such matters.

· primary agency responsible for monitoring and enforcing U.S. trade agreements.

· statutorily required to annually identify foreign policies and practices that constitute significant trade barriers and particularly considers whether any identified policies or practices are covered by trade agreements.

· refers to appropriate agency any unfair trade practice inconsistent with provisions of any trade agreement that has significant adverse impact on U.S. commerce.

· authorized to initiate actions to enforce U.S. rights under bilateral and multilateral trade agreements.

· chairs interagency group that oversees the multiple interagency committees that coordinate trade policy.

Commerce:

· general responsibility for major nonagricultural trade functions of the U.S. government, including monitoring and taking certain steps to secure compliance with trade agreements and ensuring that U.S. companies have access to foreign markets.

· statutorily responsible, along with USITC, for administering U.S. unfair trade laws (antidumping and subsidies).

· shares statutory responsibility with USTR for monitoring violations of WTO rules concerning member countries’ subsidy practices.

· trade activities carried out primarily by International Trade Administration.

Agriculture:

· provides technical assistance to USTR on matters pertaining to agricultural trade, including international negotiations on agricultural trade agreements.

· statutorily responsible for implementing and monitoring the agricultural provisions of WTO agreements and NAFTA.

· required to report to USTR and Congress re non-compliance with WTO provisions that adversely affects U.S. agricultural trade.

· Foreign Agricultural Service handles Agriculture’s trade activities and works with USTR and State on international agricultural trade issues.

State:

· advises USTR on the foreign policy implications of any trade-related actions and participates in trade negotiations that have direct and significant impact on foreign policy.

· State’s Bureau of Economic and Business Affairs has overall responsibility for formulating and implementing policy regarding foreign economic matters.

· State's economic officers (through in-country contacts with U.S. businesses and foreign officials) provide instrumental assistance in monitoring and enforcing trade agreements.

Other agencies:

· at least 13 other federal agencies are also involved in the monitoring and enforcement of trade agreements; they generally provide technical/policy input derived from their specialized areas of expertise.  For example:

q Treasury is responsible for developing policies on international monetary affairs, trade and investment, international debt strategy, and U.S. participation in international financial institutions, and advises USTR on the financial services htmects of trade agreements.

q Labor advises USTR on any labor and workers’ rights issues associated with trade agreements.

q Health and Human Services’ Food and Drug Administration helps Agriculture's FAS address other countries’ health and food safety measures affecting U.S. exports.

q U.S. International Trade Commission plays unique role due to broad investigative powers in monitoring trade data and trade agreements.

Inter-agency mechanisms:

· National Economic Council

q cabinet-level organization established in 1993.

q comprised of: the President; Vice President; Secretaries of State, Treasury, Agriculture, Commerce, Labor, Housing and Urban Development, Transportation, and Energy; Administrator of Environmental Protection Agency; Chair of Council of Economic Advisors; Director of Office of Management and Budget; U.S. Trade Representative; Assistants to President for Economic Policy, Domestic Policy, and Science and Technology Policy; National Security Advisor; and other executive departments/agencies as the President may designate.

q coordinates domestic and international economic policy formulation.

q reviews significant trade policy issues; ensures overall trade policy coordination.

· Trade Policy Committee (TPC)

q chaired by USTR; includes State, Agriculture, Commerce, Treasury, and Labor.

q two subordinate bodies - (1) Trade Policy Review Group (management-level) and (2) Trade Policy Staff Committee (senior staff-level).

q subordinate committees comprised of TPC agencies, plus other agencies.

q TPSC operates primarily through network of subcommittees/task forces composed of staff from various agencies and chaired by USTR staff.

q TPSC subcommittees deal with both regional and industry-specific issues, and specialized task forces deal with specific trade issues.

Source:        US General Accounting Office, International Trade: Strategy Needed to Better Monitor and Enforce Trade Agreements (GAO/NSIAD-00-76; March 2000).

In addition, a number the US agencies involved in trade issues, primarily USTR, Commerce, Treasury, State, and the International Trade Commission, are required by statute to prepare a variety of trade-related reports that assist their monitoring and enforcement efforts.[13]

Monitoring of China's WTO commitments

In 2001, as China entered the WTO, the US government viewed the implementation of China's WTO commitments and obligations as critical to the success of China's incorporation into the global trade regime.  Even more so than in the case of a typical trade agreement, the US focused on the need to vigilantly monitor and enforce China's WTO commitments.  In the statute authorizing extension of normal trade relations treatment to China,[14] Congress made the following findings:

The United States Government must continue to be vigilant in monitoring and enforcing the compliance by our trading partners with trade agreements in order for United States businesses, workers, and farmers to continue to benefit from the opportunities created by market-opening trade agreements.

The People’s Republic of China, as part of its accession to the World Trade Organization, has committed to eliminating significant trade barriers in the agricultural, services, and manufacturing sectors that, if realized, would provide considerable opportunities for United States farmers, businesses, and workers.

For these opportunities to be fully realized, the United States Government must effectively monitor and enforce its rights under the agreements on the accession of the People’s Republic of China to the WTO.[15]

Congress therefore authorized appropriations for additional resources to support monitoring of China's compliance with its WTO commitments.  In particular, Congress authorized monitoring activities by the US Trade Representative and the Departments of Commerce and Agriculture.  With respect to the Department of Commerce, Congress authorized appropriations for "monitoring compliance by the People’s Republic of China with its commitments under the WTO." [16]  For USTR, Congress authorized appropriations for additional staffing in "offices relating to the WTO and to different sectors of the economy, including agriculture, industry, services, and intellectual property rights protection, to monitor and enforce the trade agreement obligations of the People’s Republic of China in those sectors.[17]  With respect to the Department of Agriculture, Congress authorized appropriations "for additional staff to increase legal and technical expertise in areas covered by trade agreements and United States trade law, including food safety and biotechnology, for purposes of monitoring compliance by the People’s Republic of China with its trade agreement obligations."[18]  Congress also authorized appropriations to the Departments of Commerce and State for an overseas compliance program of "monitoring in the People’s Republic of China that country’s compliance with its international trade obligations."[19]

In addition, Congress also created two commissions whose purpose is, in part, to monitor the progress of China's compliance with its WTO obligations. 

United States-China Economic and Security Review Commission (USCC) http://www.uscc.gov

· created by Congress in the Floyd D. Spence National Defense Authorization Act for 2001 § 1238, Pub. L. No. 106-398, 114 STAT. 1654A-334 (2000) (codified at 22 U.S.C. § 7002 (2001). · legislative mandate to monitor, investigate, and report to Congress on the national security implications of the bilateral trade and economic relationship between the United States and the People's Republic of China. · consists of 12 members, of which 3 members each are appointed by --     Speaker of the House of Representatives --     President pro tempore of the Senate (as recommended by the majority leader of the Senate --     President pro tempore of the Senate (as recommended by the minority leader of the Senate --     minority leader of the House of Representatives

Congressional-Executive Commission on China (CECC) http://www.cecc.gov

· created by Congress in the China Relations Act of 2000, Pub. Law No. 106-286 (October 10, 2000) (codified at 22 U.S.C. § 6911 et seq.). · legislative mandate to monitor China's compliance with international human rights standards, to encourage the development of the rule of law in the PRC, to establish and maintain a list of victims of human rights abuses in China, and to submit an annual report to the President and the Congress. · consists of: --     nine Senators appointed by the Senate Minority Leader in consultation with Senate Minority Leader --     nine members of the House of Representatives appointed by the Speaker of the House in consultation with the House Minority Leader --     five senior Administration officials appointed by the President

Given the great number of China's WTO commitments, as well as the complexity and breadth of the accession agreement, the task of monitoring and enforcing China's compliance with its WTO obligations is a challenging endeavor.  In response to the increased responsibilities placed on them by China’s accession to the WTO, the US Trade Representative, and the Departments of Commerce, Agriculture and State have focused efforts on improving their ability to monitor China's WTO compliance.

Soon after China's accession, the Department of Commerce described the steps it had taken to initiate its monitoring program.

Commerce's China Team holds semiweekly strategy sessions to review cases and implementation plans.  A new China-specific website (www.export.gov/china) provides US business with detailed information on China's WTO obligations, compliance and market opportunities.  China Team representatives meet regularly with the commercial staff from the Chinese Embassy in Washington, D.C. and Commercial Service officers meet regularly with Ministry of Foreign Trade and Economic Cooperation in Beijing, to review specific market access and compliance problems. A group dedicated especially to monitoring developments relevant to potential unfair trade problems with China also has been established as an offshoot of Commerce’s ongoing work in import monitoring and the enforcement of U.S. rights under the WTO with respect to multilateral subsidy disciplines. Among other things, this group will monitor China’s provision of financial assistance and state aids to industrial enterprises to ensure that they conform to WTO commitments.

* * *

Commerce’s enforcement efforts are part of a coordinated U.S. Government approach to monitoring and enforcing China’s WTO compliance.  In Washington, D.C., the U.S. Department of Commerce, the Office of the U.S. Trade Representative and the Departments of State, Treasury, Agriculture and Labor, play an active role in WTO implementation and monitoring efforts.

In Beijing, Commercial Service officers, along with State Economic officers, Foreign Agricultural Service officers and Customs Attaches, participate in a WTO Implementation Coordination Committee which meets regularly to assess progress and monitor problems, with input from US consulates in Shanghai, Guangzhou, Shenyang and Chengdu.[20]

Also, in furtherance of its monitoring efforts, the Department of Commerce has set up a number of websites including China Gateway (http://www.mac.doc.gov/china/WTOAccessionPackage
NEW.html) maintained by the Office of China Economic Area and China Monitoring (http://ia.ita.doc.gov/trcs/imports/china/china.html) maintained by the Import Administration's Trade Remedy Compliance Staff.

In a recent study, the US General Accounting Office examined how the key federal agencies had organized in order to address China compliance issues.  The GAO reported that USTR, Commerce, Agriculture and State had "reorganized or established teams to better coordinate the activities among the various agency units involved in China WTO compliance," and had added staff in the United States and China to conduct their monitoring efforts.[21]  In addition to intra-agency activities, "USTR established a staff-level interagency working group focused on China WTO compliance to identify, analyze, and resolve problems."[22]  The GAO report summarized these monitoring efforts.

USTR

· In June 2002, USTR created an Office of North Asian Affairs by merging the Offices of China and Japan; this office has primary responsibility for coordinating efforts on China WTO trade issues.

· USTR's General Counsel and other sector/function-specific offices support the North Asian Affairs Office on China trade issues.

· USTR’s Monitoring and Enforcement Unit of the General Counsel's Office has primary responsibility for representing the US if a China-related dispute settlement case is brought before the WTO.

Commerce

· In May 2001, Commerce created an intra-agency China Compliance Team to facilitate compliance monitoring efforts.

· The China Compliance Team is comprised of 6 units and meets twice weekly:

q Market Access and Compliance (MAC) (chair)

q Import Administration

q Trade Development

q U.S. and Foreign Commercial Service (FCS)

q Trade Information Center

q Office of General Counsel

· 2 offices within MAC directly coordinate compliance efforts: Office of China Economic Area and Trade Compliance Center.

USDA

· In December 2001, USDA recognized its need to gather cross-agency expertise to aid in effectively monitoring China’s WTO compliance regarding agriculture.

· USDA created 2 intra-agency task forces (a USDA-wide task force and a working-level task force) within USDA’s Foreign Agricultural Service (FAS).

· 6 USDA agencies participate in the USDA-wide China Task Force, which was created in February 2002 and meets quarterly.

· The FAS-wide China Task Force (established March 2002) meets monthly to develop strategies for resolving China compliance issues.

· 2 divisions within FAS coordinate compliance efforts: the Asia and the Americas Division and the Multilateral Trade Negotiations Division.

State

· State officers at U.S. Beijing embassy took the lead in coordinating compliance monitoring efforts in China.

· U.S. embassy established a WTO Implementation Coordination Committee.

q Committee meets monthly, is chaired by the embassy’s economic minister, and coordinates WTO monitoring, compliance, technical assistance, and outreach efforts.

q Committee is comprised of State officers from relevant sections, and officers from Commerce, USDA, and Customs.

q Committee gathers, summarizes, and communicates information from China to U.S. government agencies in Washington, D.C.

· State's Office of Chinese and Mongolian Affairs is main communications link between US agencies in Washington, DC and U.S. embassy and consulates general in China.

q The office coordinates instructions and other diplomatic dispatches regarding China WTO compliance issues.

q It also coordinates with State’s Bureau of Economic and Business Affairs to obtain sector-specific and other technical expertise on China trade issues.

Inter-Agency Monitoring Group:

TPSC Subcommittee on China WTO Compliance

· The Trade Policy Committee (TPC) is the formal interagency structure led by USTR.

· The TPC has 2 subordinate bodies: Trade Policy Review Group (management-level committee) and Trade Policy Staff Committee (senior staff-level committee subordinate to TPRC).

· In 2001, USTR established a new TPSC subcommittee to focus exclusively on China’s compliance with its WTO commitments.

· The new subcommittee -- TPSC Subcommittee on China WTO Compliance -- is chaired by USTR and replaced an existing China subcommittee.

· Almost 40 officials, representing 14 departments and executive offices, participate in the China compliance subcommittee.

· In December 2001, the China WTO Compliance Subcommittee adopted an action plan with 8 components:

q comprehensive monitoring activities on a coordinated interagency basis, with input from private sector groups;

q regular dialogue with other WTO members;

q outreach to the private sector about the business environment it should expect in China;

q outreach to Chinese officials about their WTO commitments and compliance and its benefits;

q technical assistance and capacity building activities for China;

q active participation in the WTO Transitional Review Mechanism process;

q facilitation of congressional oversight, by providing an annual report to Congress; and

q efforts to seek enforcement of U.S. rights through bilateral and multilateral means, including recourse to WTO dispute settlement procedures, as appropriate.

· During its first year (2002) the China WTO Compliance Subcommittee was very active and met 11 times, at which officials evaluated and prioritized monitoring activities undertaken, reviewed steps taken by China to implement its commitments, and decided on appropriate responses.  However, GAO states that, according to agency officials, much of their monitoring work takes place informally outside of formal meetings.

· The TPSC Subcommittee on China WTO Compliance held public hearings in both 2002 and 2003.

· GAO notes that it took some time for the TPSC subcommittee to "get up to full speed."  This was due to several factors, such as the time needed by the various participants to work out roles and responsibilities, delineate monitoring tasks and set initial priorities.  Also, it was sometimes difficult to obtain timely and accurate translations of Chinese laws and regulations for review.

Source:   US General Accounting Office, World Trade Organization: First-Year U.S. Efforts to Monitor China's Compliance, GAO-03-461 (March 2003) at 6-8, 11-13.

In the US-China Relations Act of 2000, Congress enacted a requirement that USTR submit an annual report to Congress on China's compliance with its "commitments made in connection with its accession to the World Trade Organization, including both multilateral commitments and any bilateral commitments made to the United States."[23]  In its preparation of the compliance report, USTR is required to seek public participation through a public hearing.[24]  To date, USTR has issued its 1^st (Dec. 2002) and 2^nd (Dec. 2003) annual reports to Congress on China’s WTO Compliance.[25]  In both 2002 and 2003, USTR conducted public hearings prior to submitting its annual report to Congress.[26]

The US General Accounting Office has conducted a number of studies related to the monitoring of China's WTO commitments and trade agreements generally.  These studies include the following:

· World Trade Organization: Ensuring China's Compliance Requires a Sustained and Multifaceted Approach (GAO-04-172T) (October 30, 2003).

· World Trade Organization: First-Year U.S. Efforts to Monitor China's Compliance (GAO-03-461) (March 2003).

· World Trade Organization: Analysis of China's Commitments to Other Members (GAO-03-4) (October 2002).

· World Trade Organization: Selected U.S. Company Views about China's Membership (GAO-02-1056) (September 2002).

· World Trade Organization: Observations on China's Rule of Law Reforms (GAO-02-812T) (June 6, 2002).

· World Trade Organization: Status of China's Trade Commitments to the United States and Other Members (GAO/NSIAD-00-142) (May 2000).

· International Trade: Strategy Needed to Better Monitor and Enforce Trade Agreements (GAO/NSIAD-00-76) (March 2000).

The GAO has also established an electronic database of China's WTO commitments.  Because an understanding of China's WTO accession obligations is essential to assessing whether China is abiding by its commitment, and because of the length and complexity of China's accession agreement, the GAO created the electronic database to aid its analysis and to assist Congress, the Administration, and other interested parties in "analyzing, monitoring, and enforcing China's WTO commitments."[27]  The GAO's electronic data base is available at http://www.gao.gov/special.pubs/gaochnawtodb.zip.

Recently, in the 2004 appropriations legislation for Commerce and related agencies, Congress criticized federal agency efforts to date in monitoring and enforcing China's WTO commitments.  In particular, the Conference report adopted language in a House report that found that the International Trade Administration and US Trade Representative had failed to meet their mission to support U.S. businesses.  The conference report stated:

The conferees understand the difficulties in attempting to balance the positive and the negative effects of a free trade agenda.  The conferees are steadfast in their support of America's trade policy to create growth and raise living standards around the globe, and in return to increase the benefits to U.S. workers, farmers, consumers, and businesses.  Yet, the U.S. Government must uphold its responsibility to enforce trade laws, particularly with China. If trading partners do not abide by the rules that are set in the global trading system, then U.S. firms are not competing on a level playing field.[28]

Consequently, Congress appropriated additional funds for USTR and Commerce for monitoring, enforcement, and other China-related activities.  In particular, Congress provided $3 million for Commerce to establish an Office of China Compliance[29] and directed USTR to "increase the number of positions dedicated to enforcing the commitments made by the PRC Government upon accession to the WTO."[30]  Congress also directed USTR "to provide a report detailing steps taken by the PRC Government toward meeting its WTO obligations."[31]

Congress also directed USTR to prepare a report about steps taken to coordinate federal agency monitoring and enforcement efforts respecting trade agreements generally:

The conferees understand that a number of Federal agencies are involved in monitoring and enforcing our trade agreements.  The conferees agree that robust monitoring and enforcement efforts are critical and that such efforts must be well coordinated within the Executive Branch.  Accordingly, the conferees direct the USTR, working with the Department of Commerce and other Federal agencies, to take steps to assure that monitoring and enforcement efforts are coordinated among the Federal agencies to maximize their effectiveness and are based on a strategy that focuses on priority areas of potential trade violations.  USTR is directed to report back to the Committees on Appropriations on these steps within 120 days of the enactment of this Act.[32]

(b)	Private sector

In addition to monitoring by US Government agencies, the private sector also has a strong interest in monitoring China's implementation of its WTO obligations.  To the extent there are problems with China's WTO compliance, US companies are likely to experience the problems first hand through lack of access to business opportunities that were anticipated as a result of China's WTO accession.  As such, they are often the best source for detecting compliance issues and are an important resource for the US Government agencies involved in monitoring China.  The GAO noted that:

U.S. officials involved in China compliance monitoring obtain information from an informal, ad hoc network of business associations and individual companies to get information about Chinese trade practices and policies, to be alerted to market access problems and potential WTO violations, and to help weigh policy options.[33]

A number of private organizations actively monitor China's compliance with WTO commitments and prepare periodic assessments of China's progress available on the internet.  Examples of such groups include the following:

Organization	Information on China WTO Monitoring
US-China Business Council http://www.uschina.org	USCBC Analysis of China's WTO Compliance · China's WTO Implementation Efforts: Year Two (10/03/03) · Testimony to the TPSC  2003 · USCBC Written Testimony to USTR · USCBC Membership Priorities WTO Survey Results · China's WTO Implementation: A Mid-Year Assessment, June 2003 · Testimony before the Subcommittee on E. Asian and Pacific Affairs, Senate Foreign Relations Committee, March 19, 2003 · China's WTO Implementation Efforts: The First Nine Months · Testimony before the TPSC Hearing on China WTO, September 18, 2002 · USCBC written testimony for USTR, September 18, 2002 · China's WTO Implementation Efforts July 2002 · Toward WTO: Highlights of PRC Implementation Efforts to Date September 2001 · Toward WTO: Highlights of PRC Implementation Efforts to Date June 2001 See http://www.uschina.org/public/wto/#wtocompliance
US Chamber of Commerce http://www.uschamber.com	· China’s WTO Record: A Two-Year Assessment (09-18-03), http://www.uschamber.com/press/testimony/030918wto.htm · First Steps: A U.S. Chamber Report on China’s WTO Progress (September 2002), http://www.uschamber.com/press/releases/2002/september/02-137.htm
National Association of Manufacturers (NAM) http://www.nam.org	WTO Compliance Program · The China Challenge - 2/10/2004 · NAM 2003 China WTO Compliance Report - 10/8/2003 · NAM 2002 China Compliance Report - 9/11/2002 · USTR Report to Congress on China’s WTO Compliance, 12-11-2002 - 3/7/2003 · China’s WTO Commitments for 2003 - 3/10/2003 · NAM China WTO Compliance Program - 2/22/2002 · China-WTO Trade Compliance Contacts - 3/10/2003 · Impact of China’s WTO Membership on U.S. Business - 1/8/2002 (Special Report) · NAM One-Stop Web Source on China’s WTO Commitments - 2/22/2002 · WTO Compliance Program/Documents - 2/20/2003 See http://www.nam.org/secondary.htm?TrackID=&CategoryID=1243
American Chamber of Commerce in China http://www.amcham-china.org.cn	· WTO Implementation Report (Fall 2002), http://www.amcham-china.org.cn/publications/position/wto/wto_1.htm · 2003 White Paper - American Business in China, http://www.amcham-china.org.cn/publications/white/2003/en-1.htm
Coalition of Services Industries http://www.uscsi.org	China Working Group · 02/05/2004: Statement o USCC on China’s Compliance with WTO Commitments in Trade in Services (02-050-04) · CSI testimony to Trade Policy Staff Committee on China's compliance with its WTO accession commitments in services trade (10/3/2003) · CSI letter underlining China's issues of compliance with its WTO commitments in services (9/5/2003) See http://www.uscsi.org/groups/china.htm
US Council of International Business (USCIB); http://www.uscib.org/index.html	· Re China: http://www.uscib.org/index.html?documentID=2758 · Written Comments re China's WTO Compliance (09-10-03); http://www.uscib.org/%5Cindex.html?documentID=2742.
International Intellectual Property Alliance (IIPA) http://www.iipa.com	· IIPA testimony before USCC on China's failure to comply with its WTO commitments on copyright protection and enforcement and market access (February 6, 2004) · IIPA Comments Concerning China's Compliance with WTO Commitments (September 10, 2003) See http://www.iipa.com/countryreports.html

In addition, many private sector companies, trade industry groups, labor unions and policy coalitions monitor China's WTO compliance with respect to their particular fields of interest.  These groups support US monitoring efforts by informing the USTR and other agencies about Chinese business practices and any problems US companies are experiencing with market access.  They also are active in submitting comments to the TPSC Subcommittee regarding China's WTO compliance.  These groups include the following:

· Advanced Medical Technology Association	· Grocery Manufacturers of America
· AFL/CIO	· International Anti-Counterfeiting Coalition, Inc.
· AgBiotech Planning Committee	· International Intellectual Property Alliance
· American Bar Association	· National Cattlemen’s Beef Association
· American Forest and Paper Association	· National Cotton Council
· American Insurance Association/American Council of Life Insurers	· National Electrical Manufacturers Association
· American Iron and Steel Institute	· National Food Processors Association
· American Soybean Association	· National Food Processors Association
· American Sugar Alliance	· Pharmaceutical Research and Manufacturers Association
· Association of American Publishers, Inc.	· Recording Industry Association of America
· Automotive Trade Policy Council	· Semiconductor Industry Association
· Blue Diamond Growers	· U.S. Grains Council
· Central Soya Company	· U.S. Wheat Associates/Wheat Export Trade Education Committee
· Coalition for a Sound Dollar	· U.S. Motorcycle Manufacturers Association
· Conference of Asia Pacific Express Carriers	· UPS
· Distilled Spirits Council of the United States, Inc.	· U.S. Information Technology Office
· Federal Express	· U.S. Wheat Producers
· The Fertilizer Institute	· Wal-Mart
· Global Alliance for Trade Efficiency	· Wine Institute
Source:   USTR, 2002 Report To Congress On China’s WTO Compliance (December 11, 2002); USTR, 2003 Report To Congress On China’s WTO Compliance (December 11, 2003).

3.	Issues of importance identified in first two years[34]

In the course of monitoring the first two years of China's WTO membership, U.S. government and private sector groups have identified a number of areas that raised questions and concerns about the degree of China's compliance with WTO obligations and protocol commitments.  To date, the US Trade Representative has issued reports regarding China's implementation of its WTO commitments during 2002 and 2003.  The 2003 China WTO compliance report found that China’s implementation efforts failed to meet its commitments in important areas, and that, in some cases, China has imposed new or additional trade barriers.  USTR identified compliance problems in many areas, including the following:

· 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., potential restrictions on the ability to sell imported and China-made autos from the same location);

· SPS (new requirements on seafood and 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);

· 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).[35]

The following describes some of the more prominent and important issues of concern that have been raised with respect to China's WTO compliance.

(a)	Trading rights

One of the most important commitments made by China in acceding to the WTO was in the area of trading rights.  The area of trading rights covers both the right to import products into, and export products from, China.  Access to and liberalization of trading rights is fundamental to a company's ability to conduct the full range of business in China.

Before accession, China restricted trading rights both as to the number and type of enterprises that could operate in China.  USTR has described the period before accession as follows:

In the trading rights area, until shortly before its WTO accession, China severely restricted the number and types of enterprises that could import or export, and it also restricted the products that a particular enterprise could import or export. For the most part, China confined trading rights to certain state-owned trading and manufacturing enterprises, which could import or export goods falling within their approved scopes of business. China also granted limited trading rights to foreign-invested enterprises, which could import inputs for their production purposes and export their finished products.[36]

China's WTO Commitments

In its accession agreement, with respect to trading rights (i.e., the right to import and export goods), China committed to a progressive extension of trading rights for foreign-invested enterprises (FIEs), foreign companies, and foreign individuals.  Upon accession, for both Chinese enterprises and FIEs, China committed to eliminating "any export performance, trade balancing, foreign exchange balancing and prior experience requirements, such as in importing and exporting, as criteria for obtaining or maintaining the right to import and export."[37]

For Chinese-invested enterprises, China agreed to a progressive lessening of the minimum registered capital requirement to obtain trading rights from RMB 5,000,000 for year one (Dec. 2001-Dec. 2002) to RMB 3,000,000 for year two (Dec. 2002-Dec. 2003), and to RMB 1,000,000 for year three (Dec. 2003-Dec. 2004).  By the end of the 3-year phase-in period, China also agreed to eliminate the examination and approval system for trading rights.[38]

For FIEs, China agreed to gradually liberalize the scope and availability of trading rights according to the following schedule:  (1) joint-venture enterprises with minority share foreign-investment would receive full trading rights one year after accession (Dec. 11, 2002); (2) joint-venture enterprises with majority share foreign-investment would receive full trading rights two years after accession (Dec. 11, 2003); and by the end of the third year after accession (Dec. 11, 2004), all enterprises would receive full trading rights.[39]

By the end of the third year after accession (Dec. 11, 2004), China agreed to eliminate its system of examination and approval of trading rights.[40]  At that time, with the exception of products reserved for state trading enterprises, Chinese enterprises, FIEs, and individuals (including sole proprietorships of other WTO Members) would be permitted to export and import all goods.[41]  The import goods reserved to state-trading enterprises include: grain, vegetable oil, sugar, tobacco, crude oil, processed oil, chemical fertilizer, and cotton.[42]  The export goods reserved to state-trading enterprises include: tea, rice, corn, soybean, tungsten ore, ammonium paratungstates, tungstate products, coal, crude oil, processed oil, silk, unbleached silk, cotton, cotton yarn, woven fabrics of cotton, antimony ores, antimony oxide, antimony products, and silver.[43]  With respect to certain products subject to designated trading, China agreed to liberalize trading rights within three years of accession (by Dec. 11, 2004).  These products include: natural rubber, timber, plywood, wool, acrylic, and steel.[44]

China agreed generally to grant trading rights to foreign enterprises and individuals in a non-discriminatory and non-discretionary manner and that any requirements imposed for obtaining trading rights would be for customs and fiscal purposes only and would not constitute a barrier to trade.[45]  China also agreed that requirements relating to minimum capital and prior experience would not apply to foreign enterprises and individuals.[46]

The following box shows the specific commitments regarding trading rights undertaken by China in the Protocol and Working Party Report.

Protocol on Accession, WT/L/432 (23 November 2001)

5.      Right to Trade

1.       Without prejudice to China's right to regulate trade in a manner consistent with the WTO Agreement, China shall progressively liberalize the availability and scope of the right to trade, so that, within three years after accession, all enterprises in China shall have the right to trade in all goods throughout the customs territory of China, except for those goods listed in Annex 2A which continue to be subject to state trading in accordance with this Protocol.  Such right to trade shall be the right to import and export goods.  All such goods shall be accorded national treatment under Article III of the GATT 1994, especially paragraph 4 thereof, in respect of their internal sale, offering for sale, purchase, transportation, distribution or use, including their direct access to end-users.  For those goods listed in Annex 2B, China shall phase out limitation on the grant of trading rights pursuant to the schedule in that Annex.  China shall complete all necessary legislative procedures to implement these provisions during the transition period.

2.       Except as otherwise provided for in this Protocol, all foreign individuals and enterprises, including those not invested or registered in China, shall be accorded treatment no less favourable than that accorded to enterprises in China with respect to the right to trade.

Working Party Report, WT/MIN(01)/3 (10 November 2001)

IV.    POLICIES AFFECTING TRADE IN GOODS

A.     TRADING RIGHTS

1.      General

80.           ***

83.     The representative of China confirmed that during the three years of transition, China would progressively liberalize the scope and availability of trading rights.

(a)       The representative of China confirmed that, upon accession, China would eliminate for both Chinese and foreign-invested enterprises any export performance, trade balancing, foreign exchange balancing and prior experience requirements, such as in importing and exporting, as criteria for obtaining or maintaining the right to import and export.

(b)       With respect to wholly Chinese-invested enterprises, the representative of China stated that although foreign-invested enterprises obtained limited trading rights based on their approved scope of business, wholly Chinese-invested enterprises were now required to apply for such rights and the relevant authorities applied a threshold in approving such applications. In order to accelerate this approval process and increase the availability of trading rights, the representative of China confirmed that China would reduce the minimum registered capital requirement (which applied only to wholly Chinese-invested enterprises) to obtain trading rights to RMB 5,000,000 for year one, RMB 3,000,000 for year two, RMB 1,000,000 for year three and would eliminate the examination and approval system at the end of the phase-in period for trading rights.

(c)       The representative of China also confirmed that during the phase-in period, China would progressively liberalize the scope and availability of trading rights for foreign-invested enterprises. Such enterprises would be granted new or additional trading rights based on the following schedule. Beginning one year after accession, joint-venture enterprises with minority share foreign-investment would be granted full rights to trade and beginning two years after accession majority share foreign-invested joint-ventures would be granted full rights to trade.

(d)       The representative of China also confirmed that within three years after accession, all enterprises in China would be granted the right to trade. Foreign-invested enterprises would not be required to establish in a particular form or as a separate entity to engage in importing and exporting nor would new business licence encompassing distribution be required to engage in importing and exporting.

The Working Party took note of these commitments.

84.       (a) The representative of China reconfirmed that China would eliminate its system of examination and approval of trading rights within three years after accession. At that time, China would permit all enterprises in China and foreign enterprises and individuals, including sole proprietorships of other WTO Members, to export and import all goods (except for the share of products listed in Annex 2A to the Draft Protocol reserved for importation and exportation by state trading enterprises) throughout the customs territory of China. Such right, however, did not permit importers to distribute goods within China. Providing distribution services would be done in accordance with China's Schedule of Specific Commitments under the GATS.

(b)       With respect to the grant of trading rights to foreign enterprises and individuals, including sole proprietorships of other WTO members, the representative of China confirmed that such rights would be granted in a non-discriminatory and non-discretionary way. He further confirmed that any requirements for obtaining trading rights would be for customs and fiscal purposes only and would not constitute a barrier to trade. The representative of China emphasized that foreign enterprises and individuals with trading rights had to comply with all WTO-consistent requirements related to importing and exporting, such as those concerning import licensing, TBT and SPS, but confirmed that requirements relating to minimum capital and prior experience would not apply.

The Working Party took note of these commitments.

2.      Designated Trading

85.     The representative of China stated that China would adjust and expand its list of enterprises under its designated trading regime annually during the transition period, leading up to full implementation of the commitment contained in Annex 2B. The current criteria for enterprises under the designated trading regime included registered capital, import and export volume and the import volume of products subject to designated trading in the previous year, bank credit rating and profits and losses.

86.     Members of the Working Party noted China's commitment that it would phase out the limitation on the grant of trading rights for goods specified in Annex 2B of its Draft Protocol within three years after accession. In responding to questions raised by some members of the Working Party, the representative of China confirmed that China would progressively liberalize the right to trade in such goods by increasing the number of designated entities permitted to import goods in each of the three years of the transition period specified in Annex 2B. The representative of China added that China would eliminate import and export volume as a criterion for obtaining the right to trade these products, reduce minimum capitalization requirements and extend the right to register as designated importing and exporting enterprises to enterprises that used such goods in the production of finished goods and enterprises that distributed such goods in China. At the end of three years, all enterprises in China and all foreign enterprises and individuals would be permitted to import and export such goods throughout the customs territory of China. During the transition period, none of the criteria applicable under the designated trading regime would constitute a quantitative restriction on imports or exports. The Working Party took note of these commitments.

Compliance problems regarding trading rights

In the U.S. Trade Representative's China compliance report for 2002, USTR noted that, pursuant to its commitments, China was drafting regulations to extend trading rights to all domestic and foreign enterprises by the end of 2004, and that it was expected that such regulations would provide for automatic issuance of trading licenses based on routine applications and without imposing threshold requirements such as equity ownership, registered capital, scope of business, prior experience or other threshold requirements.  USTR noted that it would monitor developments regarding trading rights.[47]

In its 2003 monitoring report, USTR noted that, with respect to Chinese enterprises, China appeared to have implemented its trading rights commitments:

With the issuance of the Circular Concerning the Rules on the Administration of Import and Export Rights in July 2001, and the issuance of the Notice on the Rectification of Import and Export Qualification Standards and Verification Procedures in August 2003, China has kept pace with the required reductions in the minimum registered capital requirement for Chinese enterprises to obtain trading rights.  Currently, the minimum registered capital for Chinese manufacturing enterprises is RMB 0.5 million ($60,300), and the minimum registered capital for Chinese trading enterprises is RMB 1 million, except in the central and western regions, where the requirement was RMB 0.5 million.[48]

Otherwise, however, with respect to foreign-invested enterprises (FIEs), USTR identified a number of shortfalls in China's compliance with its trading rights commitments.  First, as to joint ventures with minority foreign ownership, China had not yet made full trading rights available (a commitment that was to be have been fulfilled by December 11, 2002).  Second, with respect to joint ventures with majority foreign ownership, China failed to meet the deadline for issuing provisions allowing for full trading rights to be available (a commitment that was to have been fulfilled by December 11, 2003).[49]  Instead, USTR reported that eligibility for trading rights in China continued to be limited by pre-accession conditions such as requirements related to minimum registered capital, import levels, export levels and prior experience.[50]  These types of conditions on trading rights were common before accession but were to have been eliminated as part of China's accession commitments.[51]

China's current rules regarding FIEs were set out in its Provisional Rules for the Establishment of Chinese-Foreign Equity Joint Venture Foreign Trade Companies, issued in January 2003.  Under these rules, the formation and operation of FIEs (with minority foreign ownership immediately and majority foreign ownership after December 11, 2003) are conditioned on certain requirements, including: (1) in the three preceding years, an average of at least $30 million in annual trade with China ($20 million if the FIE registers in central or western China), (2) a minimum registered capital of RMB 50 million ($6.03 million), and (3) employees experienced in international trade.[52]

Concerned with China's continuing restrictions on the trading rights of FIEs, the United States, throughout 2003, engaged China on this issue through bilateral talks and urged China to conform its trading rights regulations to its WTO commitments.[53]  The United States noted that, by December 11, 2004, China must implement final laws and regulations creating automatic trading rights for all enterprises, including Chinese enterprises, Chinese-foreign joint ventures, wholly foreign-owned enterprises and foreign individuals (including sole proprietorships).[54]

In addition to USTR's China compliance report, the National Association of Manufacturers (NAM) issued a report in 2003 on China's WTO compliance.  Similar to USTR, NAM's report identified compliance problems in the area of trading rights.  NAM reported that China was "not fulfilling its commitment to allow foreign joint ventures to import and sell products (e.g., tires, automobiles, auto parts and industrial equipment) in China."[55]  For example, NAM said that a "major tire company" had experienced restrictions on its trading rights that it had not anticipated.[56]  According to the tire company, the Chinese government allowed trading rights only to "new joint ventures" and required "Chinese and foreign partners to have separately done U.S. $30 million in trade with China over each of the three preceding years."[57]

Compliance positives regarding trading rights

Notwithstanding its identification of compliance problems regarding trading rights, USTR's 2003 report also highlights a positive development concerning trading rights.  In November 2003, one year ahead of China's commitment, China authorized trading rights for certain U.S. automobile companies, which will permit these companies to import significant numbers of U.S.-manufactured automobiles into China and, as well, sell and service them through their own distribution networks.

(b)	Automotive issues (financing, market access)

In the first two years of China's WTO membership, there were a number of compliance-related problems identified relating to commitments regarding automobiles and auto parts.

China's WTO Commitments

With respect to automotive issues, China assumed various obligations and commitments in its accession agreement, among them commitments on phasing out quotas on autos and auto parts and opening up motor vehicle financing services by non-bank financial institutions.  In particular, with respect to auto quotas, China agreed to phase out quotas on motor vehicles and auto parts by January 1, 2005, with a 15% annual growth in the allowable quota until elimination.[58]  China also agreed to detailed rules on quota administration, including criteria for allocating quotas.[59]  In addition, China agreed "to make its quota system operational in time for applications to be accepted and quota allocations to take place by December 31, 2001."[60]

With respect to motor vehicle financing, China agreed that non-bank financial institutions would be allowed to perform auto financing services without any market access or national treatment restrictions.[61]  China assumed this commitment upon accession.

Compliance problems regarding auto quotas

Over the past two years, there have been chronic problems and delays concerning the administration and allocation of quotas on autos.  The U.S. Trade Representative notes generally that "from the outset, China’s quota system was beset with problems."[62]  The State Council did not issue the necessary regulations on time (not until mid-December 2001), and the authorities responsible for implementing the quota system (MOFTEC for some products; State Economic and Trade Commission (SETC) for other products) were late in allocating quotas.  In addition, the regulations themselves appeared to be inconsistent in certain respects with WTO commitments.

In the case of quotas on autos, MOFTEC issued implementing rules shortly after the State Council issued its regulations in mid-December 2001 but the quota application process did not open until February 2002 and MOFTEC did not begin to allocate quotas until late April 2002.[63]  Even then, however, additional problems arose due to lack of transparency.  Parties could not determine clearly whether quotas had been allocated accurately.  Moreover, as the U.S. Trade Representative noted, "it appeared that MOFTEC was creating false fill rates by filling the quota for autos with auto parts (other than the key auto parts allowed by China’s accession agreement).[64]  Thus, by the end of 2002, the auto quotas had not been fully allocated.

The same types of problems with the auto quota system that were experienced in 2002 continued during 2003.  Again, MOFTEC was late in issuing quota allocations, with resulting uncertainty and disruption in the wholesale and retail markets for imported autos.[65]  USTR commented: "Given the persistence of these problems, it appears that China’s poor implementation of its auto quota commitments is not due simply to difficulties in implementing a new quota system."[66]

Throughout 2002 and 2003, the United States voiced its concerns over China's administration of its auto quota system, including problems with the regulations, implementation, transparency, and allocations, in various bilateral meetings and at the Trade Dialogues held in February and November 2003.  In addition, at the WTO, in cooperation with other WTO Members (EC; Japan), the United States raised these issues in the context of the regular meetings of the WTO Committee on Market Access and at the first and second TRM reviews held by the Market Access Committee in September 2002 and October 2003, respectively.[67]

Partial resolution of problems regarding auto quotas

The substantive problems encountered in 2002 and 2003 with China's auto quota system (late allocations; transparency; etc.) have not been resolved.  However, for certain U.S. auto companies, China resolved the problem of auto quotas when, in November 2003:

China announced that certain U.S. auto companies would be authorized to import sizeable quantities of U.S.-produced autos in 2004 without having to use Chinese enterprises holding quotas.  This development effectively ends the auto quota system for these companies as of the end of 2003, one year ahead of schedule.[68]

Compliance problems regarding motor vehicle financing

Despite agreeing that, upon accession, it would open up motor vehicle financing services to non-bank financial institutions, China failed to satisfy this commitment in 2002 and 2003. Because China had not opened this sector as promised, commercial banks were the only financial entities providing motor vehicle loan services.  The U.S. Trade Representative's 2003 compliance report noted that one reason for China's failure to comply was China's long delay in issuing proposed regulations:

It was not until near the end of its second year of WTO membership that China finally issued all of the measures necessary to allow foreign financial institutions to offer auto loans.  In June 2002 and again in September 2002, the Chinese regulator, the China Banking Regulatory Commission (CBRC), released draft regulations for comment.[69]

Even once the regulations were drafted, however, the United States had concerns about whether the regulations were consistent with China's WTO obligations.  In particular, the United States identified "excessive capitalization requirements, excessive net asset requirements and an unnecessarily long approval process" as WTO-inconsistent provisions.[70]  The United States, in cooperation with the U.S. industry, submitted comments to the CBRC regarding both the June 2002 and September 2002 draft regulations.  In addition, the United States pressed China for compliance with its commitments in bilateral meetings during 2002 and 2003 and in meetings of the Council for Trade in Services at the WTO (including in the context of the first TRM in October 2002).[71]

In October 2003, the CBRC finally issued final regulations.  The U.S. Trade Representative noted, however, that "[a]lthough the final regulations reduced the capital requirements from the levels set in the earlier drafts, they still remain relatively high, as the minimum registered capital is RMB 300 million ($36.2 million), and the minimum paid-in capital is RMB 500 million ($60.3 million)."[72]  But, notwithstanding that China had finally issued regulations, the motor vehicle financing sector was still not open to foreign financial institutions until China issued implementing rules establishing the procedures for applying for licenses to provide financing services.  The CBRC issued implementing rules one month later, in November 2003.  The United States has urged China to act expeditiously on license applications.

(c)	Financial services

Banking services

China's WTO Commitments

In its accession agreement, China committed to liberalize banking services over a 5 year phase-in period.  Banking services covered include acceptance of deposits and other repayable funds from the public, lending of all types, financial leasing, payment and money transmission services, guarantees and commitments, and trading of foreign exchange for own account or that of customers.  China agreed that, upon accession, US and other foreign banks would be permitted to conduct foreign currency business with Chinese enterprises and individuals throughout China without restriction and, within certain specified geographic locations, would be permitted to conduct local currency business with FIEs and foreign individuals.  The provision of local currency business services to Chinese enterprises and individuals was subject to a scheduled phase-in.  Within 2 years after accession, US and other foreign banks would be permitted to conduct domestic currency business with Chinese enterprises, subject to certain geographic restrictions, and within 5 years after accession, US and other foreign banks would be permitted to conduct domestic currency business with Chinese individuals, and all geographic restrictions would be lifted.

China's banking services commitments as set out in its services schedule are summarized below.

China WTO Commitments -- Banking Services[73]

At accession 12-11-01	Within 1 year by 12-11-02	Within 2 years by 12-11-03	Within 3 years by 12-11-04	Within 4 years by 12-11-05	Within 5 years by 12-11-06
Geographic coverage: · foreign currency business: no restriction · local currency business: open to Shanghai, Shenzen, Tianjin and Dalian Local currency business qualifications: · 3 years business operation in China · profitable for 2 consecutive years prior to application Clients: · foreign currency business, no restriction · foreign financial institutions licensed for local currency business in one region of China may service clients in any other region that has been opened for such business Licensing: · criteria: solely prudential (no economic needs test or quantitative limits on licenses) · condition to establish a subsidiary of foreign bank:  total assets of more than US$ 10 billion at end of year prior to application · condition to establish a branch of foreign bank:  total assets of more than US$ 20 billion at end of year prior to application · condition to establish a Chinese-foreign joint bank:  total assets of more than US$ 10 billion at end of year prior to application	Geographic coverage: · local currency business:  open to Guangzhou, Zhuhai, Qingdao, Nanjing, and Wuhan	Geographic coverage: · local currency business:  open to Jinan, Fuzhou, Chengdu, and Chongqing Clients: · local currency business:  may provide services to Chinese enterprises	Geographic coverage: · local currency business:  open to Kinming, Beijing, and Xiamen	Geographic coverage: · local currency business:  open to Shantou, Ningbo, Shenyang, and Xi'an	Geographic coverage: · local currency business:  all geographic restrictions removed Clients: · local currency business:  may provide services to all Chinese clients Licensing: · eliminate any existing non-prudential measures restricting owner-ship, operation, and juridical form of foreign financial institutions (including on internal branching and licenses)

China's record of compliance regarding banking services

By and large, over the past two years, China has kept pace with its commitments to liberalize banking services.  Most recently, for instance, consistent with its commitments, the People’s Bank of China (PBOC) announced in December 2003 that foreign banks will be permitted to conduct domestic currency business with Chinese enterprises.  However, the US government has expressed concerns over China's cautious approach to approving banking licenses and branches and with China's imposition of prudential requirements on foreign banks that exceed international norms.

After accession, the People’s Bank of China (PBOC) issued regulations and implementing rules covering foreign-funded financial institutions.  These regulations became effective February 1, 2002.  The U.S. Trade Representative has noted that although PBOC's regulations were timely, China lagged in opening banking services to foreign banks.  In particular, USTR said that PBOC had imposed "working capital requirements and other prudential rules that far exceeded international norms" and that these measures made it more difficult for foreign banks to establish headquarters and branches in China.[74]  At first, in 2002, the PBOC acted slowly on applications by foreign banks to conduct foreign or local currency business with FIEs and foreign individuals, but by October 2003, the PBOC had approved the applications of 13 US banks to establish branches or representative offices in China.  USTR noted, however, that only large major banks could meet the application requirements.[75]

In its 2003 compliance report, USTR notes that the PBOC claims that the domestic currency business of US banks in China, although limited to business with FIEs and foreign individuals, has grown rapidly in the last two years.  According to the PBOC, US banks' deposits and assets increased in 2002 by 75% and 14%, respectively, and in the first half of 2003, further increased by 20% (deposits) and by 10% (assets).

Despite the growth of US banks' presence in China, the US government has repeatedly urged China to conform its prudential requirements for foreign banks to international norms.  Over the past two years, the US raised this issue with China in bilateral meetings in 2002 and 2003, at meetings of the WTO Committee on Trade in Financial Services, and in the context of the first and second TRM meetings of the Financial Services Committee in October 2002 and November 2003.  USTR's 2003 report states that it has achieved a degree of progress with China on this issue as, in December 2003, the PBOC "reduced working capital requirements for various categories of foreign banks by at least RMB 100 million."[76]

Insurance services

China's WTO Commitments

In its accession agreement, China agreed to liberalize the insurance services sector by granting expanded ownership rights to foreign insurers and by phasing out geographic restrictions within three years of accession.  China committed that it would issue licenses only on the basis of prudential criteria, and that it would not apply any economic needs test or quantitative limits.  China also agreed that it would allow internal branching for foreign insurers consistent with the phased elimination of geographic restrictions.  In summary, China agreed to the following phased-in expansion of ownership rights:

	Type of insurance services	Form of establishment permitted
Upon accession	foreign non-life insurers	branch or joint venture with 51% foreign ownership
	foreign life insurers	joint venture with partner of choice with 50% foreign ownership
	large scale commercial risks, reinsurance and international marine, aviation and transport insurance and reinsurance	joint venture with foreign equity of no more than 50%
Within 2 years of accession	foreign non-life insurers	wholly-owned subsidiary
Within 3 years of accession	large scale commercial risks, reinsurance and international marine, aviation and transport insurance and reinsurance	joint venture with foreign equity of no more than 51%
Within 5 years of accession	large scale commercial risks, reinsurance and international marine, aviation and transport insurance and reinsurance	wholly-owned subsidiary

China's insurance services commitments as set out in its services schedule are summarized below.

China WTO Commitments -- Insurance Services[77]

At accession 12-11-01	Within 1 year by 12-11-02	Within 2 years by 12-11-03	Within 3 years by 12-11-04	Within 4 years by 12-11-05	Within 5 years by 12-11-06
Form of establishment: · foreign non-life insurer as branch or JV with 51% foreign ownership · foreign life insurer as JV with partner of choice with 50% foreign ownership · brokerages for insurance of large scale commercial risks, reinsurance, international marine, aviation & transport insurance and reinsurance as JV with foreign equity no more than 50% · other brokerage services unbound · internal branching permitted consistent with phase out of geographic restrictions		Form of establishment: · foreign non-life insurer as wholly-owned subsidiary	Form of establishment: · brokerages for insurance of large scale commercial risks, reinsurance, international ma-rine, aviation & transport insur-ance and reinsur-ance as JV with foreign equity no more than 51%		Form of establishment: · brokerages for insurance of large scale commercial risks, reinsurance, international ma-rine, aviation & transport insur-ance and reinsur-ance as wholly foreign-owned subsidiary
Geographic coverage: · Shanghai, Guangzhou, Dalian, Shenzen and Foshan		Geographic coverage: · Beijing, Chengdu, Chonqing, Fuzhou, Suzhou, Xiamen, Ningbo, Shenyang, Wuhan & Tianjin	Geographic coverage: · no restrictions
Business scope: · foreign non-life insurers may provide "master policy" & large scale commercial risk insurance w/o geographic restriction · foreign insurance brokers may provide "master policy" no later than Chinese brokers · foreign non-life insurers may provide insurance of enterprises abroad as well as property, related liability, and credit insurance of FIEs in China · foreign insurers may provide individual (not group) insurance to foreigners and Chinese citizens · foreign insurers may provide reinsurance services for life and non-life insurance as a branch, JV, or wholly foreign-owned subsidiary, w/o quantitative or geographic restrictions on number of licenses issued		Business scope: · foreign non-life insurers may pro-vide full range of non-life insurance services to foreign & domestic clients	Business scope: · foreign insurers may provide health insurance, group insurance &  pension/annuities insurance to foreigners and Chinese citizens
Licenses: · no economic needs test or quantitative limits · qualifications for foreign insurance institution are: · foreign insurance company with more than 30 years experience in WTO member; · representative office in China for 2 consecutive years; · total assets of more than US$ 5 billion at end of year prior to application (except for brokers); · brokers shall have total assets of more than US$ 500 million	Licenses: · foreign insurance brokers shall have total assets of more than US$ 400 million	Licenses: · foreign insurance brokers shall have total assets of more than US$ 300 million		Licenses: · foreign insurance brokers shall have total assets of more than US$ 200 million
National treatment: · foreign insurance institutions may not engage in statutory insurance business · require 20% cession of all lines of primary risks for non-life, personal accident and health insurance business with appointed Chinese Reinsurance Company	National treatment: · require 15% cession of all lines of primary risks for non-life, personal accident and health insurance business with appointed Chinese Reinsurance Company	National treatment: · require 10% cession of all lines of primary risks for non-life, per-sonal accident and health insurance business with ap-pointed Chinese Reinsurance Company	National treatment: · require 5% cession of all lines of primary risks for non-life, personal accident and health insurance business with appointed Chinese Reinsurance Company	National treatment: · no compulsory cession required

China's record of compliance regarding insurance services

Following accession, China’s insurance regulator, the China Insurance Regulatory Commission (CIRC), issued new insurance regulations covering foreign insurance companies which implemented many of China’s commitments.  However, the new regulations also raised new problems with respect to three important areas: capitalization requirements, transparency and branching.[78]

In its 2003 compliance report, USTR states that CIRC's capitalization requirements are "significantly more exacting" than in other countries and that they "limit the ability of foreign insurers to make necessary joint venture arrangements."[79]  The new regulations also are not transparent in that they allow substantial bureaucratic discretion in licensing actions and do not provide predictability to foreign insurers.  With respect to the issue of branching, even though China made specific commitments concerning branching,[80] the new regulations are vague regarding branching rights of foreign insurers.  Moreover, CIRC has required that non-life insurers that already have branches in China and wish to establish a new branch or sub-branch in China must first establish as a subsidiary.  In USTR's view, this requirement is both costly and unnecessary.[81]  USTR also noted that China has not applied this rule consistently in that CIRC apparently waived it, without explanation, for at least one foreign insurer.[82]

In 2002, the United States held a number of bilateral discussions with CIRC, MOFTEC and the State Council at which it raised its concerns about the issues of capitalization requirements, transparency, and branching.[83]  In cooperation with Canada, the EC, Japan and Switzerland, the US also raised these issues at the WTO before the Committee on Trade in Financial Services in the context of the first TRM in October 2002.[84]  As a result of their bilateral discussions, the US and China agreed to set up a working group to discuss insurance issues, with an emphasis on capitalization requirements and other prudential standards.  The US and CIRC working group first met in December 2002.

Throughout 2003, the US continued to press China on insurance issues through a number of high-level bilateral meetings, including the Trade Dialogues in February and November 2003.  Progress began to be evident when, in August 2003, China issued new draft implementing rules regarding capitalization requirements and transparency.  These draft rules clarify licensing procedures and lower capital requirements for national licenses from RMB 500 million ($60.3 million) to RMB 200 million ($24.1 million) and for branch offices from RMB 50 million ($6.03 million) to RMB 20 million ($2.41 million).[85]

On a positive note concerning China's compliance, USTR reports that CIRC lifted, ahead of schedule, certain geographic restrictions on foreign life insurers.[86]

(d)	Administration of TRQs in agriculture

China's WTO Commitments

Prior to WTO accession, China maintained a quota system on imports of bulk agricultural products.  When China acceded to the WTO, China agreed to expand market access by reducing tariffs on a wide range of agricultural products and committed to ending quotas and establishing tariff rate quotas (TRQs) on the following bulk commodities: wheat, corn, rice, soybean oil, palm oil, rapeseed oil, sugar, wool and cotton.  With respect to the TRQs, China also committed to (1) administering the TRQs transparently and making predictable, uniform, fair and nondiscriminatory decisions based on specified time periods, administrative procedures and requirements, (2) reserving a portion of the TRQs for non-state trading enterprises, (3) progressively expanding the in-quota amount over a 3-4 year implementation period, (4) eliminating TRQs on soybean oil, palm oil, and rapeseed oil by January 1, 2006, and (5) designating a single central authority to allocate and re-allocate TRQs.

The following box shows China's general commitments regarding tariff rate quotas as set out in the Working Party Report.

Working Party Report, WT/MIN(01)/3 (10 November 2001)

7.        Tariff Rate Quotas

112.     *  *  *

115.     The representative of China further noted that, in undertaking market-oriented reform in the agricultural sector, China had made progress in freeing agricultural products from state pricing and in guiding farmers to adjust the structure of agricultural production based on the demands of the market. In connection with that reform process, in the bilateral negotiations with Members, China committed that, upon accession, it would eliminate TRQs on a number of products and subject these only to tariffs. The products concerned were barley, soybeans, rapeseed, peanut oil, sunflower seed oil, corn oil, and cottonseed oil. In addition, China would replace quantitative import restrictions on sugar, cotton and three types of fertilizers (DAP, NPK and urea) by TRQs. The Working Party took note of these commitments.

116.     The representative of China stated that upon accession, China would ensure that TRQs were administered on a transparent, predictable, uniform, fair and non-discriminatory basis using clearly specified timeframes, administrative procedures and requirements that would provide effective import opportunities; that would reflect consumer preferences and end-user demand; and that would not inhibit the filling of each TRQ. China would apply TRQs fully in accordance with WTO rules and principles and with the provisions set out in China's Schedule of Concessions and Commitments on Goods. The Working Party took note of these commitments.

117.     The representative of China confirmed that for the goods listed in Annex 2 of the Draft Protocol that were subject to a TRQ, China would also apply the provisions of its Schedule relating to TRQ administration and related commitments in the Draft Protocol, including the grant of trading rights to non-state trading entities to import the TRQ allocations set aside for importation by such entities. For products in Annex 2 of the Draft Protocol that were subject to designated trading, the representative of China confirmed that China would ensure that additional enterprises granted trading rights in accordance with China's commitments to phase out designated trading would not be disadvantaged in the allocation of TRQ. The Working Party took note of these commitments.

118.     *  *  *

119.     The representative of China confirmed that the role of sub-national bodies would be limited to purely administrative operations, such as receiving applications from end-users and forwarding them to the central authority; receiving queries and transmitting these to the central authority; reporting on allocation and reallocation decisions made by the central authority and providing information regarding such allocations and reallocations upon request; checking the information in the applications to verify that it met the published criteria; notifying applicants of any deficiencies in their applications; and providing applicants with an opportunity to cure deficiencies in their applications. After the central authority decided on allocations of quota to end-users, the sub-national bodies would issue TRQ certificates accordingly. The representative of China also confirmed that China would administer a consistent national allocation (and reallocation) policy for TRQs, that it would not establish a separate process of allocation to sub-national authorities and that decisions regarding all allocations and reallocations to end-users would be made by a single, central authority. The Working Party took note of these commitments.

120.     The representative of China further confirmed that China would grant to any enterprise possessing the right to trade any product pursuant to Section 5 of the Draft Protocol, the right to import goods in Annex 2A of the Draft Protocol that were subject to a TRQ or to an agreed volume of imports by non-state trading enterprises. Such right to import would not extend to the quantity of goods specifically reserved for importation by state trading enterprises. Any enterprise possessing the right to trade pursuant to Section 5 of the Draft Protocol would also have the right to import that portion of a TRQ reallocated to non-state trading enterprises pursuant to the agreed rules on TRQ administration. The representative of China also confirmed that for goods in Annex 2A of the Draft Protocol subject to a TRQ, any enterprise granted the right to trade, pursuant to Section 5 of the Draft Protocol, would be permitted to import such goods at the out-of-quota rate. The Working Party took note of these commitments.

China's record of compliance regarding agricultural TRQs

In the U.S. Trade Representative's China compliance reports for both 2002 and 2003, USTR states that ever since the State Development and Planning Commission (SDPC) (renamed the National Development and Reform Commission (NDRC) after mid-2003 government restructuring) began administering the TRQs after China's accession, a series of problems has undermined market access for US exporters.  USTR's reports[87] identify the following problems with China's administration of agricultural TRQs in 2002:

TRQ Problems in 2002
Delay in issuing regulations	· in 2002, SDPC was late in issuing both draft and final regulations
Flawed regulations	· the regulations failed to provide the required transparency · imposed burdensome licensing procedures · established a separate sub-quota for the processing and re-export trade (contravening China’s accession agreement)
Delay in acting on applications	· SDPC was late beginning the application process
Delay in allocation of TRQs	· allocation of TRQs did not even begin until late April 2002, approximately four months late
Discriminatory allocation of TRQs	· available information indicated that SDPC decided to allocate TRQs in a manner to protect domestic farm interests and maintain the STEs' monopoly
Limited transparency	· SDPC refused to provide specific details on the amounts and the recipients of the TRQ allocations
Violation of market access and national treatment commitments	· SDPC reserved a significant portion of the TRQs for the processing and re-export trade · this practice held down imports' market share in China’s domestic market and created more competition for WTO members’ processed goods in other export markets · re: cotton, more than 60% of TRQs apparently reserved for Chinese companies that process cotton for re-export
Undermine market access commitments Administer TRQs in manner not predictable, uniform and fair	· SDPC allocated a portion of the TRQs for some commodities in smaller than commercially viable quantities · SDPC employed burdensome licensing requirements
Low TRQ fill rates	· 2002 trade data showed extremely low fill-rates for TRQ commodities of most interest to US industry: 7% (wheat);  0.1% (corn),  22% (cotton)

In an effort to address the series of problems identified regarding China's agricultural TRQs, the United States repeatedly engaged China bilaterally in 2002 and noted its concerns at meetings of the WTO Committee on Agriculture, including that committee's TRM meeting in September 2002.  In July 2002, the United States formally requested consultations with China regarding its TRQs administration.  In September 2002, the US and China met in Geneva, where the US presented its concerns and China confirmed its policy of reserving a portion of the TRQs for the export processing and re-export trade.[88]

USTR reported that, in 2003, some progress was made in China's TRQ administration, to the extent that SDPC completed required re-allocation of 2002 TRQs on time and issued 2003 TRQs "close to the prescribed time."[89]  However, the other problems with China's TRQ administration persisted through 2003.  In particular, USTR cited imperfect regulations, lack of transparency, sub-division of the TRQ, small allocation sizes and burdensome licensing.[90]

Through 2003, the United States continued to meet bilaterally with China on TRQ issues.  USTR reported that, as a result of high-level meetings in Beijing in June 2003, China agreed to address most US concerns.  In October 2003, China issued new regulations (effective January 1, 2004) that (1) eliminate separate allocations for general trade and processing trade, (2) eliminate certain unnecessary licensing requirements, and (3) create a new mechanism for identifying allocation recipients.[91]

(e)

Tariffs

In its accession agreement, China committed to reduce its tariff rates upon accession and on an annual basis thereafter according to the tariff bindings in China's Goods Schedule.  According to this Schedule, the "final" bound rate for some products will be reached after a designated time period with annual reductions in the bound rate over that period.  Thus, China agreed that it would apply an MFN tariff rate on imported products that is no higher than the bound rate for those products.

A comparison between China's WTO schedule of tariff commitments for 2003 and 2004 (i.e., bound rates in China's Goods Schedule)[92] with China's actual tariff reductions as reflected by the corresponding MFN rates published in China's Customs Tariff Schedules (Customs Import and Export Tariff of the People's Republic of China) for 2003 and 2004 shows that, for the most part, China timely implemented its tariff rate reduction commitments as required in its Goods Schedule.  See Appendix 8.

However, as discussed below, there appear to have been a number of discrepancies in China's tariff reduction implementation. 

· Information Technology Agreement

In 2002, a problem arose regarding tariff reductions for products covered by the Information Technology Agreement.  China had agreed to eliminate, by January 1, 2005, tariffs on computers, semiconductors and other information technology products.  However, with respect to 15 tariff lines, China conditioned tariff reductions on submission of a Ministry of Information Industry (MII) end-use certificate guaranteeing that imported products would be used as inputs in producing finished IT products in China.  This condition was not authorized by the Goods Schedule of China's accession agreement.  The US objected to China's action and conducted bilateral meetings in 2002.  At the WTO, during 2002, the US blocked China’s membership in the ITA Committee until the issue was resolved. 

This issue was apparently resolved in 2003.  On January 1, 2003, China transferred the certification requirement from MII to the Customs Administration.  This change established a more workable system, and the US removed its block on China’s ITA Committee membership at the WTO, which China joined in April 2003.

· Specific Duties and Compound Duties

Duties on imports are generally based on the value of the goods (ad valorem duties).  In most cases, China's bound rate is expressed as an ad valorem rate and China implemented its tariff commitments through ad valorem rates.  Duties may, however, be based on some other factors such as weight or quantity (specific duties), or a combination of value and other factors (compound duties).  For certain products, China has chosen to implement its tariff reduction commitment through specific and compound rates rather than ad valorem rates.  Under WTO dispute settlement precedent, the maintenance of tariff schedules based on something other than the type of tariff binding (e.g., specific tariffs instead of ad valorem) is not, per se, a WTO violation.  However, it would be a violation of China's WTO tariff binding if, pursuant to specific or compound rates, China collected duties that in fact exceeded the tariff binding.[93]

With respect to China's 2002 tariff reductions through specific rates, USTR noted that "[t]ariff treatment of certain products in 2002 – including the use of specific rather than ad valorem tariff rates for chicken parts . . . – did not appear to fully match China’s WTO commitments."[94]

As reviewed below, an examination of China's specific and compound duties for 2003 indicates that application of China's specific (but not compound) duties for certain products raises the possibility that duties collected for those products based on specific rates may exceed China's tariff binding.

Appendix 3 to China’s Harmonized Tariff Schedules for 2003 contains a number of items subject to Specific and Compound Tariff Rates.  The Items contained in Appendix 3 and the corresponding bound tariff rates in China's Goods Schedule are as follows:

Specific Duties

As the Table below indicates, a number of the items to which China applies specific tariffs appear to have ad valorem equivalents that would be in excess of the bound rate contained in China’s Goods Schedule.  More information would be needed, however, to determine whether these specific rates are possible violations of China’s obligations.  As noted above, the relevant test is whether or not the duty applied in China on imports from WTO Members is in fact higher than the bound rate.  

As a test of likely compliance, Chinese import statistics published by GTIS China World Trade Atlas were analyzed for 2003.  The following Table presents the average import price (CIF Basis) in China for specific-duty HS categories listed for the year 2003, as well as an estimate of the ad valorem equivalent based on the specific tariff rate listed in Appendix 3.  These figures are then compared to the 2003 bound rate (ad valorem), with any difference noted in the far right column.  A plus sign (+) indicates that the estimated ad valorem equivalent rate for the specific tariff, based on average 2003 prices, was higher than the bound rate.  A minus sign (-) indicates that the specific tariff, based on average 2003 prices, was lower than the bound rate.  As noted above, under WTO precedent, where tariffs imposed on imports exceed the bound rate tariff, there is a WTO violation.  Hence, it would appear that many of China's 2003 specific tariff items present violations of China’s WTO tariff reduction commitments.

Compound Duties

Generally, China's Compound duties appear to be in compliance with China’s WTO obligations.  In a few instances, however, the ad valorem equivalent tariff is quite high, over 500%.  This is likely due to the fact that the average unit value of imports for that item was significantly below the threshold price limit set in the compound tariff.  Therefore, these items have been labeled "n.m." for “not meaningful.”

(f)

VAT

In the Working Party Report, some WTO Members " expressed concern that some internal taxes applied to imports, including a value-added tax ("VAT") were not administered in conformity with the requirements of the GATT 1994, particularly Article III,"[95] which obliges Members to provide national treatment.  Those Members "noted that China appeared to permit the application of discriminatory internal taxes and charges to imported goods and services, including taxes and charges applied by sub-national authorities."[96]  In response to these concerns, China:

confirmed that from the date of accession, China would ensure that its laws, regulations and other measures relating to internal taxes and charges levied on imports would be in full conformity with its WTO obligations and that it would implement such laws, regulations and other measures in full conformity with those obligations.[97]

In its 2003 report, USTR noted that China uses VAT policies "to encourage domestic production in a number of industrial and agricultural sectors," particularly, semiconductors and fertilizer.[98]  USTR stated that in the case of semiconductors, China provided VAT rebates to domestic semiconductor producers and, in the case of fertilizer, China exempted domestically-produced fertilizer from the VAT.  USTR noted that these were examples of differential tax treatment that "raised serious WTO concerns."[99]  U.S. private sector groups have expressed their views on VAT more forcefully.  For example, the U.S. Council on International Business commented regarding semiconductors:

The Chinese government imposes a 17 percent VAT on all domestically produced and imported semiconductors sold in China, but permits domestic semiconductor producers to obtain a rebate of the VAT paid in excess of 3 to 6 percent, depending on the circumstances.  As a result, imported semiconductors are subject to a much higher effective VAT rate than are domestic semiconductors benefiting from the rebate.  This discriminatory tax treatment is a clear violation of the national treatment obligation of Article III of the GATT 1994, and runs counter to explicit Chinese commitments in the Protocol of Accession and the Working Party Report on China's WTO Accession to bring its VAT into compliance with WTO rules.[100]

USTR stated in December 2003 that it would "continue to press China" on the VAT issue and would "take further appropriate actions seeking elimination of China’s differential tax treatment, including dispute resolution at the WTO, if necessary."[101]  Subsequently, in February 2004, USTR indicated that it was actively preparing a WTO dispute settlement case against China's VAT policy as applied to semiconductors, but that it would give China "one last shot" to resolve the matter.[102]  Testifying before the Senate Finance Committee on March 9, 2004, USTR Zoellick stated that the United States was moving closer to challenging China over China’s value-added tax on semiconductors:

If they don’t fix it very soon we’re going to bring a case,” Zoellick said of China’s semiconductor VAT.[103]

Subsequently, press reports indicated that the United States would file a WTO dispute settlement case.  On March 17^th, the Financial Times reported:

The US is set to launch its first World Trade Organisation complaint against China, charging that Beijing is violating global trade rules by offering big tax breaks for domestic semiconductor producers.

The case, which US officials said could be filed as early as Wednesday [i.e., March 17], will mark the end of a two-year honeymoon in which Washington has tried to resolve a series of disputes with China without resorting to the WTO.

*  *  *

At issue is a 17 per cent value-added tax that China imposes on all semiconductors.  The Chinese government rebates all but 3 to 6 per cent of that tax for domestic producers but retains the full tax on imports, giving domestic chipmakers a huge advantage in an industry with narrow profit margins.

The Chinese tax has become the biggest international trade issue for the $70bn (£39bn, E57bn) US semiconductor industry, which fears the rebate is encouraging semiconductor production in China at the expense of US imports.

The US industry had wanted a negotiated solution to the dispute, which would have prevented a long WTO dispute settlement process.  But China has refused to relent, arguing it is a critical part of its development strategy.[104]

On March 18, 2004, the United States formally filed a WTO dispute settlement case against China "regarding its discriminatory tax rebate policy for integrated circuits."[105]

(g)

SPS

In the Working Party Report, some Members "expressed concerns in relation to the use by China of sanitary and phytosanitary ("SPS") procedures as non-tariff barriers."[106]  In response, China said that "pursuant to the provisions of the SPS Agreement, China applied SPS measures only to the extent necessary to protect the life and health of human beings, animals and plants" and committed that "China would not apply SPS measures in a manner which would act as a disguised restriction on trade" and "would ensure that SPS measures would not be maintained without sufficient scientific evidence."[107]  China also confirmed that it comply with the SPS Agreement upon accession.[108]

In 2002 and 2003, however, US agricultural products were subjected to various SPS measures that were, in the US' view, questionable, raised WTO concerns, and frustrated US export efforts.  For example, in 2002 and 2003, China imposed a zero-tolerance policy on pathogens in imports of raw poultry and meat, a standard that the US states is "not reasonably achievable, nor scientifically justifiable."[109]  Moreover, China's standard for imports is contrary to national treatment principles as it does not apparently apply domestic raw poultry and meat.[110]  US wheat exports also experienced SPS problems due to China's imposition of, first, a maximum residue level (MRL) for selenium that is lower than the international standard, and second, an MRL for vomitoxin in wheat even though there is no international standard.[111]  The US repeatedly engaged China on these issues in 2002 and 2003, both bilaterally and in the WTO TRM in the context of the WTO Committee on Sanitary and Phytosanitary Measures, but the USTR's 2003 report states that "little progress has been achieved."[112]

In 2003, another SPS issue arose concerning soybeans.  China announced in August 2003 that, due to detection of Phytophthora sojae in shipments from the Spring of 2003, it planned to suspend soybean imports from four companies trading US soybeans.  The US Government raised concerns about China's announcement for several reasons: first, there appeared to be no legitimate purpose for China's delay in making the announcement; second, China failed to set a date for the suspension; and, third, it appeared that China's action was intended to "disrupt the importation of U.S. soybeans, and not to address a legitimate phytosanitary concern."[113]  The US sought high-level meetings with China regarding this issue, and, in September 2003, China agreed to future technical level meetings between US and Chinese agricultural experts.  In the interim, China agreed not to impose any suspensions.[114]  Subsequently, it was reported that the US and China would again meet on this issue in March 2004.[115]

(h)	Intellectual Property Rights

In the period before WTO accession, China made important amendments, revisions and improvements to its framework of intellectual property rights (IPR) laws, including copyright, trademark and patent laws, in order to bring its laws into conformity with the WTO Agreement on Trade-Related htmects of Intellectual Property Rights (TRIPS Agreement).  China's efforts in this regard were reviewed in the Report of the Working Party.[116]

Upon accession to the WTO, China committed to abide by the provisions of the TRIPS Agreement, which effectively meant that China agreed to follow internationally-accepted norms for the protection and enforcement of the intellectual property rights of foreign companies and individuals (including those from the US) in China.[117]  Among other provisions, the WTO TRIPS Agreement:

· sets minimum standards of protection for copyrights and neighboring rights, trademarks, geographical indications, industrial designs, patents, integrated-circuit layout designs and undisclosed information;

· sets minimum standards for the enforcement of intellectual property rights in administrative and civil actions;

· sets minimum standards, with regard to copyright piracy and trademark counterfeiting, for the enforcement of intellectual property rights in criminal actions and actions at the border;

· requires that, subject to limited exceptions, WTO Members provide national and MFN treatment to the nationals of other WTO Members with regard to protection and enforcement of intellectual property rights.

Since accession, the general assessment is that China has largely done a satisfactory job with respect to amending its IPR laws to comply with the TRIPS Agreement and bringing its laws into line with international norms in most key areas.  In its 2003 compliance report, USTR states that China has continued to make improvements in its IPR legal framework. USTR notes that, in 2003, China issued new measures concerning patents, trademarks, and copyrights which moved China further toward full compliance with its TRIPS Agreement obligations.[118]

With respect to effective enforcement of intellectual property rights, however, the general consensus is that China has failed to comply with its commitments to adhere to its TRIPS Agreement obligations.  China is required by the TRIPS Agreement to implement effective enforcement procedures and to provide civil and criminal remedies that have a deterrent effect.[119]  China's efforts in the area of IPR enforcement have fallen short of its commitments.

The reality is that piracy and counterfeiting remain rampant in China.  The cost of ineffective IPR enforcement has been enormous.  USTR observes that:

[A]ccording to a July 2003 report by the State Council’s Development Research Center, the market value of counterfeit goods in China is between $19 billion and $24 billion, which translates into enormous losses for IPR rights holders.  Various U.S. copyright holders report, for example, that inadequate enforcement has resulted in piracy levels in China that have remained at 90 percent or above in 2003 for all copyright sectors, and estimated U.S. losses due to the piracy of copyrighted materials has continued to exceed $1.8 billion annually.[120]  {Emphasis added}

And, as USTR notes, IPR infringement in China has affected a wide spectrum of "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, among many others."[121]

China's IPR enforcement framework involves three avenues for action -- administrative enforcement, criminal prosecution, and civil actions for monetary damages.  To date, each of these avenues, particularly administrative and criminal enforcement, have been ineffective and have not deterred IPR violations.  Although the US has actively engaged in bilateral activities such as seminars and other technical assistance to improve China's IPR enforcement, it is the consensus of US industry "that credible criminal penalties and greater administrative penalties, with strong financial support and leadership from the central government, will be essential to reducing counterfeiting and piracy rates in China.”[122]

In the 2003 compliance report, USTR identifies reasons that China's IPR enforcement efforts are ineffective.  With regard to administrative enforcement, although China periodically conducts anti-counterfeiting and anti-piracy campaigns, such campaigns fail to be effective because:

· the cases brought usually result in extremely low fines;

· fines are kept artificially low because many administrators set low value for counterfeit or pirated goods rather than the value of the genuine articles;

· even if a person is caught warehousing infringing goods, China does not consider this sufficient evidence to prove an intent to sell them, which results in lower fines;

· administrators rarely forward an administrative case to the Ministry of Public Security for criminal investigation, even for commercial-scale counterfeiting or piracy;

· IPR infringers consider seizures and fines by the Government to be simply a cost of doing business;

· IPR infringers are usually able to resume their operations without much difficulty.[123]

With regard to China's criminal enforcement efforts, USTR states that it has "virtually no deterrent effect on infringers" because:

· authorities have pursued criminal prosecutions in only a small number of cases;

· lack of transparency makes it difficult to know the outcome of cases and whether penalties were imposed;

· criminal liability thresholds are very high and seldom met;

· to bring a criminal action, sales must total RMB 200,000 ($24,100) for enterprises and RMB 50,000 ($6,030) for individuals;

· the proof-of-sale requirement is unworkable because it does not apply to warehoused but unsold counterfeit or pirated goods, and because infringers are unlikely to keep detailed sales records.[124]

In order to address its IPR enforcement shortcomings, USTR urges China to take the following actions:

· begin to refer administrative cases to the Supreme People’s Procuratorate for criminal prosecution;

· revise its IPR legal framework to provide for substantially higher administrative fines;

· administrative authorities should impose and publicize fines so they will act as a deterrent;

· revise its criminal liability thresholds;

· broaden its laws and regulations so they apply to the willful manufacture, storage, distribution and use of counterfeit and pirated goods, and not only when a sale can be proved;

· allow criminal prosecutions of the export of counterfeit or pirated goods on a commercial scale;

· increase criminal penalties (as current prison terms are too low to deter infringers engaged in commercial-scale counterfeiting or piracy).[125]

With respect to civil enforcement of IPR violations, USTR reports that there has been an increase in the number of civil actions being brought for monetary damages and injunctive relief by both Chinese parties as well as foreign parties, due in part to the ineffectiveness of the administrative and criminal enforcement avenues.[126]  However, the civil enforcement route has proven to be effective, either.  In the civil courts, many judges lack necessary technical training, cases can often take years to complete, and the results have not been consistent.

One recent and prominent example that illustrates the ineffectiveness of enforcement of intellectual property rights through a civil action is the trademark infringement case brought by Toyota.  In that case, Toyota sued a Chinese car maker, Geely, for using a logo that Toyota claimed was confusingly similar to Toyota's logo.  Toyota asked for injunctive relief, monetary damages, and recognition of its name and logo as well-known trademarks.  The court rejected Toyota's claims:

"The logo of Geely Group's Merry (the model name of an economy car produced by the company) is obviously different from that of Toyota, and thus cannot cause any confusion," said the final judgment.[127]

(A Chinese-language copy of the Toyota court decision is attached as Appendix 13.)  The Toyota decision has been viewed as a set back for IPR protection and enforcement in China.[128]  However, it is unclear what effect the Toyota decision may have on other trademark infringement cases under consideration by other automakers.[129]

(i)

Subsidies

Export subsidies

In the accession protocol and working party report, China committed that, upon accession, it would eliminate all export subsidies on both industrial and agricultural products.[130]

However, despite China's WTO commitments, USTR reports that, during 2002 and 2003, China continued to allow export subsidies for agricultural products, particularly corn and cotton.  In its 2002 report, USTR noted that US industry had expressed concern about China's continued use of export subsidies for corn and cotton.[131]  In the 2003 report, USTR noted that China appeared to continue to grant export subsidies for corn, to the detriment of US exporters.

It appears that significant quantities of corn have been exported from China, including corn from Chinese government stocks, at prices that may be 15 to 20 percent below domestic prices in China.  As a result, U.S. corn exporters have lost market share for corn in their traditional Asian markets, such as South Korea and Malaysia, while China is exporting record amounts of corn.  In 2003, China’s already high level of corn exports increased by 80 percent.[132]

In response to China's actions, the US raised its concerns about export subsidies with China on a bilateral level and at the WTO as part of the 2002 and 2003 TRM reviews before the Committee on Agriculture.  However, to date, this matter has not been resolved, in part because China has not provided information about its corn polices in response to USTR requests for such information.[133]  Indeed, it is difficult to ascertain whether China has in fact eliminated any export subsidy given that, for the last two years, China has failed to submit its required annual subsidy notification to the WTO’s Committee on Subsidies and Countervailing Measures.[134]

In addition to export subsidies on agricultural products, US industry has charged that China continues to grant export subsidies to industrial products, such as high technology electronics, biomedicine, new materials and integrated circuits.[135]  USTR has noted, however, that "China's possible export subsidies on industrial goods are difficult to identify and quantify because they are most often the result of internal administrative measures and not publicized or they may be provided through mechanisms such as credit allocations or low-interest loans," or take such forms as "guaranteed provision of energy, raw materials or labor supplies."[136]

It appears that China also provides tax relief to foreign investors that is export contingent.  In the 2003 TRM of China conducted by the WTO’s Committee on Subsidies and Countervailing Measures, China confirmed that it uses its tax laws to encourage the formation of wholly foreign-owned enterprises that are export-oriented.[137]  Although this specific tax program has not been investigated as a possible export subsidy, such tax programs have been deemed to be export subsidies by the Department of Commerce where they provided a benefit (deferral of direct taxes) that was contingent upon exports.[138]

Domestic subsidies

In its accession agreement, in addition to committing to eliminate all subsidy programs that would be prohibited under Article 3 of the SCM Agreement (i.e., subsidies contingent on export performance (export subsidies) and subsidies contingent on the use of domestic over imported goods (import substitution subsidies), China also committed to phasing out three subsidy programs: (1) subsidies provided to certain state-owned enterprises which are running at a loss (to be terminated by end of 2000); (2) priority in obtaining loans and foreign currencies based on export performance (to be terminated by end of 2000); and (3) preferential tariff rates based on localization rate of automotive production (to be terminated by end of 2000).[139]

It appears that China may not have eliminated the subsidies it committed to phasing out.  The National Association of Manufacturers has noted that China continues to use subsidies widely, and often through assistance to state-owned enterprises (SOEs) running at a loss:

Subsidized Exports -- We continue to receive reports from different industries that Chinese products are being sold in the United States at prices so low that they could not even cover the cost of raw materials and shipping much less full production and marketing costs.  These reports suggest the possibility of widespread use of subsidies, either direct or indirect, to help Chinese exporters gain a competitive advantage in the U.S. market. One important source of indirect subsidy is continued bank lending to money-losing and insolvent Chinese manufacturers, often state-owned or state-controlled enterprises. Since the Chinese banks providing these loans are either state-owned or state-controlled, the Chinese government bears responsibility for their lending practices.[140]  {Emphasis added}

When government subsidies are provided to domestic producers -- for example, steel companies -- the likely result is expanded capacity and overproduction, which in turn leads to severe market distortions such as price instability and dumping.[141]

As part of its WTO accession process, China agreed to notify all of its subsidies that are included within the meaning of Article 1 of the WTO SCM Agreement.[142]  In Annex 5A to both the Accession Protocol and the Working Party Report, China provided notification of its subsidies pursuant to Article 25 of the SCM Agreement.  Annex 5A provides information on twenty-four subsidy programs.  The first subsidy program listed in Annex 5A is "Subsidies From Central Budget Provided To Certain State-Owned Enterprises Which Are Running At A Loss."[143]  Nine sectors are identified as receiving subsidies under this program, one of which is the "ferrous-metal industry."[144]  China's notification, however, only provided information on this program up to 1998 and indicated that the program was to end in 2000.[145]  However, whether in fact China has ended this or any other enumerated program is not known because China has not yet supplemented its accession notification, and has not submitted any of the semi-annual subsidy notifications called for in the SCM Agreement.

China's lack of transparency in reporting its subsidies, and particularly with respect to subsidies provided to state-owned enterprises running at a loss, has been raised in the context of the annual TRM process at the WTO.  In the most recent TRM (2003), the US noted China's failure to notify its subsidies and specifically asked China to clarify whether subsides to state-owned enterprises running at a loss had been ended.  Until China clearly demonstrates that it has phased out this, and other, subsidy programs that it agreed to end, it cannot be said that China is in compliance with its accession commitments.

8.         In the area of subsidies, the delegate of the United States stated that the United States was disappointed with China’s failure to submit its annual subsidy notification, required under Article 25.1 of the Subsidies Agreement.  In fact, China had not made an Article 25.1 notification since joining the WTO nearly two years ago.  The United States urged China to submit a new and full notification of its subsidies as soon as possible and, in any event, China should immediately notify what it could, even if such a notification was not comprehensive.  By not participating in the notification process, China undermined the transparency that Members had worked hard to develop and hampered the ability of Members to confirm that China was complying with its obligations under the Subsidies Agreement and its Protocol of Accession.

9.         In the view of the United States, an example of the uncertainty that China’s lack of notification fostered concerned subsidies provided to certain state-owned enterprises which were running at a loss.  According to China’s Protocol of Accession, this subsidy was to end in 2000.  The representative of China had told the SCM Committee the previous year that the programme had been eliminated in 2001.  However, the delegate of the United States stated that, according to recent Chinese press reports, the Government was currently working to eliminate this programme.  He explained that by providing more detailed information on the programme, such as the decrees that ended or would end the programme at the central and local levels, China would help dispel confusion among other Members concerning the status of these subsidies.[146]  {Emphasis added}

Moreover, China's recent injection of $US 85 billion into three of the largest banks in China in order to bail them out from failing loans raises questions as to whether China has phased out subsidies to support state-owned enterprises operating at a loss.  One news reports noted:

The Chinese government will pump around 40 billion dollars into the Industrial and Commercial Bank of China (ICBC) in the latest move to bail out its ailing banking sector, state media reported.

The cash injection from foreign exchange reserves is much larger than the 22.5 billion dollars each given to the Bank of China and China Construction Bank last week, the Business Post reported citing various banking sources.

* * *

An official at the People's Bank of China, the central bank, was quoted in the Chinese report as saying a total of about 120 billion dollars would be injected into the big four state-owned banks to clean up their balance sheets and prepare them for listing.

That would leave 35 billion dollars for the Agricultural Bank of China, widely seen as the weakest of the big four and which the CBRC does not think will be ready for listing until 2007.

Analysts have long speculated that Beijing would be forced to inject public funds to rescue the debt-ridden sector that for years handed out easy loans to China's money-losing state enterprises.

It is estimated that NPLs account for about 45 percent of all loan assets in China's banking system although official figures put the bad debt at just under 17 percent.[147]

While it is the case that the United States can raise issues concerning China's subsidies within the WTO, the US should also review its present approach to Chinese subsidies under US countervailing duty law.  For the reasons reviewed in the memorandum attached as Appendix 14, the US Department of Commerce has the discretion to revise its handling of countervailing duty issues for non-market economy countries such as China.  Should Commerce not make such modifications, then Congress should mandate a change through appropriate legislation.

---

[1] Is China Playing By the Rules? Free Trade, Fair Trade, and WTO Compliance, Statement of Charles W. Freeman III, Deputy Assistant U.S. Trade Representative, before the Congressional-Executive Commission on China (September 24, 2003) (emphasis added).

[2] See U.S. Department of Commerce website: http://www.mac.doc.gov/china/JCCTforwebo.htm.

[3] See U.S. Department of Commerce website: http://www.mac.doc.gov/china/JCCTforwebo.htm.

[4] See U.S. Department of Commerce website: http://www.mac.doc.gov/china/JCCTforwebo.htm.

[5] See U.S. Department of Commerce website: http://www.mac.doc.gov/china/JCCTforwebo.htm.

[6] See U.S. Department of Commerce website: http://www.mac.doc.gov/china/JCCTforwebo.htm.

[7] See U.S. Department of Treasury, Joint Statement of the 15th Session of the China-U.S. Joint Economic Committee, September 9, 2002.

[8]        USTR, press release 2003-10 (February 14, 2003).

[9] U.S., China Launch High-Level Trade Dialogue, Hope to Meet in January, Inside US-China Trade, October 30, 2002.

[10]       Statement by Ambassador Peter F. Allgeier, Deputy United States Trade Representative, Before the House Committee on Appropriations Subcommittee on the Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies (May 22, 2003).

[11]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 5 (December 11, 2003).

[12]       US General Accounting Office, International Trade: Strategy Needed to Better Monitor and Enforce Trade Agreements (GAO/NSIAD-00-76; March 2000) at 8.

[13]       For a listing of such reports, see US General Accounting Office, International Trade: Strategy Needed to Better Monitor and Enforce Trade Agreements (GAO/NSIAD-00-76; March 2000) at p. 50-52 (Appendix III).

[14]       US-China Relations Act of 2000, Pub.L. 106–286, Div. B, Title IV, § 411, Oct. 10, 2000, 114 STAT. 880.

[15] 22 U.S.C. § 6941 (emphasis added).

[16]       19 U.S.C. § 6943(a)(1).

[17]       19 U.S.C. § 6943(c)(4).

[18]       19 U.S.C. § 6943(d).

[19]       19 U.S.C. § 6943(b)(1).

[20]       US Department of Commerce, China's Accession to the WTO: What it Means for U.S. Industry, Export America, Vol. 3, No. 1 (January 2002), at 25-26.

[21]       US General Accounting Office, World Trade Organization: First-Year U.S. Efforts to Monitor China's Compliance, GAO-03-461 (March 2003) at 5.  The GAO report states that "full-time equivalent staff in key units that are involved in China monitoring and enforcement activities across the four agencies increased from about 28 to 53 from fiscal year 2000 to 2002, based on agency officials’ estimates."  Id. at 8.  "Commerce had the largest overall increase in staff devoted to China WTO compliance.  Specifically, staffing levels in Commerce’s Market Access and Compliance division increased from 7 to 22 between fiscal years 2000 and 2002."  Id. at 10.

[22]       US General Accounting Office, World Trade Organization: First-Year U.S. Efforts to Monitor China's Compliance, GAO-03-461 (March 2003) at 5.  See also US Sets Up Interagency Group to Deal With China WTO Compliance, Inside US-China Trade, December 5, 2001, at 1; US Interagency Group Begins to Scrutinize China's WTO Compliance, Inside US-China Trade, December 12, 2001, at 1.

[23]       19 U.S.C. § 6951(a).

[24]       19 U.S.C. § 6951(b).

[25]       USTR, 2002 Report To Congress On China’s WTO Compliance (December 11, 2002); USTR, 2003 Report To Congress On China’s WTO Compliance (December 11, 2003).  The China compliance reports are available at http://www.ustr.gov/regions/china-hk-mongolia-taiwan/2002-12-11-China_WTO_compliance_report.pdf and http://www.ustr.gov/regions/china-hk-mongolia-taiwan/2003-12-18-china.pdf.

[26]       A listing of the individuals and groups that submitted comments to, and testified before, the TPSC regarding China's WTO commitments is appended to USTR's China compliance reports.  See USTR, 2002 Report To Congress On China’s WTO Compliance at Appendices 1 and 2; USTR, 2003 Report To Congress On China’s WTO Compliance at Appendices 1 and 2.

[27] See US General Accounting Office, GAO’s Electronic Database of China’s World Trade Organization Commitments (GAO-03-797R; June 13, 2003), available at http://www.gao.gov/new.items/d03797r.pdf.

[28]       H. Conf. Rep. 108-401, Making Appropriations For Agriculture, Rural Development, Food And Drug Administration, And Related Agencies For The Fiscal Year Ending September 30, 2004, And For Other Purposes Conference Report To Accompany H.R. 2673, 108^th Cong., 1^st Sess. 574 (Nov. 25, 2003).

[29]       Pub. L. 108-199, Div. B, Title II, Jan. 23, 2004, 118 STAT. 65.

[30]       H. Rep. 108-221, Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies Appropriations Bill, Fiscal Year 2004, 108^th Cong., 1^st Sess. 64. (2003).

[31]       H. Rep. 108-221, Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies Appropriations Bill, Fiscal Year 2004, 108^th Cong., 1^st Sess. 64. (2003).

[32]       H. Conf. Rep. 108-401, Making Appropriations For Agriculture, Rural Development, Food And Drug Administration, And Related Agencies For The Fiscal Year Ending September 30, 2004, And For Other Purposes Conference Report To Accompany H.R. 2673, 108^th Cong., 1^st Sess. 573 (Nov. 25, 2003).

[33]       US General Accounting Office, World Trade Organization: First-Year U.S. Efforts to Monitor China's Compliance, GAO-03-461 (March 2003) at 14..

[34] NOTE:   In two previous subsections, this paper reviewed major concerns and questions that were raised by Members in the first and second annual TRM meetings.  That review focused on the issues identified by Members generally within the overall multilateral TRM process at the WTO.  The following section reviews some of the major China compliance issues identified by the United States, particularly in the US Trade Representative's 2002 and 2003 annual China compliance reports.  Some of the issues identified and reviewed here overlap with the earlier sections dealing with issues raised within the TRM process, but in the following section these issues are presented from the perspective of the US and in greater detail.

[35] See generally USTR, 2003 Report To Congress On China’s WTO Compliance (December 11, 2003).

[36]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 11 (December 11, 2003).

[37] Report of the Working Party on the Accession of China, para. 83(a).

[38] Report of the Working Party on the Accession of China, para. 83(b).

[39] Report of the Working Party on the Accession of China, para. 83(c), (d).

[40] Report of the Working Party on the Accession of China, para. 83(a).

[41] Report of the Working Party on the Accession of China, para. 83(a).

[42] Report of the Working Party on the Accession of China, Annex 2A1.

[43] Report of the Working Party on the Accession of China, Annex 2A2.

[44] Report of the Working Party on the Accession of China, Annex 2B.

[45] Report of the Working Party on the Accession of China, para. 84(b).

[46] Report of the Working Party on the Accession of China, para. 84(b).

[47] See USTR, 2002 Report To Congress On China’s WTO Compliance, at 19 (December 11, 2002).

[48]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 12 (December 11, 2003).

[49] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 12 (December 11, 2003).

[50] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 12 (December 11, 2003).

[51]       USTR notes:

Since well before China’s accession, pursuant to China’s Foreign Trade Law, foreign-invested manufacturing enterprises have had the right to import inputs for production purposes and the right to export their finished goods, without the need for prior approval.  In January 2001, China expanded the import rights of some foreign-invested manufacturing enterprises with the issuance of the Supplementary Provisions (II) to the Provisional Regulations Governing the Establishment of Investment-type Companies by Foreign Business Investment.  In July 2001, shortly before its accession, China granted limited additional export rights to some foreign-invested manufacturing enterprises with the issuance of the Circular Concerning the Extension of Import and Export Rights for Foreign-Funded Enterprises.  Both of these measures, however, conditioned trading rights eligibility on requirements related to minimum registered capital, import levels, export levels and/or prior experience, among others.

          USTR, 2003 Report To Congress On China’s WTO Compliance, at 12-13 (December 11, 2003).

[52]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 13 (December 11, 2003).

[53]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 13 (December 11, 2003).  The United States discussed the issue of trading rights with China at the first and second Trade Dialogues held in February 2003 and November 2003, respectively.  In addition, the United States raised this issue at "a series of high-level meetings" in late 2003, as well as before the WTO's Market Access Committee in October 2003, in the context of the Transitional Review Mechanism at the WTO.  Id.

[54]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 13 (December 11, 2003).

[55] See National Association of Manufacturers, Review Of China’s Compliance With Its WTO Accession Commitments: Comments Submitted to the Interagency Trade Policy Staff Committee, September 10, 2003 (available at www.nam.org).

[56] Id.

[57] Id.  China's restrictive requirement of $30 million in annual trade for three prior years was cited in USTR's 2003 report as well.  See U.S. Trade Representative, 2003 Report To Congress On China’s WTO Compliance, at 13 (December 11, 2003).

[58] See Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001) Annex 3 (Non-Tariff Measures Subject to Phased Elimination); Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), Annex 3 (Non-Tariff Measures Subject to Phased Elimination).

[59] See Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), Section IV.B.8. (Quantitative Import Restrictions, including Prohibitions and Quotas), paras. 121-131.

[60]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 23 (December 11, 2003).

[61] See Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), Annex 9 (Schedule of Specific Commitments on Services, WT/MIN(01)/3/Add.1, 10 November 2001) at 7.B. (Banking and Other Financial Services).

[62]       USTR, 2002 Report To Congress On China’s WTO Compliance, at 12 (December 11, 2002); U.S. Trade Representative, 2003 Report To Congress On China’s WTO Compliance, at 23 (December 11, 2003).

[63]       USTR, 2002 Report To Congress On China’s WTO Compliance, at 12 (December 11, 2002); U.S. Trade Representative, 2003 Report To Congress On China’s WTO Compliance, at 23 (December 11, 2003).

[64]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 23 (December 11, 2003).

[65]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 23 (December 11, 2003).

[66]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 23 (December 11, 2003).

[67]       USTR, 2002 Report To Congress On China’s WTO Compliance, at 12 (December 11, 2002); U.S. Trade Representative, 2003 Report To Congress On China’s WTO Compliance, at 23 (December 11, 2003).

[68]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 24 (December 11, 2003).  Press reports indicated that the U.S. companies benefiting from China's decision included General Motors, Ford, and DaimlerChrysler.  See USTR’s China Report More Skeptical, But Still Downplays WTO Action, Inside US-China Trade, December 31, 2003.

USTR said China in November said it had given trading rights to “certain U.S. auto companies” one year ahead of schedule, which will let these select companies export cars to China. DaimlerChrysler and General Motors were among these companies (Inside US-China Trade, Nov. 19)."

The November 19 report referenced above stated:

Zhang’s visit was also used to announce separate contracts with General Motors, Ford and DaimlerChrysler worth several billion dollars.  According to a Nov. 12 GM release, China will buy 4,500 complete vehicles in 2004 and 2005, a deal worth about $1.3 billion. The company also said it would export another $1.1 billion in components for the assembly of GM cars produced in China, and that several smaller agreements have been struck to export several thousand other GM cars to individual Chinese importers.

In a separate Nov. 12 release, DaimlerChrysler said it also has an agreement with China to export 4,500 cars, and a Chinese release indicated that an agreement has also been reached with Ford.

          U.S. Agricultural, Industrial Exports Surge In Recent Weeks, Inside US-China Trade, November 19, 2003.

[69]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 58-59 (December 11, 2003).

[70]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 59 (December 11, 2003).

[71]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 59 (December 11, 2003).

[72]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 59 (December 11, 2003).

[73] Source: Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), Annex 9 (Schedule of Specific Commitments on Services, WT/MIN(01)/3/Add.1, 10 November 2001) at 7.B. (Banking and Other Financial Services).

[74]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 56 (December 11, 2003).

[75]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 56 (December 11, 2003).

[76]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 56 (December 11, 2003).

[77] Source: Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), Annex 9 (Schedule of Specific Commitments on Services, WT/MIN(01)/3/Add.1, 10 November 2001) at 7.A. (All Insurance and Insurance-Related Services).

[78]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 57 (December 11, 2003).

[79]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 57 (December 11, 2003).

[80] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 57 (December 11, 2003):  "With regard to branching, China scheduled a commitment to allow non-life firms to establish as a branch in China upon accession and to permit internal branching in accordance with the lifting of China’s geographic restrictions. China further agreed that foreign insurers already established in China that were seeking authorization to establish branches or sub-branches would not have to satisfy the requirements applicable to foreign insurers seeking a license to enter China’s market." 

[81]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 57 (December 11, 2003).

[82]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 57 (December 11, 2003).

[83]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 57 (December 11, 2003).

[84]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 57 (December 11, 2003).

[85]       USTR, 2003 Report To Congress On China’s WTO Compliance, at 58 (December 11, 2003).

[86] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 58 (December 11, 2003):  "In early 2002, CIRC approved life insurance operations for U.S. insurers in Beijing, Suzhou and Tianjin, two years before China had committed to do so in its services schedule.  In 2003, CIRC approved life insurance operations for a U.S. insurer in Chongqing nearly one year ahead of schedule.  Other foreign life insurers must now be provided the same access to those cities."

[87] See USTR, 2002 Report To Congress On China’s WTO Compliance, at 32 (December 11, 2002); USTR, 2003 Report To Congress On China’s WTO Compliance, at 45 (December 11, 2003).

[88] See USTR, 2002 Report To Congress On China’s WTO Compliance, at 32 (December 11, 2002); USTR, 2003 Report To Congress On China’s WTO Compliance, at 46 (December 11, 2003).

[89] See USTR, 2002 Report To Congress On China’s WTO Compliance, at 32 (December 11, 2002); USTR, 2003 Report To Congress On China’s WTO Compliance, at 46 (December 11, 2003).

[90] See USTR, 2002 Report To Congress On China’s WTO Compliance, at 32 (December 11, 2002); USTR, 2003 Report To Congress On China’s WTO Compliance, at 46 (December 11, 2003).

[91] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 46 (December 11, 2003).

[92]       WT/ACC/CHN/49/Add.1 (Schedule CLII - People's Republic of China, Part I - Schedule of Concessions and Commitments on Goods).

[93] See, e.g., Argentina-Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, Report of the Appellate Body, WT/DS56/AB/R, March 27, 1998.

[94]       USTR, 2003 National Trade Estimate Report on Foreign Trade Barriers, at 48.

[95] Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at para. 104.

[96] Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at para. 104.

[97] Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at para. 107.

[98] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 7-8 (December 11, 2003).

[99] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 7-8 (December 11, 2003).

[100]      U.S. Council for International Business (USCIB), Written Comments re China WTO Obligations, September 10, 2003; available at http://www.uscib.org/%5Cindex.html?documentID=2742.

[101] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 8 (December 11, 2003).

[102] USTR Warns of China WTO Case on Semiconductor VAT if No Progress by April, Inside US-China Trade, February 11, 2004.

[103] Zoellick Signals Clear Opposition to WTO Case on China Currency, Inside US-China Trade, March 10, 2004.

[104]      Edward Alden, US to file WTO complaint against China, Financial Times, March 17, 2004; available at http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1079419679859.

[105]      USTR press release 2004-22: U.S. Files WTO Case Against China Over Discriminatory Taxes That Hurt U.S. Exports (March 18, 2004).

[106] Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at para. 198.

[107] Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at para. 199.

[108] Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at para. 200.

[109] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 47 (December 11, 2003).

[110] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 47 (December 11, 2003).

[111] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 46 (December 11, 2003).

[112] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 47 (December 11, 2003).

[113] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 47 (December 11, 2003).

[114] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 47 (December 11, 2003).

[115] See U.S., China Plan March Soybean Phytophthora Meeting, Inside US-China Trade, January 28, 2004:

U.S. and Chinese officials are hoping to meet sometime in March to discuss China’s claims that some U.S. exports of soybeans contain phytophthora . . . . [T]he U.S. is expected to argue that China’s claims are unjustified and not based on sound science.

[116] Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at paras. 251-252.

[117] See generally Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at paras. 251-305 (regarding China's intellectual property rights commitments).

[118] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 50 (December 11, 2003).  The new laws cited are (1) Amendments to the Patent Law Implementing Measures; (2) Rules on the Determination and Protection of Well-Known Trademarks; (3) Measures on the Implementation of the Madrid Agreement on Trademark International Registration; (4) Measures on the Registration and Administration of Collective Trademarks and Certification Marks; (5) Measures on the Implementation of Administrative Penalties in Copyright Cases.

[119]      In particular, Articles 41 (general obligations) and 61 (criminal procedures) of the TRIPS Agreement mandate effective enforcement of IPR.

[120] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 50-51 (December 11, 2003).

[121] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 51 (December 11, 2003).  See also USTR, 2004 Trade Policy Agenda and 2003 Annual Report of the President of the United States on the Trade Agreements Program (March 2004), at 164: "IPR problems are pervasive, covering the widespread production, distribution and enduse of counterfeit and pirated products, brands and technologies.  Violations include the rampant piracy of film, music, publishing and software products, infringement of pharmaceutical, chemical, information technology and other patents, and counterfeiting of consumer goods, electrical equipment, automotive parts and industrial products."

[122] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 51 (December 11, 2003).

[123] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 52 (December 11, 2003).

[124] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 52-53 (December 11, 2003).

[125] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 52-53 (December 11, 2003).

[126] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 53-54 (December 11, 2003).

[127] Japanese carmaker loses suit, China Daily, November 25, 2003; available at http://www1.chinadaily.com.cn/en/doc/2003-11/25/content_284444.htm.  See also Toyota loses trademark suit against China carmaker, International Herald Tribune Online, November 24, 2003 ("Toyota Motor on Monday lost a trademark lawsuit against Geely Group, China's biggest private carmaker, in a case that had been closely watched by overseas companies concerned about protecting their designs and logos in the mainland market."); available at http://www.iht.com/articles/118787.html.

[128] See, e.g., China High Tech PR Newsletter, December 2003 ("Although a victory for Geely, the court ruling is seen as a major setback for multinationals doing business in China and trying to protect their Intellectual Property Rights (IPR)."), available at http://www.chinahightechpr.com/fullArticle.cfm?code=294.

[129]      For example, GM has alleged IPR infringement of its car models in China.  See China vows to solve IPR disputes between automaker GM, SAIC Chery, People's Daily, December 4, 2003; available at http://english.peopledaily.com.cn/200312/04/eng20031204_129676.shtml.  See also Toyota loses trademark suit against China carmaker, International Herald Tribune Online, November 24, 2003 ("The court decision came a setback for other automakers, including General Motors, which has said it is "investigating" whether Chery Automobile's QQ minicar resembles the Chevrolet Spark."); available at http://www.iht.com/articles/118787.html.  Another report states: "Counterfeiting - usually just of parts - is driving carmakers crazy in China."  Joann Muller, Stolen Cars: The nerve! The pirates of Shanghai are knocking off entire motor vehicles , Forbes.com, February 16, 2004; available at http://www.forbes.com/
forbes/2004/0216/058_print.html.

[130] See Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001) at Item 10.3 ("China shall eliminate all subsidy programmes falling within the scope of Article 3 of the SCM Agreement upon accession.") and Item 12.1 ("China shall implement the provisions contained in China's Schedule of Concessions and Commitments on Goods and, as specifically provided in this Protocol, those of the Agreement on Agriculture. In this context, China shall not maintain or introduce any export subsidies on agricultural products.").

See also Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at para. 167 ("The representative of China confirmed, as provided in Section 10.3 of the Draft Protocol, that it would eliminate all export subsidies, within the meaning of Article 3.1(a) of the SCM Agreement, by the time of accession. To this end, China would, by accession, cease to maintain all pre-existing export subsidy programmes and, upon accession, make no further payments or disbursements, nor forego revenue or confer any other benefit, under such programmes.").

[131] See USTR, 2002 Report To Congress On China’s WTO Compliance, at 33 (December 11, 2002).

[132] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 48 (December 11, 2003).

[133] See USTR, 2003 Report To Congress On China’s WTO Compliance, at 48 (December 11, 2003).

[134] See WTO Committee on Subsidies and Countervailing Measures, Chair’s Report to the Council for Trade in Goods on Transitional Review of China, G/SCM/111 (4 November 2003) at 3.

[135]      USTR, 2003 National Trade Estimate Report on Foreign Trade Barriers at 58.

[136]      USTR, 2003 National Trade Estimate Report on Foreign Trade Barriers at 58.

[137] See WTO Committee on Subsidies and Countervailing Measures, Chair’s Report to the Council for Trade in Goods on Transitional Review of China, G/SCM/111 (4 November 2003) at 5.  Specifically, China exempts wholly foreign-owned enterprises that are export-oriented from paying income tax for a certain period of time, which is followed by an additional period during which the enterprise is entitled to a 50 percent rebate of income tax.  Enterprises located in special economic zones, or economic and technology development zones, or any other exporting enterprises that already enjoyed an income tax rate of 15 per cent, would pay income tax at the rate of 10 per cent if they also met certain requirements.

[138]      See, e.g., Oil Country Tubular Goods from Korea, 49 Fed. Reg. 46776 (Nov. 28, 1984) (“Articles 22, 23 and 24 of the "Act Concerning the Regulation of Tax Reduction and Exemption" provide for the deduction from taxable income of a number of different reserves relating to export activities.  These reserves cover export losses, overseas market development and price fluctuation losses.  Under Article 22, a corporation may establish a reserve amounting to one percent of the foreign exchange earnings, or 50 percent of net income in the applicable period, whichever is smaller.  If certain export losses occur, they are offset from the reserve fund. If there are no offsets for export losses, the reserve is returned to the income account and taxed, after a one-year grace period, over a three-year period.”)

[139] See Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001) at Annex 5B (Subsidies to be Phased Out).

[140]      Testimony of Franklin J. Vargo, Vice President, International Economic Affairs, National Association of Manufacturers, On Behalf of The National Association of Manufacturers Before the House Committee on International Relations, Hearing On U.S.-China Ties: Reassessing the Economic Relationship, October 21, 2003.

[141]      China's steel industry, which is now the largest in the world, has been and continues to be the beneficiary of government support.  Continued subsidization of the Chinese steel industry has fostered massive capacity increases in China that are not driven by rational market signals.  The massive capacity expansion in China will exacerbate the problem of global excess capacity and lead to increased exports of Chinese steel products when demand in China diminishes.  See, e.g., Comments of American Iron and Steel Institute (AISI) to U.S. Trade Representative Concerning China's Compliance with WTO Commitments, Sept. 9, 2002; available at www.steel.org/policy/trade/st_020909.htm.

[142] See Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001) at Item 10.1.

[143] See Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001) at Annex 5A, item I.

[144] See Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001) at Annex 5A, item I.

[145] See Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001) at Annex 5B (Subsidies to be Phased Out).

[146]      WTO Committee on Subsidies and Countervailing Measures, Chair's Report To The Council For Trade In Goods On Transitional Review Of China, G/SCM/111 (4 November 2003) at paras. 8-9.

[147]      Channelnewsasia, China to inject 40 billion dollars into state bank: report, January 12, 2004; http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/65892/1/.html.