I. Review of China’s WTO Compliance in 2004
In many respects, China made significant progress in 2004 in meeting the obligations and commitments it assumed upon accession to the World Trade Organization (WTO). In a number of areas, however, China’s compliance has fallen short of its commitments. The following sections review WTO compliance issues identified in the reports issued by the U.S. Trade Representative and selected private sector groups.
A. Major Compliance Concerns
In 2004, the primary areas of compliance concerns noted by the U.S. and private sector interested parties were the following:
- Intellectual property rights
o While China has undertaken major efforts to revise its laws and regulations regarding patents, trademarks, and copyrights to comply with the requirements of the TRIPS Agreement, enforcement of intellectual property rights, while improved, is far from adequate. All observers state that counterfeiting and piracy in China remained rampant in 2004. China’s failure to adequately enforce IPR is a major problem for many WTO members and has had enormous economic impact on U.S. businesses.
- Trading and distribution rights
o While China implemented its commitment to full trading rights (right to import and export) ahead of schedule in 2004, concerns remain regarding distribution rights in China. China issued regulations providing for implementation of distribution rights but U.S. businesses are concerned that China has not issued rules clarifying how the application and approval process for acquiring distribution rights will work.
o Regarding sales away from a fixed location (direct selling), China failed to meet its commitment to open this market to foreign providers by December 11, 2004.
- Services
o In many services sectors, China has met the letter of its liberalization commitments but has frustrated market openings with new burdensome licensing and operating requirements.
o Such regulatory burdens as the imposition of high capital requirements, prudential rule requirements that exceed international norms, branching restrictions, and threshold criteria that are more restrictive of the scope of activities permitted than existed before accession, have affected U.S. providers of insurance services, express delivery services, telecommunications services, and construction services, among others.
- Agriculture
o While China has become a growing market for U.S. agricultural exports (2003 exports amounted to $5.4 billion), there were continuing problems with market access and transparency.
o In particular, some notable concerns were:
§ biotechnology regulations regarding risk assessment, labeling and field trials
§ transparency deficiencies in China’s tariff rate quota regime for bulk agricultural commodities (such as wheat, corn, cotton and vegetable oils)
§ sanitary and phytosanitary (SPS) regulations that are overly restrictive or not based on sound science
- Industrial policies
o In a number of areas, China has employed policies that effectively limit market access, impose conditions on market access, or give preferential treatment.
o Examples include:
§ discriminatory VAT policies affecting semiconductors (issue was resolved bilaterally) and fertilizer
§ failure to provide national treatment with respect to price controls on medicines and drug reimbursement
§ preferential import duties and VAT treatment to certain products (particularly from Russia)
§ discriminatory application of SPS measures
§ disparate standards testing of foreign products compared to domestic products
§ inadequate transparency regarding proposed technical regulations and conformity assessment procedures
§ development of unique standards for products where international standards already exist (affecting such areas as autos, telecommunications equipment, wireless local area networks, radio frequency identification tag technology, audio video coding, whiskey and other distilled spirits, and fertilizer)
§ inconsistent application of the China Compulsory Certification (CCC) mark requirement and failure, so far, to accredit any foreign-invested conformity assessment enterprise capable of testing and certifying the CCC mark
§ investment laws and regulations that continue to “encourage” technology transfer
§ auto industrial policy that discourages imports of auto parts and encourages use of domestic technology
§ government procurement policy that mandates purchases of Chinese-produced software to the extent possible
B. USTR’s 2004 Report on China’s WTO Compliance
On December 11, 2004, the Office of the U.S. Trade Representative (USTR) issued its third annual review of China’s compliance with its WTO accession commitments and obligations. The USTR conducted its monitoring of China’s compliance efforts and published its report, 2004 Report to Congress on China’s WTO Compliance, pursuant to Congress’ statutory directive and mandate.[1] See U.S.-China Relations Act of 2000, P.L. 106-286, section 421; 22 U.S.C. § 6951. The USTR’s China Compliance Report examines nine broad categories of China’s WTO commitments. In its report, USTR notes both progress achieved since China’s accession as well as continuing shortcomings regarding China’s performance of its commitments. While USTR’s report is comprehensive, its main focus is on the trade concerns that have been raised by U.S. business interests (“stakeholders”), with particular emphasis upon continuing shortcomings regarding China’s performance of its commitments, rather than upon the many non-controversial areas where China has satisfactorily complied with WTO commitments. As identified and singled out in USTR’s report, the following tables highlight China’s compliance deficiencies (as well as some important successes) in the third year of its WTO membership (2004) that most affected U.S. stakeholders.
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1. Trading Rights and Distribution Services[2] |
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Trading Rights
· “Trading rights” involves two elements: the right to import goods (into China) and the right to export goods (from China). “Trading rights” are critical to the ability of U.S. businesses to operate and expand in China and to be able to receive the value of other commitments made by China. · China had committed to fully grant trading rights to all entities (both domestic and foreign) by the end of the third year after accession (i.e., by December 11, 2004). · In the first two years of membership, however, China fell behind in granting phased-in trading rights to foreign-invested enterprises. Even up to mid-2004, China limited trading rights by retaining certain conditions on trading rights (e.g., minimum registered capital requirements, import levels, export levels, and prior experience) that China had committed to eliminate. · In January 2004, China drafted a revised Foreign Trade Law that included provisions meeting its trading rights commitments. The final revised Foreign Trade Law was issued in April 2004. It provided for the automatic grant of trading rights through a registration process. · At the JCCT meeting in April 2004, China agreed to implement its trading rights commitments six months ahead of schedule, that is, by July 1, 2004. · In June 2004, China’s MOFCOM issued final implementing rules and the grant of full trading rights became effective on July 1, 2004. · USTR reports that U.S. companies have reported few problems regarding the new trading rights registration process.
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Distribution Services
· With limited exceptions, China committed to end national treatment and market access restrictions on foreign enterprises providing distribution services through a local presence within three years of China’s accession. · In the first two years of membership, China fell behind in liberalizing distribution services. China did not begin to liberalize until mid-2004, when MOFCOM issued regulations that eliminated national treatment and market access restrictions on joint ventures providing wholesaling services, commission agents’ services, direct retailing services (other than sales away from a fixed location) and franchising services. China provided that these services would be allowed through an approval certificate process. The regulations also provided that liberalization would extend to wholly foreign-owned enterprises on December 11, 2004. · USTR notes the following deficiencies: § MOFCOM has delayed issuing implementing regulations, with the result that the procedures for securing the necessary approval certificates are not clear and foreign enterprises have so far been prevented from providing wholesaling, commission agents’, and franchising services. § MOFCOM has delayed issuing regulations on sales away from a fixed location, or direct selling, with the result that foreign enterprises have been prevented from starting up direct selling activities.
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Wholesaling Services and Commission Agents’ Services
· China committed to a gradual phase-in of wholesaling services and commission agents’ services by foreign-invested enterprises regarding goods made by other enterprises in China or imported goods, beginning December 2002, with full services allowed to wholly-foreign invested enterprises by December 11, 2004. · China, however, did not comply with its timetable. In 2003 and into 2004, China continued to restrict theses services to joint ventures with minority foreign ownership and continued to impose restrictions such as stringent qualification requirements. · In April 2004, MOFCOM issued regulations that eliminated market access and national treatment restrictions on wholly foreign-owned enterprises and reduced capital requirements as of the scheduled phase-in date of December 11, 2004. Under the regulations, enterprises must obtain central or provincial-level MOFCOM approval before providing these services. · USTR notes the following deficiencies: § MOFCOM has not yet provided guidance or implementing rules as to how the central or provincial-level approval system will work.
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Retailing Services
· China committed to a gradual phase-out of restrictions (such as geographic and quantitative limitations) on retailing services by foreign enterprises, with wholly-foreign invested enterprises permitted full retailing services by December 11, 2004. · China, however, did not comply with its phase-in schedule. In 2003 and into 2004, China continued to restrict retailing services through burdensome conditions (such as minimum threshold requirements as to volume, imports/exports, assets, registered capital, and prior experience). · In April 2004, MOFCOM issued regulations that eliminated market access and national treatment restrictions on wholly foreign-owned enterprises and reduced capital requirements as of the scheduled phase-in date of December 11, 2004. Under the regulations, enterprises must obtain central or provincial-level MOFCOM approval before providing retailing services. · USTR notes the following deficiencies: § As with wholesaling services, MOFCOM has not yet issued guiding rules as to how its approval system will operate.
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Sales away from a fixed location
· China committed to end market access and national treatment restrictions for sales away from a fixed location (direct selling) by December 11, 2004. · During 2004, MOFCOM drafted three regulations to implement the direct selling commitment, but China did not make these draft regulations available for public comment. · Based on its knowledge of the draft regulations, USTR notes the following potential problems: § National treatment: the draft regulation permits direct selling of domestically-produced goods, but restricts selling of imported goods to a fixed location. § Other provisions have requirements that appear to make direct selling commercially unviable.
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2. Import Regulation[3] |
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Tariffs
· In general, USTR found that China complied with its commitment to make the tariff reductions in both agricultural and industrial goods that were required as of January 1, 2004.
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Customs and Trade Administration
Customs Valuation · Upon accession, China assumed the obligations of the WTO Agreement on Customs Valuation and agreed to implement these without a transition period. In January 2002, China issued customs valuation regulations. In addition, by December 11, 2003, China had committed to value digital products (e.g., floppy disk, cd-rom) based on the value of the underlying carrier medium, rather than the imputed value of the content. · USTR notes the following deficiencies: § China has not uniformly implemented its regulations with the result that U.S. exporters are still encountering valuation problems at Chinese ports. These problems include: (1) valuation based on reference pricing instead of transaction value; (2) addition of royalties and license fees to the dutiable value of imported software; (3) non-uniform valuation by ports of particular digital products; and (4) valuation of high-value electronic media to be used to produce multiple copies of products (e.g., DVDs) based on the estimated value of the future copies instead of the value of the carrier medium itself.
Rules of Origin · Upon accession, China became subject to the WTO Agreement on Rules of Origin. · USTR has not raised concerns about China’s implementation of its rules of origin obligations, except to note that China has not been adequately transparent in drafting and issuing its implementing regulations (e.g., China did not circulate draft regulations for comment).
Import Licensing · Respecting China’s adherence to the WTO Import Licensing Agreement, USTR reports that it has raised various concerns regarding MOFCOM’s automatic and non-automatic licensing regulations in order to promote clarity and to ensure no trade-distorting effects.
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Non-tariff Measures
· China agreed to eliminate numerous nontariff measures (NTMs), including import quotas, licenses and tendering requirements covering numerous products. For some products, the NTMs were ended upon accession. For other products, China agreed to a transitional phase out of NTMs (e.g., on autos and auto parts, crude oil, refined oil, and tires), with all NTMs ended by January 1, 2005. · China agreed to provide detailed procedures for allocating import quotas during the phase-out period, but, during the transition period, China’s quota system had many problems. USTR notes that necessary regulations were issued late, quotas were allocated late, and lack of transparency prevented knowing if the quotas were allocated properly. · As of January 1, 2005, China committed to have no import quotas in place.
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Tariff-rate Quotas on Industrial Products
· China agreed to implement a transparent system of TRQs to give access for three industrial products, including fertilizer, a major U.S. export. · USTR notes the following deficiencies: § China was slow to implement its TRQ system in 2002, and there was a lack of transparency. § In 2003, China issued the quota allocations on time but discouraged TRQ holders from freely using their quotas. U.S. fertilizer exports decreased by 47% in 2003 and by 18% in 2004 (Jan-Sept).
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Other Import Regulation
Antidumping · China agreed to conform its regulations and procedures to the WTO Antidumping Agreement. · USTR notes the following deficiencies: § China’s AD practice has not been adequate with respect to transparency and fair procedures. For example, the Chinese authorities have not provided parties with sufficiently detailed information or provided adequate disclosure of the facts and calculations on which the AD determination is based.
Countervailing Duties · China agreed to conform its regulations and procedures to the WTO Agreement on Subsidies and Countervailing Measures. · USTR finds that China’s regulations and procedural rules generally accord with the Subsidies Agreement, but that certain provisions are not implemented. · China has not yet initiated any subsidies proceeding.
Safeguards · China agreed to conform its regulations and procedures to the WTO Safeguards Agreement. · USTR finds that China’s regulations and procedural rules generally accord with the Safeguards Agreement, but that certain provisions have not been implemented. · China has initiated one safeguards proceeding (steel products). The safeguard measure was terminated in December 2003.
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3. Export Regulation[4] |
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· China agreed to maintain export restrictions in accordance with WTO rules, which generally prohibit (with exceptions) export restrictions (other than duties, taxes or other charges) (GATT Article XI). · USTR notes the following deficiencies: § China has continued to impose export restrictions on certain products, most notably blast furnace coke and fluorspar. § In 2004, export restrictions on coke adversely affected U.S. integrated steel producers and their customers. China’s quota, and the illegal sale of export quota certificates, caused a significant increase in the export price of coke. § Although, in late July 2004, China increased the quota and the export price declined, USTR continues to urge China to end export quotas on coke. § Regarding fluorspar, China imposes quotas and license fees on fluorspar exports, but does not restrict domestic users of fluorspar.
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4. Internal Policies Affecting Trade[5] |
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Non-discrimination
· China agreed to abide by the core GATT 1994 principles of Most-Favored Nation (MFN) (nondiscrimination) and national treatment, and to repeal or revise laws inconsistent with those principles. · USTR notes the following deficiencies: § Although China revised many of its laws that conflicted with MFN and national treatment, China has not applied MFN and national treatment in all areas. § U.S. pharmaceutical manufacturers have noted national treatment problems regarding price controls on medicines and drug reimbursement. § China has applied preferential import duties and VAT treatment to certain products (particularly from Russia). § From accession, China has continued to discriminate in applying SPS measures.
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Taxation
· China agreed that its tax laws would conform to MFN and national treatment principles.
VAT Policies · USTR notes the following national treatment deficiencies in China’s VAT system: § In 2004, China applied discriminatory VAT rates to imports of semiconductors and fertilizer but not to domestically-produced semiconductors and fertilizer. § With respect to semiconductors, the U.S. initiated the dispute settlement process in March 2004. In July 2004, the issue was resolved when China agreed to eliminate the VAT on semiconductors. § With respect to fertilizer, China exempts all phosphate fertilizers except DAP (a fertilizer the U.S. exports to China) from a 13% VAT. So far, China has not changed this policy. § Generally, some U.S. industries complain that Chinese producers can avoid VAT payments (through poor collection procedures, special deals or even fraud), while importers must pay the VAT.
Consumption Taxes · USTR notes the following national treatment deficiencies in China’s consumption taxes: § The effective consumption tax rate on imported products (e.g., spirits/alcoholic beverages, tobacco, cosmetics and skin/hair care preparations, jewelry, fireworks, rubber, motorcycles and automobiles) is substantially higher than the rate applied to domestic products because China uses different tax bases to compute consumption taxes for domestic and imported products.
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Subsidies
· Upon accession, China assumed the obligations of the WTO Subsidies Agreement, including the elimination of prohibited subsidies (export subsidies and import substitution subsidies). · USTR notes the following deficiencies: § Since accession, China has failed to submit to the WTO Subsidies Committee any notifications of its subsidy programs (an annual requirement). (However, in November 2004, in the Goods Council TRM, China committed to submit its subsidies notification within 2005.)
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Price Controls
· An annex to China’s accession agreement listed products and services subject to price control or government guidance pricing. In 2004, China maintained its price controls and guidelines on the listed products and services (e.g., pharmaceuticals, natural gas, transportation (including freight transportation), tobacco, and other agricultural products).
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Standards, Technical Regulations and Conformity Assessment Procedures
· China assumed the obligations of the Agreement on Technical Barriers to Trade which sets rules and procedures regarding the development, adoption and application of voluntary product standards, mandatory technical regulations, and testing/certification procedures. The TBT Agreement is directed to preventing the use of technical requirements as unnecessary barriers to trade.
Restructuring of Regulators · China has made significant changes to its standards and technical regulations regime. · USTR notes the following deficiencies: § Despite China’s changes to its standards testing regime, in some sectors, foreign products are tested in specially designated laboratories that are separate from those laboratories used to test domestic products. This disparate testing can lead to uneven treatment.
Transparency · USTR notes the following deficiencies: § China’s notifications of proposed technical regulations and conformity assessment procedures have been submitted by two agencies (AQSIQ or SAC). TBT measures from other Chinese agencies have not been notified. § When TBT measures have been notified, in some cases, the comment periods have been unacceptably short, or the comments disregarded.
Standards and Technical Regulations · China has made progress in conforming its technical regulations to international standards. · USTR notes the following deficiencies: § In some sectors, China has been developing unique requirements even where there are well-established international standards (e.g., autos, telecommunications equipment, wireless local area networks, radio frequency identification tag technology, audio video coding, whiskey and other distilled spirits, and fertilizer). § These unique standards will create significant barriers to market entry and make the cost of compliance high for foreign companies. § One example was China’s issuance in May 2003 of two mandatory standards for encryption over Wireless Local Area Networks (WLANs) (which incorporated the WLAN Authentication and Privacy Infrastructure (WAPI) encryption technique), applicable to domestic and imported equipment containing WLAN (also known as Wi-Fi) technologies. In April 2004, the US and China resolved the WAPI issue when China said it would suspend indefinitely its proposed implementation of WAPI as a mandatory standard. § Another example is continuing pressure from within the Chinese government to select China’s 3G telecommunications standard.
Conformity Assessment Procedures · China has established one safety mark (“China Compulsory Certification” or “CCC” mark), issued to both Chinese and foreign products. · USTR notes the following deficiencies: § In 2004, U.S. companies continued to complain that the CCC mark regulations lack clarity. § China is applying the CCC mark requirements inconsistently, i.e., many domestic products that require the CCC mark are still being sold without the mark. § In addition, in some sectors, U.S. companies complained in 2004 about duplication in certification requirements (particularly for telecommunications products). § Despite national treatment commitments, to date, China has accredited 68 Chinese enterprises to test for and certify the CCC mark, but has not accredited any foreign-invested conformity assessment bodies.
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Other Internal Policies
State-Owned and State-Invested Enterprises · China agreed that purchases of goods and services by state-owned and state-invested enterprises for commercial non-governmental purposes would be subject to WTO rules, in particular that they would be based on commercial considerations. · USTR notes that U.S. companies have not complained regarding WTO compliance in this area.
State Trading Enterprises · China agreed that state trading enterprises would provide full information on their pricing mechanisms and ensure transparent and WTO-consistent import purchasing procedures. · USTR notes the following deficiencies: § So far, in response to requests for information regarding the pricing and purchasing practices of state trading enterprises, China has only provided general information, not sufficient to meaningfully assess China’s compliance efforts.
Government Procurement · China is not a member of the WTO Agreement on Government Procurement (GPA) but committed to initiate negotiations to accede to the GPA. In the interim, China agreed that central and local governments would conduct procurement in a transparent manner. · USTR notes that U.S. companies have expressed concern regarding implementing rules on government software procurement that are being drafted by MOF. The draft reportedly mandated that central and local governments should purchase domestic software to the extent possible. The concern is focused on China’s apparent restrictive definition of “domestic products.”
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5. Investment[6] |
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· China committed to eliminate export performance, local content and foreign exchange balancing requirements from its laws, regulations and other measures. China agreed that importation or investment approvals would not be conditioned on these requirements or other requirements such as technology transfer and offsets. · USTR notes the following deficiencies: § Although not formally requiring it, some of China’s revised laws and regulations continue to “encourage” technology transfer. In practice this “encouragement” will effectively be a “requirement” in many cases. § In 2004, U.S. companies report that some Chinese officials still consider factors such as export performance and local content when making investment approval decisions.
· Although China had committed, by accession, to revise its Industrial Policy for the Automotive Sector to make it WTO-consistent, China missed the deadline. China circulated a draft revised automobile industrial policy in 2003 and issued the final version in May 2004. · USTR notes the following deficiencies: § The new auto industrial policy contains discriminatory provisions that discourage the importation of auto parts and encourage the use of domestic technology. § The new policy also contains some provisions too vague to assess (e.g., regarding complete knocked-down auto kits).
· In 2004, the State Council made no changes to the 2002 Sectoral Guidelines Catalogue for Foreign Investment. · USTR notes the following concern: § China’s placement of the production and development of genetically-modified plant seeds in the “prohibited” category for foreign investment is an exception to China’s progress in opening up other sectors to foreign investment.
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6. Agriculture[7] |
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Tariffs
· In 2004, China implemented required tariff changes on agricultural goods on schedule.
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China’s Biotechnology Regulations
· In 2002 and 2003, the U.S. had serious concerns with China’s regulations and procedures for issuing final safety certificates, particularly for U.S. exports of soybeans, corn and other commodities. The U.S. and China agreed to a series of interim solutions through issuance of temporary safety certificates so as to avoid disrupting trade. This issue appears to have been resolved when, in February 2004, China issued a final safety certificate for biotech soybeans and subsequently issued safety certificates for corn, canola, and cotton. · USTR notes the following concerns: § Despite the resolution of the safety certificate issue, USTR notes that concerns remain regarding other areas covered by China’s biotechnology regulations, particularly risk assessment, labeling and field trials.
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Tariff-Rate Quotas on Bulk Agricultural Commodities
· China committed to replace quotas on certain bulk commodities (e.g., wheat, corn, cotton and vegetable oils) and to provide market access through a transparent system of TRQs, with established rules regarding quota applications, allocations and re-allocations. · Initially, in 2002, China’s operation of its TRQ system was plagued with problems including regulations that provided inadequate transparency, imposed burdensome licensing procedures, and appeared to provide separate sub-quotas for the processing and re-export trade. In addition, China’s allocation of the TRQs showed favoritism to domestic farm interests. Because of its concerns, the U.S. requested formal consultations with China. · Subsequently, in 2003, China’s bettered its performance but the U.S. noted that the problems of transparency, sub-division of the TRQ, small allocation sizes, and burdensome licensing persisted. · China issued new regulations in 2004 and its operation of the TRQ system generally improved. · USTR notes the following concerns: § USTR notes that, despite much improvement, transparency continues to be a problem.
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Sanitary and Phytosanitary Issues
· Through the SPS Agreement, China committed that SPS measures would address legitimate scientific-based concerns, not discriminate arbitrarily, and not be disguised restrictions on trade. · USTR notes the following concerns: § In 2004, U.S. agricultural exports faced increased SPS measures that raised WTO concerns, in particular, measures covering BSE (Bovine Spongiform Encephalopathy, known as “mad cow” disease) and AI (Avian Influenza). o BSE: in December 2003, China banned U.S. bovine products after a case of BSE found in the U.S. China banned not only beef but low-risk bovine products as well (which do not pose a risk of BSE and should not have been banned under international standards). In September/November 2004, China agreed to allow resumption of imports of most low-risk bovine products but, as of December 2004, imports of these products had not yet resumed. o AI: in February 2004, China banned U.S. poultry due to cases of low-pathogenic AI in Delaware. In November 2004, China lifted the general ban (but retained a ban on poultry products from Connecticut and Rhode Island). § Regarding wheat: (1) China’s imposition of a maximum residue level (MRL) for selenium that is below the international standard threatens all U.S. wheat exports to China; (2) although there is no international standard, China imposed a MRL for vomitoxin in wheat. {However, USTR notes that China appears not to be enforcing these measures.} § Regarding raw poultry and meat, China applies certain non-science-based standards (e.g., zero tolerance for pathogens) to imports that are not applied to domestic raw poultry and meat. This violates national treatment and has slowed imports from the U.S. § Regarding food additives, China imposes overly restrictive standards that block imports of many U.S. processed food products. The banned food additives are widely used in other countries and are approved by the World Health Organization (WHO). § USTR notes that, except for BSE and AI, little progress has been achieved on the foregoing issues.
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Inspection-related Requirements
· During 2002 and 2003, the U.S. expressed concerns about AQSIQ’s administration of import licensing procedures, in particular about arbitrary use of inspection-related requirements (e.g., import inspection permits; quarantine inspection permits) to restrict, delay and increase the cost of such U.S. exports as soybeans, cotton, meat and poultry. · In 2004, the U.S. continued to raise these concerns. · In June 2004, China issued a new regulation (Decree 73) that made quarantine inspection permits more workable. · USTR notes the following deficiencies: § Decree 73 raised new concerns regarding required contract terms and commercial risk. § U.S. shippers complained that Decree 73 increased the financial risk for exporters shipping commodities to China. § With respect to soybeans, although U.S. soybean exports to China continued to go forward, Decree 73 appears to have created uncertainty in the market and contributed to general downward pressure on world soybean prices.
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Export Subsidies
· China committed to eliminate all export subsidies upon accession. · In 2002 and 2003, U.S. industry expressed concerns that China was providing export subsidies on corn, as China was exporting significant quantities of corn at prices 15-20% below domestic prices. · In 2004, USTR notes that it appeared China was becoming a net importer of corn and its corn exports were being made on a commercial basis.
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7. Intellectual Property Rights[8] |
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Legal Framework
· At the time of accession and thereafter, China modified its IPR laws, regulations and implementing rules regarding patents, trademarks and copyrights. In 2003, China issued additional new measures on patents, trademarks and copyright. · USTR observes that, overall, China’s IPR laws are generally in compliance with the TRIPS Agreement, although some improvements still need to be made. · China continued to make improvements to its laws and regulations in 2004, such as in the recognition of foreign well-known marks. China also issued a series of new Customs Administration regulations and implementing rules regarding protections against the import and export of IPR infringing products · USTR notes the following concerns: § In some areas, China’s new regulations and implementing rules are not clear or need revision, such as regarding the storage/disposition of infringing goods and transferring cases for possible criminal prosecution. § Although not required to do so, at the April 2004 JCCT meeting, China agreed to ratify and implement the WIPO treaties as soon as possible. By December 2004, China had not yet acceded to the 1996 WIPO Internet-related treaties.
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Enforcement
· Under the WTO TRIPS Agreement, China is obligated to implement effective IPR enforcement procedures, including deterrent-effective civil and criminal remedies. · USTR notes the following concerns: § In 2004, IPR infringement was rampant and, in the view of some U.S. businesses, had worsened. U.S. losses due to IPR piracy are estimated to be between $2.5-$3.8 billion annually. § In 2004, IPR infringement affected a wide range industries. Examples include films, music, publishing, software, pharmaceuticals, chemicals, information technology, consumer goods, electrical equipment, automotive parts and industrial products. § China has failed to provide effective IPR enforcement. This is the result of lack of coordination between government ministries and agencies, local protectionism and corruption, high thresholds for criminal prosecution, lack of training and weak sanctions for infringement.
Administrative Enforcement · USTR notes the following concerns: § Although China continues to take administrative enforcement actions against IPR violators, the actions have been largely ineffective in deterring IPR violations for a number of reasons including: o Extremely low fines are imposed (because value of infringing goods is based on price for the infringing goods, not the genuine goods). o Evidence of warehousing infringing goods is not sufficient to prove an intent to sell them. o Rarely are administrative cases forwarded to the Ministry of Public Security for criminal investigation.
§ Although China Customs issued new regulations on administrative penalties in September 2004, the fines to be imposed are too low (the lower of 30% of the value of the goods confiscated, or RMB 50,000 ($6,030)).
Criminal Enforcement · Presently, criminal enforcement has virtually no deterrent effect. · At the April 2004 JCCT meeting, China agreed to apply criminal sanctions to a wider range of IPR-infringing activities and to increase the penalties for IPR violations. China also pledged that, by the end of 2004, it would issue judicial interpretations that lower the value thresholds for criminal investigations/prosecutions, and apply criminal sanctions to the import, export, distribution and storage of counterfeit goods and to on-line piracy. (NOTE: As of the date of USTR’s report, China was still drafting these judicial interpretations. They were issued in late December 2004). · USTR notes the following concerns: § China needs to revise its laws, including judicial interpretations, and investigate, prosecute, convict and sentence a much higher percentage of IPR infringers, as well as increase criminal penalties. § Prosecution of IPR crimes requires coordination between national and local agencies, but coordination remains problematic. § Criminal liability thresholds have been very high and seldom met. They also require proof of sales of the infringing goods, which is often not available.
Civil Enforcement · IPR civil actions in Chinese courts are increasing due to the ineffectiveness of administrative and criminal enforcement. · USTR notes the following concerns: § In 2004, U.S. companies still complained that Chinese courts did not provide consistent and fair IPR enforcement, due to factors such as inadequate technical training and ineffective court rules regarding evidence, expert witnesses, and protection of confidential information. § Enforcement of IPR rights in Chinese courts is slow. For example, a patent rights case can take between four to seven years to complete.
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8. Services[9] |
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Financial Services -- Banking
· China committed to phase in banking services by foreign banks over 5 years. · Although China has generally met its WTO commitments to liberalize, it has also imposed restrictions that have made it difficult for foreign banks to set up in China. · USTR notes the following concerns: § Following accession, the People’s Bank of China imposed, on foreign banks’ headquarters and branches, working capital requirements and other prudential rules that went beyond international norms, and which made it more difficult for foreign banks to set up in China. § Although China made reductions in capital requirements in December 2003 and July 2004, the U.S. continued to urge China to align its prudential requirements with international norms.
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Financial Services – Insurance
· China committed that, within three years of accession, it would phase out geographic restrictions on all types of insurance operations, and expand ownership rights and scope of activities for foreign firms. · The China Insurance Regulatory Commission (CIRC) issued regulations after accession that created problems in three areas – unreasonably high capitalization requirements, inadequate transparency, and vague rules regarding branching rights (China has required existing non-life insurer branches that seek to branch in China to set up as a subsidiary, which is both costly and unnecessary). · USTR notes the following concerns: § Following consultations with the U.S. in 2002 and 2003, China issued final implementing rules in May 2004. While the new rules lowered capital requirements for national licenses and branches, they did not adequately deal with China’s conditions on branching rights. In addition, in at least one instance, China waived this requirement for a foreign firm but has not stated how or whether other firms can obtain the same waiver. § It appears that China has been issuing concurrent branch approvals (more than one at a time) for Chinese insurers, but only approving branches of foreign firms consecutively (one at a time).
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Financial Services – Motor Vehicle Financing
· Upon accession, China agreed to open the motor vehicle financing sector to foreign non-bank financial enterprises without any limitations on market access or national treatment. · Initially, in the first two year after accession, China failed to meet this obligation. · In October 2003, the China Banking Regulatory Commission (CBRC) issued regulations implementing its commitments. · USTR notes the following concerns: § The regulations imposed relatively high capital requirements that make it difficult for small and medium-sized enterprises to enter the market.
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Legal Services
· On accession, China committed to allow foreign law firms to provide legal services through one profit-making representative office, and to end quantitative and geographical restrictions after one year. · Regulations issued in 2001-2002 appeared to impose a needs test for foreign law firms wanting to set up offices in China (contrary to GATS), appeared to restrict the types of legal services that could be provided, and required unnecessarily time-consuming procedures in setting up an office or branch. · USTR notes the following concerns: § There has been little progress in addressing the problems cited previously -- economic needs test, unreasonable restrictions on types of legal services, and unnecessary time-consuming procedures.
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Telecommunications Services
· Upon accession, China committed to open its telecommunications services market to foreign suppliers through JVs with Chinese companies, to increase the foreign stake over time, and to end geographic restrictions within 2-6 years. China also committed to have an independent regulator, by separating the regulatory and operating functions of the Ministry of Information Industry (MII), and to adopt pro-competitive regulatory principles. · China issued regulations in December 2001 implementing China’s commitments. · USTR notes the following concerns: § China’s regulations established high capital requirements (especially for basic telecommunications services) that effectively bar entry for many potential foreign suppliers. § China has not established an independent regulator. While MII is nominally separate from the current telecommunications operators, MII has extensive influence and control over their operations and uses its regulatory authority to disadvantage foreign firms. § In contrast to international norms, MII reclassified several telecommunications services from the “value-added” category to the “basic” category (slower liberalization; higher capitalization) and restricted what new services could be classed as “value added.” As a result, U.S. firms’ access has been limited. § MII’s licensing process is very slow. USTR is unaware that any application to provide value-added services has been completed.
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Express Delivery Services
· China agreed to permit foreign express delivery companies in JVs with Chinese companies to increase their stake over time, and to allow wholly foreign-owned subsidiaries within four years of accession. · China also agreed to provide an independent regulator by separating the regulatory and operations functions of China Post. · Following accession, two measures issued by China raised problems. China required foreign service providers to obtain “entrustment” authority from China Post (their competitor) and China imposed weight/rate restrictions on letters the foreign providers could handle. These problems were addressed and resolved in September 2002 when China issued revised regulations. · USTR notes the following concerns: § In July-November 2003, China circulated draft amendments to the postal services law, which (1) gave China Post a monopoly on letters under 500 grams (a horizontal commitment violation as it restricted existing scope of activities), and (2) failed to establish an independent regulator. At the April 2004 JCCT, China indicated that the weight restriction would not resurface as a problem. However, the July 2004 draft amendment still contained a weight restriction (reduced to 350 grams).
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Construction and Related Engineering Services
· On accession, China agreed to permit foreign companies to provide construction and related engineering services in JVs with Chinese companies, limited to foreign-invested projects and subject to capitalization requirement. Within three years of accession, China committed to remove these restrictions and to allow wholly foreign-owned subsidiaries provide services in four types of projects. · USTR notes the following concerns: § China issued regulations in September 2002 that raised a number of problems, including imposing new and more restrictive conditions than existed prior to accession when foreign companies could work on a project-by-project basis. The regulations also required foreign firms to obtain qualification certificates; required foreign-invested enterprises to incorporate in China; and imposed high minimum registered capital requirements and foreign personnel residency requirements. Except for the incorporation requirement, these rules went into effect in April 2004. The incorporation requirement is to be effective in July 2005, and foreign companies will face uncertainty after that date. § In November 2004, China issued another problematic regulation. It states that a company providing project management services on a project may not provide both construction services and related construction engineering design services on the same project. U.S. companies often provide all of these services in combination.
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Aviation Services
· Although China made no WTO commitments regarding aviation services, China signed an agreement with the U.S. in July 2004 to increase market access for U.S. providers of aviation services.
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Maritime Services
· Although China made no WTO commitments regarding maritime services, China signed an agreement with the U.S. in December 2003 to increase market access for U.S. providers of maritime services.
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Other Services
· In some sectors (e.g., several types of professional services, tourism and travel-related services, educational services and environmental services), China has implemented its commitments to phase in market access.
· In its audio-visual services commitments, China agreed to permit 20 foreign films per year for theatrical release. · USTR notes the following deficiencies: § China has applied a restrictive interpretation to its market access commitments. China treats its commitment to permit 20 foreign films per year as an upper limit rather than as a minimum. This interpretation has encouraged illegal copying and sale of foreign films in China.
· China revised Foreign Trade Law (April 2004) appears to provide broad authority for services safeguards. · USTR notes the following deficiencies: § The WTO Services Agreement does not provide for safeguard measures on services.
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9. Legal Framework[10] |
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Transparency
· China committed to providing, before implementation, a reasonable period for public comment on new or modified laws and regulations. · China also committed to translating its trade-related laws and regulations into one (or more) of the WTO languages (English; French; Spanish) and to publish them in an official journal.
Public Comment · Following accession, China repealed, revised, or enacted many trade-related laws and regulations. In 2002 and 2003, China was deficient in providing opportunity for public comment before new or modified laws and regulations were implemented. · USTR notes the following deficiencies: § Despite progress, in 2004, provision for public comment continued to be uneven. For example, drafts of the Foreign Trade Law, automobile industrial policy, rules of origin regulations, and customs regulations were either selectively circulated or not circulated at all. § China has been deficient in providing translations of its trade-related laws and regulations.
Enquiry Points · China has established various enquiry points where WTO members, foreign companies or individual can obtain information. USTR notes that U.S. companies have generally found China’s enquiry points to be responsive and helpful.
Official Journal · China committed to establish or designate an official journal for publication of its trade-related laws, regulations and other measures. · USTR notes the following deficiencies: § China has yet to either establish or designate an official journal for publication of its trade-related laws, regulations and other measures
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Uniform Application of Laws
· China committed to apply, implement and administer its trade laws, regulations and other measures in a uniform and impartial manner throughout China. China also agreed to establish an internal review mechanism to examine instances of non-uniform application. · USTR notes the following deficiencies: § China established an internal review mechanism in 2002. However, in 2004, USTR notes that the actual operation of this mechanism still is unclear. § In 2004, as in prior years, some problems with uniformity continued (reviewed in sections on Customs, Taxation, Investment and Intellectual Property Rights).
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Judicial Review
· China agreed to establish independent and impartial tribunals to review administrative actions on trade-related matters. China has designated certain courts to handle administrative decisions related international trade issues and intellectual property rights, but, so far, foreign companies have not had much experience with these courts. · China had made progress in improving the quality of its judges, but there are still many judges with little legal training. · USTR notes the following deficiencies: § In 2004, many U.S. companies still are concerned about the independence of China’s judiciary, as they are often influenced by political, government or business pressures.
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C. Other Reports on China’s WTO Compliance
1. American Chamber of Commerce – PRC
In September 2004, the American Chamber of Commerce in China issued its 2004 White Paper: American Business in China, which covers a range of issues concerning the business climate in China including the impact and implementation of China’s WTO commitments. In general, the 2004 White Paper strikes a positive note about China’s efforts to comply with its WTO obligations, as indicated by the following:
With the exception of intellectual property rights, we believe China is substantially in compliance with its WTO deadlines and specific obligations. While some commitments remain problematic and there continue to be many areas where the market access opportunities anticipated still have not been realized, China has taken noteworthy steps this year to comply with its basic commitments in the areas of trading rights, insurance, auto finance, and agriculture, among others.
* * *
As we are essentially at the mid-point of the five-year WTO implementation timetable, our members indicate that China needs to complement its overall solid 2004 WTO performance with greater transparency in the drafting of its commercial laws and regulations and ensuring that local and provincial governments do not thwart market access commitments made at the national level.[11]
Despite the White Paper’s broad optimistic note, it focuses specific attention on intellectual property rights (IPR) and acknowledges China’s shortcomings in that area: “Our members report that the situation in IPR seems to be worsening, with over three-quarters reporting that they are negatively affected by IPR infringement.[12]
In its review of China’s WTO compliance, the White Paper identifies the following major areas of concern, among others.
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Intellectual Property Rights |
“Widespread infringement of intellectual property rights in China continues to impact a broad variety of products and technologies, across sectors such as media and entertainment, pharmaceuticals, information technology, consumer goods, electrical equipment, automotive parts, and many others. While China has put in place a sound basic legal and regulatory framework designed to address this problem, it lacks an effective enforcement system and, overall, we believe the situation in the marketplace is worsening, not improving. * * * Few counterfeiters or copyright pirates are subject to criminal sanctions in China, and the administrative sanctions imposed on them fall short of the TRIPS-mandated standard of effective enforcement that has a ‘deterrent’ impact.”[13]
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Regulatory Transparency |
“Of great importance to the American business community . . . is the opportunity to review and comment on ‘all laws, regulations, and other measures pertaining to or affecting trade in goods, services, TRIPs, or the control of foreign exchange before such measures are enforced.’ * * * Chinese ministries have from time to time asked our individual member companies to comment on draft regulations that affect their respective industries. Nonetheless, such consultation between the Chinese government and the foreign business community remains carefully managed and selective, with widely varying practices among different ministries.”[14]
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Agricultural Market Access |
“China committed to make systemic changes designed to create fairness, predictability, and transparency in agricultural trade. China has only partially fulfilled these commitments. * * * Another problematic area is China's use of a tariff rate quota (TRQ) system on agricultural products, which acted as a non-tariff barrier on imports of foreign agricultural goods.”[15]
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Value-Added Taxes |
“China uses value-added tax (VAT) policies to encourage or protect domestic production in a number of industrial and agricultural sectors.”[16]
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Trade and Distribution |
MOFCOM issued the regulations specifying “how foreign-invested commercial enterprises may conduct retail, wholesale, franchise, or commission agency business. Overall, the regulation satisfies China's WTO commitments in the distribution sector. However, the regulation states that new stores opened by foreign-invested distribution companies must suit the urban and commercial development plans of the city in which the store will be located and present local government documentation to that effect when submitting an application. Given the discretionary latitude possessed by local officials in this regard, this requirement could be used as a market-entry barrier to restrict the number of foreign distribution operations in a given city. Additionally, the regulations failed to address direct selling, which China's WTO commitments define as one type of distribution service . . . .”[17]
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National Treatment |
“In express delivery, the U.S. industry has significant reservations regarding the proposed extension of China Post's monopoly to deliveries of domestic letters weighing less than 500 grams, according to the draft postal regulations. These draft regulations create a new unspecified charge on express industry revenues to help support China Post's universal service, as well as a new, unworkable licensing regime that gives new powers of supervision, inspection, and punishment to the postal regulator.”[18]
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2. U.S. Chamber of Commerce
In September 2004, the U.S. Chamber of Commerce issued a report assessing China’s WTO compliance.[19] The report noted that China has made progress in meeting its WTO commitments in many areas, “particularly in tariff reduction, revising existing laws and drafting and passing new ones to comply with its WTO requirements, and educating its officials and companies about its WTO obligations.” Notwithstanding China’s compliance positives, the Chamber’s report highlights areas where China has not fully met its commitments. Some of the areas noted include the following sampling:
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Market Access |
“China has made positive regulatory changes that appear to presage greater market access for foreign companies as specified under its WTO commitments. At the same time, however, China appears to be adopting new policies that undercut these changes. China’s continuing reliance on high capitalization requirements to restrict the market access that it promised in its accession agreements and use of proprietary standards that discount foreign IPR and shield emerging domestic players from global competition are examples where China appears to be undercutting meaningful implementation of its WTO commitments.” [20]
“Excessive capitalization requirements to enter or expand in many key sectors, including insurance, telecommunications, auto finance, and banking, remain a major concern for many U.S. Chamber members.”[21]
“China should actively adopt measures that open its market in ways that comply with the spirit of its WTO obligations, even if it is not strictly bound to do so under its WTO commitments. New PRC policy directives that affect sectors of strong interest to U.S. Chamber member companies could greatly limit their ability to provide goods and services in the China market. . . . China should refrain from adopting policies that are more restrictive than those in place prior to its WTO accession, as it has done in the case of construction and engineering services and as it appears to be doing in the area of government procurement. In these cases, U.S. goods and service providers face a rolling back of the market access they have enjoyed.[22]
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IPR |
“China’s intellectual property rights (IPR) enforcement and broader protection efforts are inadequate.”[23]
“After nearly three years as a member of the global trading body, it is clear that China has not addressed key weaknesses in its IPR enforcement system and the protection that is accorded to companies of all sizes fails on the whole to meet the standards of effectiveness and deterrence set out in the TRIPS Agreement.” [24]
“Counterfeit pharmaceuticals are a significant and increasing problem in China, especially over-the-counter products sold outside of hospitals, and the agriculture sector reports evidence of counterfeit fertilizer. Pirated music, books, business software, movies, and video games are also readily available on the market, and unauthorized use of software by business is rampant, hindering the ability of both indigenous and U.S. creators and rights holders to build successful businesses.”[25]
“Full protection under PRC law and enforcement of IPR in China as set forth in China’s TRIPS obligations are critical to the interests of foreign and PRC companies in China, as well as to China’s public health and safety, the integrity and attractiveness of China’s investment regime, and its broader economic development goals.”[26]
“Protection and enforcement of IPR, as defined in the WTO TRIPS agreement, is of increasing in importance to automakers operating in China. Since China’s accession to the WTO, there has been an increase in IPR violations of autos and automotive products, such as automotive braking, steering, and emissions systems.”[27]
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Transparency |
“Regulatory transparency remains a key concern of U.S. Chamber member companies. The U.S. Chamber applauds the measures that MOFCOM adopted at the end of 2003 that promote the ministry’s compliance with China’s WTO transparency commitments, specifically those that require People’s Republic of China (PRC) authorities to provide a “reasonable period for comment to the appropriate authorities” before trade-related measures are implemented. Other PRC ministries and agencies, however, have been far less progressive in their approaches to circulating draft regulations to foreign companies and in providing a reason able window for comment. We urge the Chinese government to have all its rulemaking ministries and agencies follow MOFCOM’s example in fulfilling China’s transparency obligations under the WTO. China also needs to fulfill its recent promise to fully separate the regulatory and commercial functions in the express delivery and telecommunications sectors.”[28]
“PRC ministries outside of MOFCOM continue to circulate draft regulations to foreign companies in ad hoc fashion. In instances when PRC authorities circulate regulations to the foreign business community, comment periods for foreign companies remain woefully short. Many companies report cases of receiving regulations only through their PRC joint venture partners. And, while new trade-related regulations are increasingly available via online, trade gazettes, and other sources, PRC agencies continue to lag in translating such regulations into WTO-authorized languages.”[29]
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Trading and distribution rights |
“China’s full and consistent implementation of its trading rights and distribution services obligations by December 11, 2004, is of critical interest to foreign companies. The U.S. Chamber applauds China’s early phase-in of trading rights for wholly foreign-owned companies on July 1. Further, it hopes that MOFCOM will release implementing regulations soon that clarify how new and existing wholly foreign-owned businesses in China can acquire distribution rights to allow foreign businesses to begin distribution services on the December 11, 2004, phase-in date.”[30]
“The Regulations on Management of Foreign Investment in the Commercial Sector, issued in mid-April, provide new guidance to foreign companies on how they may conduct retail, wholesale, franchise, and commission agency services in the China market. But, the regulations fail to offer details on how existing foreign-invested companies in China can incorporate distribution services into their existing scopes of business.”[31]
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Standards |
The U.S. Chamber is concerned about China’s use of discriminatory standards to erect barriers to fair competition and in violation of its WTO obligations. * * * China has moved to develop, adopt, and increasingly mandate unique national technology standards across a wide range of technology products. Examples include a mandated encryption standard for wireless communications devices and the development of unique national standards for AVS for media/TV, IGRS for connectivity, and EVD for recording media. * * * China’s adoption of mandatory national technology standards that are out of step with international standards efforts and that don’t consistently respect intellectual property are troubling to U.S. Chamber members, many of whom have made significant investments in China.
China also continues to maintain for certain imported products a tiered conformity assessment process that is incompatible with its WTO obligations under Article 13.4(a) of the Agreement on Technical Barriers to Trade, which requires that China maintain no more than one conformity assessment process for all imported goods.
China’s implementation of its new certification regime, centered on the China Compulsory Certification (CCC) mark, remains a work in progress, with many imported products still facing additional inspection processes beyond the CCC-qualifying process.
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National treatment |
“U.S. Chamber members continue to harbor concerns over China’s lackluster application of the WTO’s national treatment and nondiscrimination principles in the areas of price controls on medicines and drug reimbursement. China’s actions in this area appear designed to benefit domestic pharmaceutical manufacturers at the expense of their foreign counterparts.”[32]
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Agriculture |
“While China has eliminated or reduced some tariff barriers, foreign companies are experiencing problems with several nontariff barriers that restrict trade into China, create significant marketplace uncertainty, and discourage further foreign investment.”[33]
These include such measures as: · a new animal and plant quarantine regulation that “requires that Quarantine Import Permits (QIPs) be approved prior to signing contracts, which appears to provide China’s AQSIQ with blanket authority to annul or void import permits in the case of a government-issued warning or ban.”[34] · “U.S. soybean, cotton, and meat traders have reported significant restrictions on exports of products to China stemming from AQSIQ’s issuance of Import of Animal and Plant Quarantine permits and its inspection procedures.”[35]
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3. US-China Business Council
The US-China Business Council has compiled a WTO Scorecard covering China’s “Year Three Commitments.”[36] The USCBC observes that China has fulfilled the bulk of its market opening commitments but that China's fulfillment of its commitments is “not always clear-cut.”[37] Some of the areas in which the Scorecard notes compliance concerns are the following.
- Trading Rights: China issued regulations but no companies have been approved.
- Distribution: China issued regulations regarding wholesale, retail, and commission agents' services, but implementation remains unclear. China is late in issuing regulations regarding retailing and wholesaling of pharmaceuticals and retailing of refined fuels.
- Telecom: China met its commitment to open this market but has imposed strict conditions which effectively block foreign entry.
- Construction: China met its commitment to open this market but has imposed strict conditions which effectively block foreign entry.
- Freight Transport Services: China is late in opening market to wholly foreign–owned road enterprises and storage and warehousing enterprises.
- Repair, Maintenance, and Leasing: China is late in issuing regulations to permit wholly foreign–owned enterprises to enter this market.
- Autos: China is late in raising to $90 million the level of foreign investment in auto manufacturing that requires provincial approval.[38]
II. China WTO Issues and U.S. Enforcement
A. The Use of China-Specific Safeguards in the United States
1. China Accession Provisions
China’s protocol of accession, as well as the working party report, included two special safeguard provisions that are available to all WTO Members during transitional periods and that are applicable to China specifically. First, WTO members may apply a product-specific transitional safeguard to deal with import surges of particular products from China that cause market disruption. Second, WTO members may apply a special textile safeguard provision in order to deal with market disruption due to increased imports of Chinese textile and apparel products.
a. Product-Specific Safeguards
China’s accession protocol provides for a general “product-specific special safeguard” measure, which is applicable to any type of product (i.e., industrial and agricultural goods) and is available to the U.S. (and other WTO Members) for 12 years following China’s accession to the WTO (until December 11, 2013).[39] This provision allows WTO Members to take action to restrain imports of Chinese goods that cause or threaten to cause “market disruption” to the domestic industry producing such goods.
The transitional product-specific safeguard is unique to China. No other acceding country (either to GATT or the WTO) has been subject to a transitional product-specific safeguard. Members insisted, however, that because China acceded to the WTO before it had achieved all necessary trade reformations or met all WTO obligations, a product-specific safeguard mechanism was necessary to protect other WTO Members from increased imports from China during China's transitional period.
The product-specific safeguard’s injury standard is "market disruption," which exists wherever imports of an article, like or directly competitive with an article produced by the domestic industry, are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury to the domestic industry.[40] This standard is substantially less than the “serious injury” standard of a typical safeguard action.
The Protocol provides that before a product-specific safeguard measure is applied, a consultation process should take place to see if the parties can reach a mutually satisfactory solution.[41] If consultations succeed, China "shall take such action as to prevent or remedy the market disruption."[42] If, however, consultations do not succeed within 60 days, the WTO member may take action to prevent or remedy the market disruption by imposing a product-specific safeguard measure.[43]
Product-specific safeguard measures may be in place for two years where there has been a relative increase in imports, and three years where the increase is absolute. After these respective periods, however, China may “retaliate” by suspending substantially equivalent concessions or obligations under the WTO Agreement.[44]
b. Textile Safeguards
The working party report to China's accession established a special textile safeguard mechanism that is available to WTO Members through December 31, 2008.[45] The safeguard is applicable to textile and apparel products covered by the Agreement on Textiles and Clothing ATC as of the date the WTO Agreement entered into force (January 1, 1995).
Paragraph 242 of the working party report sets out the[46] terms of the special textile safeguard. If a WTO Member believes (and can show) that imports of certain Chinese textile and apparel products are “threatening to impede orderly development of trade in these products” due to “market disruption,” the WTO Member can request consultations with China “with a view to easing or avoiding such market disruption.”[47] The injury standard (“market disruption”) is less stringent than the “serious injury” test of a regular safeguard action.
Upon receipt of a request, China will “hold its shipments ... to a level no greater than 7.5 per cent (6 per cent for wool product categories) above the amount entered during the first 12 months of the most recent 14 months preceding” the request.[48] Consultations would be held within 30 days of the request with the aim of reaching a "mutually satisfactory solution" within 90 days of the request.[49] If no solution can be reached, consultations, and export restraints, continue.[50] Textile safeguards may be applied from the date that consultations are requested through December 31 of that year.[51] In general, no textile safeguard may last longer than one year unless it is reapplied through further consultations, or otherwise agreed to by China and the WTO member.[52]
2. U.S. Application of China-Specific Safeguards
a. Product-Specific Safeguards
The China product-specific safeguard was enacted in U.S. law by Section 421 of the Trade Act of 1974, as amended, 19 U.S.C. § 2451. Section 421 permits U.S. domestic industries and workers adversely affected by increased imports from China to seek relief. [53]
As of January 2005, there have been only five Section 421 investigations. The last active investigation was completed in March 2004. Of the five Section 421 investigations, the ITC made an affirmative injury determination and recommended relief in three cases and made a negative determination in two cases. No case has resulted in relief to a domestic industry, however, as the President denied relief in the three affirmative cases.
Section 421 Investigations
|
Product |
Investigation Initiated |
ITC Determination |
Recommended Relief |
President’s Determination |
|
Pedestal actuators |
August 19, 2002 |
Affirmative (3-2) October 18, 2002 |
Quotas |
Denied relief on grounds of national economic interest (January 17, 2003) |
|
Steel wire garment hangers |
November 27, 2002 |
Affirmative (5-0) January 27, 2003 |
Additional duties |
Denied relief on grounds of national economic interest (April 25, 2003) |
|
Brake drums and rotors |
June 6, 2003 |
Negative (5-0) August 5, 2003 |
Not applicable |
Not applicable |
|
Ductile iron waterworks fittings (DIWF) |
September 5, 2003 |
Affirmative (6-0) December 4, 2003 |
3-year tariff-rate quota |
Denied relief on grounds of national economic interest (March 3, 2004) |
|
Innersprings |
January 6, 2004 |
Negative (6-0) March 8, 2004 |
Not applicable |
Not applicable |
The following tables summarize the five Section 421 actions that have been completed as of January 2005.
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TA-421-01: Pedestal Actuators from China |
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Petition Filed: August 19, 2002, on behalf of Motion Systems Corp., Eatontown, NJ.
Investigation Instituted: effective August 19, 2002; Pedestal Actuators from China, 67 Fed. Reg. 54822 (Institution) (ITC August 26, 2002).
ITC Injury Determination: Affirmative. On October 18, 2002, by a vote of 3-2, the USITC determined that pedestal actuators from the People’s Republic of China are being imported into the United States in such increased quantities or under such conditions as to cause market disruption to the domestic producers of like or directly competitive products. See Pedestal Actuators from China, 67 Fed. Reg. 69557 (Determination) (ITC November 18, 2002).
ITC Remedy Recommendation: October 29, 2002. The Commission recommended import relief in the form of a quota.
· Commissioners Hillman and Miller recommended a quantitative import restriction for 3 years in the amount of 5,626 units in year 1; 6,470 units in year 2; and 7,440 units in year 3. · Commissioner Koplan recommended a quantitative import restriction for 3 years in the amount of 4,425 units in year 1; 4,514 units in year 2; and 4,604 units in year 3.
The Commission transmitted its remedy proposals to the President and U.S. Trade Representative on November 7, 2002. See Pedestal Actuators from China, 67 Fed. Reg. 69557 (Determination) (ITC November 18, 2002).
Views of Commission: Pedestal Actuators from China, TA-421-1, USITC Pub. 3557 (November 2002).
President's Decision: On January 17, 2003, the President announced that he was not providing relief because he had determined that import relief was not in the national economic interest and that import relief would have an adverse impact on the United States economy clearly greater than the benefits of such action. The President provided the following reasons for his decision not to grant relief:
In determining not to provide import relief, I considered its overall costs to the U.S. economy. The facts of this case indicate that imposing the USITC's recommended quota would not likely benefit the domestic producing industry and instead would cause imports to shift from China to other offshore sources.
Even if the quota were to benefit the primary domestic producer, the cost of the quota to consumers, both the downstream purchasing industry and users of the downstream products, would substantially outweigh any benefit to producers' income. The USITC's analysis confirms this conclusion.
In addition, downstream industries are already under pressure to migrate production offshore to compete with lower-cost imports of finished products. Higher component costs resulting from import relief would add to this pressure. Given the significantly larger number of workers in the downstream purchasing industry when compared with the domestic pedestal actuator industry, I find that imposing import restrictions would do more economic harm than good.
Finally, a quota would negatively affect the many disabled and elderly purchasers of mobility scooters and electric wheelchairs, the primary ultimate consumers of pedestal actuators.
Memorandum of January 17, 2003--Presidential Determination on Pedestal Actuator Imports From the People's Republic of China, 68 Fed. Reg. 3155 (Presidential Document January 22, 2003).
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TA-421-02: Steel Wire Garment Hangers from China |
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Petition Filed: November 27, 2002, on behalf of CHC Industries, Inc., Palm Harbor, FL; M&B Hangers Co., Leeds, AL; and United Wire Hanger Corp., South Hackensack, NJ.
Investigation Instituted: effective November 27, 2002; Certain Steel Wire Garment Hangers from China, 67 Fed. Reg. 72700 (Institution) (ITC December 6, 2002).
ITC Injury Determination: Affirmative. On January 27, 2003, by a vote of 5-0, the USITC determined that certain steel wire garment hangers from the People’s Republic of China are being imported into the United States in such increased quantities or under such conditions as to cause market disruption to the domestic producers of like or directly competitive products. See Certain Steel Wire Garment Hangers from China, 68 Fed. Reg. 8926 (Determination) (ITC February 26, 2003).
ITC Remedy Recommendation: February 5, 2003. The Commission recommended import relief in the form of an additional duty.
· Commissioners Okun, Hillman, and Miller recommended relief in the form of an additional duty for 3 years: 25% year 1; 20% in year 2; and 15% in year 3. In addition, they recommended expedited consideration of trade adjustment assistance for firms and/or workers affected by the subject imports. · Commissioner Bragg recommended relief in the form of an additional duty for 2 years: 20% year 1; 15% in year 2. · Commissioner Koplan recommended relief in the form of an additional duty of 30% for 3 years. In addition, he recommended expedited consideration of trade adjustment assistance for firms and/or workers affected by the subject imports. See Certain Steel Wire Garment Hangers from China, 68 Fed. Reg. 8926 (Determination) (ITC February 26, 2003).
The Commission transmitted its remedy proposals to the President and U.S. Trade Representative on February 14, 2003. See Notice of Proposed Measure and Opportunity for Public Comment Pursuant to Section 421 of the Trade Act of 1974: Certain Steel Wire Garment Hangers From the People's Republic of China, 68 Fed. Reg. 10765 (USTR March 6, 2003).
Views of Commission: Certain Steel Wire Garment Hangers from China, TA-421-2, USITC Pub. 3575 (February 2003).
President's Decision: On April 25, 2003, the President announced that he was not providing relief because he had determined that import relief was not in the national economic interest and that import relief would have an adverse impact on the United States economy clearly greater than the benefits of such action. The President provided the following reasons for his decision not to grant relief:
The facts of this case indicate that imposing additional tariffs on Chinese imports would affect domestic producers unevenly, favoring one business strategy over another. While most of the producers would likely realize some income benefits, additional tariffs would disrupt the long-term adjustment strategy of one major producer, which is based in part on distribution of imported hangers, and cause that producer to incur substantial costs.
In addition, most domestic producers, including the petitioners, have begun to pursue adjustment strategies. While these strategies have included consolidation, modernization of production facilities, and expansion into complementary products and services, domestic producers are also expanding their use of imports. Indeed, a substantial part of the surge in imports during the most recent period measured was brought in by domestic producers themselves, including the petitioners.
Moreover, after 6 years of competing with Chinese imports, domestic producers still account for over 85 percent of the U.S. wire hanger market. With this dominant share of the market, domestic producers have the opportunity to adjust to competition from Chinese imports even without import relief.
Furthermore, there is a strong possibility that if additional tariffs on Chinese wire hangers were imposed, production would simply shift to third countries, which could not be subject to section 421's China-specific restrictions. In that event, import relief would have little or no benefit for any domestic producer.
Additional tariffs would have an uneven impact on domestic distributors of wire hangers. For some distributors, the tariffs would likely lead to some income benefits. However, the tariffs would likely harm other distributors in light of their business models.
Additional tariffs would also likely have a negative effect on the thousands of small, family-owned dry-cleaning businesses across the United States that would either have to absorb the resulting increased costs or pass them on to their customers.
Memorandum of April 25, 2003--Presidential Determination on Wire Hanger Imports from the People's Republic of China, 68 Fed. Reg. 23017 (Presidential Document April 29, 2003).
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TA-421-03: Brake Drums And Rotors from China |
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Petition Filed: June 6, 2003, on behalf of the Coalition for the Preservation of American Brake Drum and Rotor Aftermarket Manufacturers (consisting of Dana Corp. (Brake and Chassis Division)/Brake Parts, Inc.; Federal Mogul Corp.; and Thyssen Krupp Waupaca/Waupaca Foundry, Inc.).
Investigation Instituted: effective June 6, 2003; Certain Brake Drums and Rotors from China, 68 Fed. Reg. 35702 (Institution) (ITC June 16, 2003).
ITC Injury Determination: Negative. On August 5, 2003, by a vote of 5-0, the USITC determined that certain brake drums and rotors from the People’s Republic of China are not being imported into the United States in such increased quantities or under such conditions as to cause market disruption to the domestic producers of like or directly competitive products. See Certain Brake Drums and Rotors from China, 68 Fed. Reg. 48938 (Determination) (ITC August 15, 2003).
ITC Remedy Recommendation: None.
Views of Commission: Certain Brake Drums and Rotors from China, TA-421-3, USITC Pub. 3622 (August 2003).
President's Decision: None.
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TA-421-04: Ductile Iron Waterworks Fittings from China |
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Petition Filed: September 5, 2003, on behalf of McWane, Inc., Birmingham, AL, and three subsidiaries: Clow Water Systems Co., Coshocton, OH, Tyler Pipe Co., Tyler, TX, and Union Foundry Co., Anniston, AL.
Investigation Instituted: effective September 5, 2003; Certain Ductile Iron Waterworks Fittings from China, 68 Fed. Reg. 54010 (Institution) (ITC September 15, 2003).
ITC Injury Determination: December 4, 2003. By a vote of 6-0, the USITC determined that certain ductile iron waterworks fittings from the People’s Republic of China are being imported into the United States in such increased quantities or under such conditions as to cause market disruption to the domestic producers of like or directly competitive products. See Certain Ductile Iron Waterworks Fittings from China, 68 Fed. Reg. 69421 (Determination) (ITC December 12, 2003).
ITC Remedy Recommendation: December 15, 2003. The Commission recommended import relief in the form of a tariff-rate quota for a three-year period: · 50% tariff on imports exceeding 14,324 short tons in year 1; · 40% tariff on imports exceeding 15,398 short tons in year 2; and · 30% tariff on imports exceeding 16,553 short tons in year 3.
The Commission further recommended expedited consideration of trade adjustment assistance for firms and/or workers affected by the subject imports.
The Commission transmitted a report on its determination, as well as its remedy proposals, to USTR on December 24, 2003.
Views of Commission: Certain Ductile Iron Waterworks Fittings from China, TA-421-4, USITC Pub. 3657 (December 2003).
President's Decision: On March 3, 2004, the President announced that he was not providing relief because he had determined that import relief was not in the national economic interest and that import relief would have an adverse impact on the United States economy clearly greater than the benefits of such action. The President provided the following reasons for his decision not to grant relief:
The facts of this case indicate that imposing the USITC's recommended tariff-rate quota remedy or any other import relief available under section 421 would be ineffective because imports from third countries would likely replace curtailed Chinese imports. The switch to third country imports could occur quickly because the major U.S. importers already import substantial quantities from countries such as India, Brazil, Korea, and Mexico. Because importers' existing inventories of imports will likely cover demand for approximately 6 to 12 months from the imposition of import relief, a switch from China to alternative import sources would not likely lead to significant additional demand for domestically produced pipe fittings, even accounting for a time lag in making that switch. Under these circumstances, import relief would provide no meaningful benefit to domestic producers.
In addition, import relief would cost U.S. consumers substantially more than the increased income that could be realized by domestic producers. Indeed, the USITC estimated that its recommended remedy would generate a negative net domestic welfare effect of between $2.3 million and $3.7 million in the first year alone.
While not necessary in reaching my determination that imposing import relief would have an adverse impact on the United States economy clearly greater than the benefits, it is also worth noting two additional points:
· First, evidence suggests that domestic producers enjoy a strong competitive position in the U.S. market, and in fact the largest domestic producer recently announced price increases nationwide ranging from 8 to 35 percent. The two smaller domestic producers and the major U.S. importers have publicly indicated that they would follow these price increases.
· Second, in 2002 and 2003, imports of this product have been relatively stable in volume terms and have shown a slight decline in value terms.
The circumstances of this case make clear that the U.S. national economic interest would not be served by the imposition of import relief under section 421. I remain fully committed to exercising the important authority granted to me under section 421 when the circumstances of a particular case warrant it.
Memorandum of March 3, 2004--Presidential Determination on Imports of Certain Ductile Iron Waterworks Fittings From the People's Republic of China, 69 Fed. Reg. 10597 (Presidential Document March 8, 2004).
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TA-421-05: Innersprings from China |
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Petition Filed: January 6, 2004, on behalf of the U.S. member companies of The American Innerspring Manufacturers (AIM), Memphis, TN. Petitioning firms include Atlas Spring, Gardena, CA; Hickory Springs Manufacturing Co., Hickory, NC; Leggett & Platt, Carthage, MO; and Joseph Saval Spring & Wire Co., Inc., Taylor, MI.
Investigation Instituted: effective January 6, 2004; Innersprings from China, 69 Fed. Reg. 2002 (Institution) (ITC January 13, 2004).
ITC Injury Determination: Negative. On March 8, 2004, by a vote of 6-0, the USITC determined that uncovered innerspring units from the People’s Republic of China are not being imported into the United States in such increased quantities or under such conditions as to cause market disruption to the domestic producers of like or directly competitive products. See ITC News Release 04-022: ITC Announces Determination in China Safeguard Investigation Concerning Uncovered Innerspring Units from China (March 8, 2004).
ITC Remedy Recommendation: None.
Views of Commission: Uncovered Innerspring Units from China, TA-421-5, USITC Pub. 3676 (March 2004).
President's Decision: None.
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b. Textile Safeguards
The special China textile safeguard set out in the Working Party Report to China's WTO accession became effective upon China's entry into the WTO on December 11, 2001. In the United States, the textile safeguard was not implemented by statute. Rather, the textile safeguard was implemented by procedural rules issued by the Committee to Implement Textile Agreements (“CITA”), the official U.S. government entity responsible for administering the Agreement on Textiles and Clothing (“ATC”). In May 2003, CITA issued the procedural rules for bringing a special safeguard action to seek relief from Chinese imports.[54] [55]
The following summarizes the China textile safeguard requests made and government actions taken in the U.S. since China’s accession.
· September 2002
The American Textile Manufacturers Institute (ATMI) petitioned CITA to impose special textile quotas on five product categories: (1) knit fabric; (2) gloves; (3) dressing gowns; (4) brassieres; and (5) textile luggage.[56] In addition, ATMI identified a sixth product, textured filament yarn from China, and asked CITA to prepare a case for the possible imposition of quota restraints on imports of that product in the event that imports continued to increase.[57] In making its request, ATMI cited a 119% increase in textile imports from China in the first six months of 2002 and stated that imports of Chinese textile products were "experiencing their greatest surge in history."[58]
During the first six months of the year, Chinese exports of textile and apparel products to the United States increased by almost 900 million square meters, with the textile portion increasing by more than 700 million square meters. On the strength of this increase, China surpassed both Pakistan and Canada to become the second largest textile and apparel exporter to the United States, shipping 1.9 billion square meters during the first six months of the year. China accounted for 60 percent of the increase in world-wide imports of textile and apparel products during the first half of the year.[59]
ATMI also presented the following data with respect to the product categories identified in its petition.
1) Knit fabric – Chinese knit fabric exports rose 22 thousand percent and the average price of Chinese knit fabric dropped by 60 percent, catapulting China from being the 26th largest supplier of such exports to the U.S. to the 5th place among all foreign suppliers;
2) Gloves – China’s exports of gloves to the United States tripled over the last six months, with the result that Chinese exports are now twice as large as those from the next largest supplier;
3) Nightwear/Dressing Gowns – Chinese exports of nightwear more than quadrupled, vaulting China from seventh to first place among supplying countries. The Chinese surge was accompanied by a 47% drop in Chinese prices;
4) Brassieres – In less than six months, China leapfrogged the top two long-standing largest suppliers – Mexico and the Dominican Republic – as China’s price per dozen dropped to $29, by far the lowest of any major supplier;
5) Luggage – Chinese exports of textile luggage have quadrupled to 71 million kilograms while imports from every other supplier have simultaneously dropped, some by as much as 60 percent. Chinese prices fell by 62% during the same period of time. China now ships more than five times as much as the next largest supplier;
6) Textured filament yarn – Chinese exports have only recently begun to surge and remain relatively small. However, over the past two months, Chinese exports increased at a rate of 400,000 kilograms a month.[60]
At the time the petitions were filed, importers questioned whether ATMI was eligible to request textile safeguards with respect to certain of the products identified because ATMI members do not make four of the five products for which ATMI petitioned for relief (i.e., dressing gowns, brassieres, gloves, and textile luggage).[61] However, ATMI members do produce and supply the fabric used in making these products. A press article noted at the time that:
For CITA to impose a safeguard, it would have to apply an expansive definition of market disruption that would cover upstream suppliers of a given product, an ATMI source said. Under this definition, quotas could be imposed on a given product if it disrupted U.S. exports of fabric used to make these items, he said. This would be consistent with the market disruption definition CITA has applied in the past to invoke quotas under the Multifiber Arrangement (MFA), he said.
* * *
A Commerce Dept. official said this week that given this first request, CITA is looking at both the specific categories as well as the whole process for evaluating the request. This includes questions of whether upstream suppliers can claim market disruption or whether petitioners have to meet a standing requirement, he said. He said that CITA would “at some point” decide how to proceed on the request.[62]
· May 2003
Prior to CITA's issuance of procedural rules applicable to special textile safeguard requests in May 2003, CITA took no official action with respect to ATMI's September 2002 petitions.[63] When CITA issued its procedural rules, however, it resolved the question about ATMI's standing by determining that, in accord with past CITA practice, domestic producers of components used in producing like or directly competitive products were eligible to request safeguards:
Consistent with longstanding Committee practice in considering textile safeguard actions, requests may be filed by an entity (which may be a trade association, firm, certified or recognized union, or group of workers) that is representative of either: (A) a domestic producer or producers of a product that is a like or directly competitive with the subject Chinese textile or apparel product; or (B) a domestic producer or producers of a component used in the production of a product that is like or directly competitive with the subject Chinese textile or apparel product.[64]
Once the new procedural rules were issued, it was determined that ATMI (the only petitioner for a China-specific textile safeguard so far) would need to re-file the petitions it had initially filed in September 2002.
. . . Commerce has indicated that it will have to re-file a petition on Chinese safeguards now that the regulations outlining the process have been published . . . . One source said that while some officials have said a new petition is not needed, ATMI will need to include new information, which means it will effectively have to file a new document with CITA before the process begins.[65]
· July 2003
On July 24, 2003, ATMI, together with certain other textile groups, filed petitions requesting that a textile and apparel safeguard action be taken against China with respect to four product categories.
· August 2003
In August 2003, CITA accepted three of the petitions filed by ATMI (knit fabric, dressing gowns, and brassieres) and rejected the fourth (gloves). The following summarizes the petitioners, product categories, and status of and the four petitions:
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Petitioners |
Product |
Category |
Status |
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· American Yarn Spinners Association · American Manufacturing Trade Action Coalition · American Textile Manufacturers Institute · National Textile Association |
Knit fabric |
222 |
Accepted by CITA |
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· American Manufacturing Trade Action Coalition · American Textile Manufacturers Institute · National Textile Association |
Cotton and man-made fiber dressing gowns
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350/650 |
Accepted by CITA |
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· American Manufacturing Trade Action Coalition · American Textile Manufacturers Institute · National Textile Association |
Cotton and man-made fiber brassieres |
349/649 |
Accepted by CITA |
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· American Manufacturing Trade Action Coalition · American Textile Manufacturers Institute · National Textile Association |
Cotton and man-made fiber gloves |
331/631 |
Rejected by CITA |
On August 18, 2003, CIT published a notice in the Federal Register soliciting public comments on the three safeguard requests that it had accepted.[66] The petitions on these three product categories showed substantial increases in imports of various textile and apparel products from China. For example, the petition on certain knit fabrics showed an increase in imports from a little over 31,000 kilograms in 2001 to more than 7 million kilograms in 2002, accompanied by price declines of more than 50 percent.[67] The petitions on the other products also showed increases in imports from China of 300 to more than 500% and price declines of 44-50 percent between 2001 and 2002.[68] The public comment period for the three textile petitions ended on September 17, 2003.
· December 2003
On December 23, 2003, CITA determined that Chinese-origin knit fabric, dressing gowns, and brassieres are, due to market disruption (and the threat thereof), threatening to impede the orderly development of trade in such products, and that imports of such products from China play a significant role in the existence (and threat) of market disruption. Pursuant to these findings, on December 29, 2003, CITA issued notices in the Federal Register announcing that it had (1) established import limits for knit fabric, dressing gowns, and brassieres, and (2) requested consultations with China.[69] The import limits established by CITA on these textile products from China became effective on December 24, 2003 and be in effect until December 23, 2004.[70]
· June 2004
On June 28, 2004, U.S. producers of socks and other textile producers filed a safeguard petition covering cotton, wool, and man-made fiber socks (categories 332/432 and 632 part).
· October 2004
Up to October 2004, CITA had imposed 3 textile safeguards. On October 8, 2004, a U.S. textile industry coalition filed a new special textile safeguard petition covering product categories 347 and 348 (men’s and boys’ and women’s and girls’ cotton trousers) and based upon a “threat” of increased imports.[71]
Upon the filing of the new petitions, U.S. retailer and importer groups argued that there was no basis in CITA’s rules for accepting a safeguard petition based only on the “threat” of increased imports rather than actual increased imports.[72]
On October 12, 2004, U.S. textile and apparel groups filed 4 new threat-based safeguard petitions covering man-made fiber trousers (categories 647/648), man-made fiber knit shirts (categories 638/639), man-made fiber and cotton shirts (categories 340/640), and cotton knit shirts and blouses (categories 338/339).[73]
On October 15, 2004, U.S. textile and apparel groups filed a threat-based safeguard petition covering cotton and man-made fiber underwear (categories 352/652).[74]
On October 27, 2004, U.S. textile and apparel groups filed a threat-based safeguard petition covering combed cotton yarn (category 301).[75]
On October 29, 2004, as provided for under paragraph 242 of the Report of the Working Party on China’s WTO accession,[76] the U.S. requested consultations with China with respect to imports of Chinese origin cotton, wool, and man-made fiber socks. The U.S. established a 12-month limit on socks from China, beginning on October 29, 2004, and extending through October 28, 2005.[77]
· November 2004
On November 8, 2004, U.S. textile and apparel groups filed a threat-based safeguard petition covering synthetic filament fabric (category 620).[78]
On November 10, 2004, U.S. textile and apparel groups filed a threat-based safeguard petition covering wool trousers (category 447).[79]
On November 19, 24, and 30, 2004, respectively, U.S. textile and apparel groups filed new safeguard petitions requesting extension of the current safeguards on the 3 products that would expire on December 24, 2004 (i.e., knit fabric, dressing gowns, and brassieres).[80]
The following table identifies the textile safeguard petitions filed with CITA since October 8, 2004.
Source: http://www.otexa.ita.doc.gov/chinare1dec1.pdf
· December 2004
On December 1, 2004, the U.S. Association of Importers of Textiles and Apparel filed suit in the U.S. Court of International Trade challenging CITA’s acceptance of textile safeguard petitions on the basis of a “threat” of increased imports and requested that the CIT issue preliminary injunction enjoining CITA from granting relief. The CIT case name and court number are: U.S. Association of Importers of Textiles and Apparel v. United States, Court No. 04-00598.
Following briefing and oral argument on the plaintiff’s motion for a preliminary injunction, on December 30, 2004, CIT Judge Goldberg granted the motion for a preliminary injunction and issued an order enjoining CITA from proceeding on the threat-based safeguard requests during the pendency of the court action. The court’s order is set out below:
ORDER
Court No. 04-00598
Upon consideration of plaintiff U.S. Association of Importers of Textiles and Apparel’s Motion for a Preliminary Injunction and the accompanying Memorandum of Points and Authorities in support thereof, defendant’s Motion to Dismiss and Opposition to Plaintiffs’ Motion for a Preliminary Injunction and the accompanying Memorandum in support thereof, the Declarations filed by plaintiff in support of its Motion for a Preliminary Injunction, Defendant’s Response in Opposition to Declarations Filed by USA-ITA in Support of its Motion for a Preliminary Injunction, upon all other papers and proceedings had herein, and upon due deliberation, it is hereby
ORDERED that plaintiff’s Motion for a Preliminary Injunction is granted; and it is further
ORDERED that defendant United States, together with its delegates, officers, agents, servants, and employees, including defendants Secretary of Commerce Donald Evans, Secretary of State Colin L. Powell, Secretary of the Treasury John W. Snow, U.S. Trade Representative Robert B. Zoellick, Secretary of Labor Elaine L. Chao, and all officers, agents, servants, and employees of the United States, the U.S. Department of Commerce, the U.S. Department of State, the U.S. Department of the Treasury, the Office of the U.S. Trade Representative, and the U.S. Department of Labor, shall be, and hereby are, enjoined, during the pendency of this action, from accepting, considering, or taking any further action on petitions filed pursuant to the procedures published at 68 Fed. Reg. 27787 (May 21, 2003), and the clarification thereto published at 68 Fed. Reg. 49440 (Aug. 18, 2003), that are based on the threat of market disruption by Chinese textile or textile products; and it is further
ORDERED that the Committee for the Implementation of Textile Agreements shall be, and hereby is, enjoined, during the pendency of this action, from self-initiating consideration of whether to impose safeguards pursuant to the procedures published at 68 Fed. Reg. 27787 (May 21, 2003), and the clarification thereto published at 68 Fed. Reg. 49440 (Aug. 18, 2003), based on the threat of market disruption by Chinese textile or textile products; and it is further
ORDERED that plaintiff will not be required to post a bond or security in conjunction with the issuance of this preliminary injunction.
3. Effectiveness and Possible Modifications to China-Specific Safeguards
a. Product-Specific Safeguards
To date, the China-specific product-specific safeguard remedy (Section 421action) has not provided relief to any U.S. industry. The expectations of its utility as a measure to provide relief to U.S. industries injured from a surge in Chinese imports have not been realized.
Of the five cases brought so far, the International Trade Commission found in three cases that the domestic industry was injured by a surge in Chinese imports and recommended relief. However, the President chose in each instance to deny relief.
It has been more than a year since the last Section 421 petition was filed. It is likely that the paucity of cases in the last year is due, not to a decrease in Chinese imports (which have continued to increase rapidly), but because U.S. industries have observed the results of the first five cases and have judged that the prospective relief to be gained from a petition is not worth the costs and time to bring it.
Moreover, domestic parties may also have been discouraged from bringing 421 petitions by the political tenor of the ultimate decision making process as they have seen the effect of lobbying by China in each of the affirmative 421 determinations to discourage the President from granting relief.[81] The apparent political nature of the 421 determinations by the President to date has been criticized by legal observers and legislators.[82]
As to possible modifications in the 421 statute to make it more effective toward its purpose, one constant uncertainty is the element of discretion granted to the President as the ultimate decision maker regarding relief. However, one possible statutory modification that should be considered is legislation to provide monetary relief (at least to the extent of covering legal costs) to those U.S. industries that bring a 421 petition, receive an affirmative determination and a recommendation for relief from the ITC but are then denied relief by the President. This small measure of compensation would assist U.S. industries (particularly those comprised of small and medium-sized companies) to benefit from the Section 421 remedy.
More substantive modifications, such as making relief if proposed by the USITC mandatory as long as consistent with WTO durational limits (without retaliation rights) are more desirable but would presumably be resisted institutionally by the Administration since it reduces its role/discretion in the process.
Separately, the USITC itself appears to add obligations on domestic petitioning industries that are not contained in the statute and which appear to misapprehend the purpose of Section 421. The Commission requires domestic industries to supply adjustment plans similar to a section 201 action even though the premise of the statute is implementing rights under the accession protocol to deal with the transitional period when China is undergoing further significant legal and economic reform. Bringing USITC practice into conformity with the underlying purpose and intent of the statute doesn’t require legislative activity but possibly Congressional oversight.
b. Textile Safeguards
Since China’s accession in December 2001, CITA has imposed only four textile safeguard measures, and the nine petitions filed since October 8, 2004 are now suspended as the result of a preliminary injunction issued by the Court of International Trade. Thus, the track record so far of the textile safeguard is very limited and it would be premature at this stage to pronounce an assessment of the effectiveness of the textile safeguard as a remedial measure. However, the fact that, of the five petitions that were filed prior to October 8, 2004, CITA rejected only one (cotton and man-made fiber gloves) is an indication that the textile safeguard is working as envisioned by the U.S. and other WTO Members. Of course, the outcome of the present challenge in the CIT to CITA’s authority to accept petitions based upon the threat of increased imports will be relevant in the short term to the ability of U.S. companies and their workers to obtain relief before a significant track record of increased imports for remaining products being reintegrated. While the preliminary injunction may delay the merits being considered (and hence may cost workers their jobs and some companies their continued viability), the industry and workers will be able to file cases certainly by the second half of 2005 if imports surge as anticipated.
B. China’s Exchange Rate Policy and the Likelihood of a Successful WTO Challenge
1. China’s Exchange Rate Policy
For ten years, China has maintained a fixed exchange rate for their currency relative to the dollar. As noted in the latest Treasury Department report to Congress, “China kept its fixed exchange rate of 8.28 renminbi to the U.S. dollar throughout the reporting period, a rate it has maintained since 1995, through periods of both upward and downward pressures on the balance of payments.”[83] Although the U.S. has urged China to move toward a flexible, market-based exchange rate regime and to reduce controls on capital flows, and although China has indicated publicly and at senior levels that it will move to a flexible exchange rate regime, China has not done so to date.[84]
Many economists have estimated that China’s currency is undervalued by as much as 40% or more.[85] As a result, Chinese goods compete domestically and internationally at prices that are artificially low hurting U.S. producers in the U.S. market, in the Chinese market and in third country markets. It is argued that China’s pegged exchange rate effectively acts as a tax on U.S. exports and a subsidy to China’s exports, which causes the loss of U.S. manufacturing jobs. Concern about China's undervalued currency and its effects on U.S. manufacturing and increased imports led to a number of proposals in the 108th Congress to address this problem. For example, Senator Schumer introduced a bill (S. 1586)[86] that would have found that:
(1) China's currency is artificially pegged below its market value by 15-40 percent, or an average of 27.5 percent;
(2) the undervaluation of the yuan makes exports from China less expensive for foreign consumers and foreign products more expensive for Chinese consumers, which effectively result is a subsidy to China's exports and a virtual tariff on foreign imports;
(3) China's undervalued currency and the U.S. trade deficit with China is contributing to significant U.S. job losses and harming U.S. businesses;
(4) China has intervened in the foreign exchange markets to hold the value of the yuan within an artificial trading range; and
(5) China's undervalued currency and intervention in the value of its currency violates the spirit and letter of the world trading system.
The Schumer bill would have imposed a 27.5% additional rate of duty on Chinese imports unless the President certified to Congress that China was no longer manipulating its exchange rate and that its currency was valued in accordance with accepted market-based trading policies.
In 2004, other attempts were made to address China’s exchange rate policy. In particular, two Section 301 petitions were filed with the U.S. Trade Representative seeking U.S. action regarding China’s exchange rate policy. Initially, the Fair Currency Alliance, a group of trade associations and unions representing manufacturing, agriculture and labor, prepared a Section 301 petition[87] to address the problem of Chinese currency manipulation but eventually chose not to file the petition with USTR.
Thereafter, on September 9, 2004, the China Currency Coalition, another coalition of U.S. industrial, service, agricultural, and labor organizations, filed a Section 301 petition seeking immediate elimination of the Chinese currency’s undervaluation.[88] On the same day it was filed, USTR rejected the petition.
On September 30, 2004, another Section 301 petition on China’s currency policy (nearly identical to the CCC’s petition) was filed by 30 members of the House and Senate.[89] On November 12, 2004, USTR rejected the 301 petition filed by the 30 members of Congress.[90]
2. Possible Grounds for a WTO Challenge to China’s Exchange Rate Policy
Various bases for a WTO challenge to China’s exchange rate policy have been proposed. The primary grounds for challenging China's exchange rate policy are that China's undervaluation of the yuan constitutes a prohibited export subsidy within the meaning of various GATT articles and WTO Agreements, violates GATT Article XV:4, and violates China’s obligations under the International Monetary Fund’s Articles of Agreement.. In brief, these potential grounds to a WTO challenge are:
Prohibited Export Subsidy:
§ WTO SCM Agreement: Article 3.1(a) of the SCM Agreement prohibits “subsidies, contingent in law or in fact, ... upon export performance....” Article 3.2 of the SCM Agreement states that WTO Members States “shall neither grant nor maintain” prohibited export subsidies. In its accession protocol, China committed to "eliminate all subsidy programmes falling within the scope of Article 3 of the SCM Agreement upon accession." [91]
§ GATT Article VI: The Ad Note to GATT Articles VI:2 and VI:3 provides that “multiple currency practices can in certain circumstances constitute a subsidy to exports which may be met by countervailing duties . . . . By ‘multiple currency practices’ is meant practices by governments or sanctioned by governments.” GATT, Ad. Article VI, paras. 2-3, note 2.[92]
§ GATT Article XVI: This article expressly recognizes that export subsidies “. . . may cause undue disturbance to . . . normal commercial interests, and may hinder the achievement of the objectives of this Agreement.” GATT Article XVI:2. Paragraph 4 prohibits export subsidies by directing that "contracting parties shall cease to grant either directly or indirectly any form of subsidy on the export of any product other than a primary product which subsidy results in the sale of such product for export at a price lower than the comparable price charged for the like product to buyers in the domestic market.” GATT Article XVI:4.
§ WTO Agriculture Agreement: According to Article 3.2 of the Agriculture Agreement, Members shall not provide export subsidies in excess of those specified in their schedule of commitments. Article 9.1 identifies specific types of export subsidies subject to reduction commitments, and Article 10.1 further specifies that export subsidies not identified in Article 9.1 shall not be applied in contravention of Members’ export subsidy commitments. In the working party report to China's accession, China expressly committed that “by the date of accession, China would not maintain or introduce any export subsidies on agricultural products.”[93]
Violation of GATT Article XV:4:
§ GATT Article XV:4 states: “Contracting parties shall not, by exchange action, frustrate* the intent of the provisions of this Agreement, nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.”[94] China’s undervaluation of its yuan constitutes an “exchange action” that frustrates the intent of various provisions of the GATT Agreement, particularly Article I (MFN), Article II (tariff bindings), Article III (national treatment), Articles VI and XVI (export subsidies prohibited), and Article XI (bars taxes & charges (other than duties) that restrict imports).
§ China’s undervaluation also constitutes a “trade action” that frustrates the intent of the IMF’s Articles of Agreement, particularly Article IV, Section 1(iii) (each IMF member shall “avoid manipulating exchanges rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.”).
IMF Agreement Violation:
§ China’s undervaluation of the yuan violates China’s obligations under IMF Article IV (each IMF member shall: “(iii) avoid manipulating exchange rates or the international monetary system in order to . . . gain an unfair competitive advantage over other members.”) by giving China’s exports an unfair competitive advantage in trade with the U.S. and other IMF members.
§ China’s undervaluation of the yuan violates China’s obligations under IMF Article VIII, section 3 (“No member shall engage in, or permit any of its fiscal agencies ... to engage in any discriminatory currency arrangements or multiple currency practices ....”) by discriminating against U.S. products to China’s benefit.
3. Likelihood of a Successful WTO Challenge to China’s Exchange Rate Policy
On substance, the potential grounds for challenging China's exchange rate policy at the WTO have prima facie merit. Although currency practices have not commonly been challenged at the WTO (or the predecessor GATT) as export subsidies or as actions frustrating the intent of the GATT and IMF Agreements, there has long been an acknowledgement that currency manipulation practices could constitute export subsidies. Notwithstanding the inherent merit of these arguments, however, a realistic assessment must recognize that, given that the Administration has twice rejected Section 301 petitions that were based on the complaints that China's manipulation of its exchange rate policy constituted a prohibited export subsidy within the meaning of GATT Article VI and XVI, the SCM Agreement, and the WTO Agriculture Agreement, as well as an exchange and a trade action that frustrates the intent of the GATT and IMF Agreements, it is not likely that the same Administration would favor a WTO challenge of China's exchange rate policy on the same grounds that it rejected in the Section 301 petitions.[95]
Separately, US antidumping law could be modified to permit currency manipulation to be treated as a form of dumping consistent with the original GATT notes.
C. Non-Market Economy Status of China in U.S. Antidumping Proceedings and Prospects for Change
For purposes of U.S. antidumping duty proceedings, the U.S. Department of Commerce has determined that China is a non-market economy (NME) country. NME status means that, in antidumping duty investigations concerning imports from China, the Department of Commerce uses a special NME methodology to calculate antidumping duty margins because Commerce considers Chinese exporters to be operating within a centrally planned economy in which the government controls pricing and production decisions. Therefore, except in cases where individual companies can demonstrate an absence of government control over their export activities, Commerce treats all exporters as a single enterprise for dumping purposes. Exporters who show an absence of government control, however, are eligible to receive a separate dumping margin specific to their imports.
1. NME Country Definition
A “non-market economy country” is defined by statute in Section 771(18) of the Tariff Act of 1930, as amended; 19 U.S.C. § 1677(18):
(18) Nonmarket economy country.
(A) In general.
The term ‘nonmarket economy country’ means any foreign country that the administering authority determines does not operate on market principles of cost or pricing structures, so that sales of merchandise in such country do not reflect the fair value of the merchandise.
(B) Factors to be considered.
In making determinations under subparagraph (A) the administering authority shall take into account –
(i) the extent to which the currency of the foreign country is convertible into the currency of other countries;
(ii) the extent to which wage rates in the foreign country are determined by free bargaining between labor and management,
(iii) the extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country,
(iv) the extent of government ownership or control of the means of production,
(v) the extent of government control over the allocation of resources and over the price and output decisions of enterprises, and
(vi) such other factors as the administering authority considers appropriate.
The statute also states that any determination of NME country status “shall remain in effect until revoked by the administering authority” (Commerce).[96] Thus, China’s NME country status shall remain in effect until Commerce changes that status. This does not mean, however, that Commerce may change China’s NME status without a full on the record consideration of the issue in a specific case context. Rather, as noted by James J. Jochum, then Assistant Secretary for Import Administration of the U.S. Department of Commerce:
Any decision to graduate China to market economy status, whenever that decision is made, must be made in the context of a formal, quasi-judicial proceeding in accordance with Section 771, subparagraph 18(b) of the Tariff Act of 1930, as amended, and would be based solely on facts in evidence placed on the administrative record of such proceeding. As in previous proceedings undertaken pursuant to this statute, the record would be developed from data and information gathered from expert third party sources such as the OECD and World Bank, as well as from comments received from interested parties and the public.[97]
2. NME Methodology
Normally, Commerce calculates antidumping duty margins based on the amount by which the “normal value” (i.e., the price in the foreign market) exceeds the “export price” (i.e., U.S. price) for the merchandise at issue. However, in antidumping duty cases concerning imports from an NME country such as China, Commerce does not base “normal value” on prices of the merchandise in the NME but rather uses a "factors of production" methodology for determining normal value.[98]
The “factors of production” typically are comprised of the labor hours, energy amounts, and quantities of raw materials needed to make the product.[99] Commerce values these factors (except for labor) for the NME country based on costs from a “surrogate country.” Commerce selects a “surrogate country” (or countries) that is at a level of economic development comparable to the NME country. For example, in numerous past cases, Commerce has used India as a surrogate country for China. For labor, Commerce publishes the rate that will be used. Commerce often uses imports into the surrogate country to value raw materials and energy prices in the surrogate country to value energy. Commerce calculates the “normal value” by summing the products of the factors of production times their surrogate-country values and then adding to that sum an amount for factory overhead, selling, general, and administrative expenses (GS&A), and profit. The values for producers' factory overhead, GS&A and profit are taken from public sources in the surrogate country for producers of the same or similar types of products. There are a number of exceptions to the above that have developed over time and many domestic petitioners perceive that Commerce has developed a methodology that in many cases will result in a gross understatement of a realistic normal value.
Once the NME’s normal value is calculated, it is compared to the export price, and if the export price is less than the normal value, then Commerce determines that the product has been sold for less than fair value (dumped). For NME investigations, Commerce determines a “country-wide” dumping margin for imports from the NME country that have been manufactured by state-controlled enterprises and an individual company dumping margin for NME imports that have been manufactured by a particular company (provided that company has demonstrated that its export operations are not controlled by the government).
3. U.S.-China Working Group on China’s NME Status
China has been seeking a change in its NME status under U.S. antidumping duty law.[100] This issue was a topic at the 15th session of the U.S.-China Joint Commission on Commerce and Trade (JCCT)[101] which took place on April 21, 2004, in Washington, DC. The JCCT was chaired by Commerce Secretary Donald Evans, U.S. Trade Representative Robert Zoellick and Chinese Vice Premier Wu Yi and resulted in a number of agreements, including the establishment of a working group on China’s NME status and the steps necessary for China to become a market economy, as described below.
Leveling the Playing Field -- Structural Issues and Market Economy Status
One of President Bush’s key goals in the trade arena is to ensure that the playing field is level, meaning that competition is determined by the market, rather than government intervention. In prior decisions, the Commerce Department has found that China does not yet qualify as a market economy under the U.S. antidumping law. In the case of China, the surest means to ensure that the playing field is level is to encourage China’s ongoing structural reforms, which are intended to create a market economy.
In order to assess China’s reforms to date, as well as to identify the steps China would have to take, under U.S. law, to achieve market economy status, China and the U.S. agreed during the JCCT meetings to the establishment of a working group, to be jointly chaired by James Jochum, Assistant Secretary for Import Administration from the Department of Commerce, and the appropriate Director General from MOFCOM. The immediate goals of the group will be to:
o Consult closely regarding the criteria under U.S. law needed to achieve market economy status;
o Review, under the framework established by U.S. law, the broad spectrum of policies and practices that are a part of the ongoing structural reform in China ; and
o Identify the steps necessary for China to qualify as a market economy under U.S. law.[102]
In May 2003, the Department of Commerce requested public comments concerning the identification of relevant topics and issues for discussion in the working group on China’s NME status.[103] In response, U.S. industry groups generally argued that China must make substantial changes in its economic structure before the U.S. makes any change to China’s NME status.[104] The press described the tenor of these responses as follows:
Commerce largely received comments from U.S. industry groups arguing that the U.S. must ensure that China takes real steps to address the six [statutory] factors ... before market economy status is granted. Some argued that China is so far from a market economy determination that it is just too early to consider changing China’s status ....
* * *
Regardless of the level of opposition to a change in China’s economic status, these groups and several others noted that China must address U.S. complaints in several areas before the U.S. could consider such a change. These areas include the pegging of the renminbi to the dollar, wage rate controls, investment restrictions, government control of prices and resources, banking restrictions, the absence of the rule of law in China, subsidies, transparency, discriminatory taxes, and the existence and practices of state-owned companies.[105]
Subsequent to the agreement to establish a working group, U.S. and China officials met in July 2004 to set up procedures for the operation of the working group. The U.S. and China agreed that the working group on China’s NME status would meet twice a year with the next meeting to occur in Washington D.C. in either January or February 2005.[106] Concerning the substantive issues that the working group will address, the press reported the views of the U.S. Assistant Secretary of Commerce for Import Administration, James J. Jochum:
In terms of substance, Jochum said he expects the market economy group would likely discuss the six statutory criteria under U.S. law that describe the conditions of a country must meet in order to be considered a market economy country in trade remedy cases. Those factors are the degree of currency convertibility, free wage rate determination, foreign investment, government ownership or control of production, government ownership over the allocation of resources, and a sixth catch-all category that allows Commerce to look at “other appropriate factors.”[107]
4. Prospects for Change in China’s NME Status
It is more likely than not that China’s status as a NME country for purposes of antidumping duty law will not change in the near future.
First, the U.S. negotiated the right to apply the NME antidumping methodology to Chinese imports subject to antidumping investigations for 15 years after China’s WTO accession in the U.S.-China Bilateral Trade Agreement (signed November 15, 1999). This right was subsequently included in China’s Protocol of Accession.[108] Thus, China agreed that WTO Members could use an NME antidumping methodology through December 11, 2016. China is, however, permitted to demonstrate that market conditions prevail in its economy as a whole or in a particular industry, and, if such a demonstration is accepted by a WTO Member's investigating authority and it concludes that China is a market economy country, the Member must thereafter employ the normal rules in determining price comparability in antidumping duty cases.[109]
Second, in June 2004, Commerce Secretary Evans “strongly downplayed the idea that the Bush Administration is moving rapidly toward giving China market economy status (MES) ... and said China among other things still must relinquish its tight control over its economy and state ownership of assets before the U.S. could consider changing its designation.”[110] In particular, Secretary Evans identified the following factors that supported maintaining the current NME status of China:
We are well aware that achieving market economy status is a high priority for China. The Structural Issue working group, also established at the April JCCT, is the place where we will engage on the range of non-market-based policies and practices present in the Chinese economy -- such as currency convertibility, labor and wage issues, and the extent of government intervention in the market.
China must significantly reduce government micromanagement of its economy and introduce a far higher level of transparency-- among many other changes-- before it can achieve a full transition to a market-driven economy.
Only then will China be able to make meaningful and sustainable progress.
Even today, far too many key assets and means of production within the Chinese economy are owned and operated by the state. We have seen too few “for sale” signs on the commanding heights of the Chinese economy. We need to see them.
We need to see them because market forces won’t control China’s economy until there is a substantial rollback of its control over raw materials, financial system, real estate, utilities, and large enterprises within China. When a government controls the means of production, it radically distorts economic conditions, undermines efficient capital usage, and compromises long-term potential and stability.
For example, I just returned from North Eastern China where the state still owns outright or controls a majority interest of roughly 90 percent of all manufacturing enterprises. None of us should be surprised that the region now supplies only eight percent of China’s output—down from 14 percent in 1981.
When markets operate with accurate information, they send price signals about risk and reward in a marketplace.
China’s leaders realize that treating the symptoms may buy time, but it won’t cure the structural flaws that are inviting insolvency and only grow worse with time. But they have huge obstacles ahead.
There continues to be a troubling level of non-performing loans in the portfolios of China’s state-run banking system.
Last year, I advised China to lift its capital controls so that the Chinese entrepreneurs could experience greater financial freedom. These controls undermine opportunities for entrepreneurship and expanded prosperity. The hopes, dreams, and aspirations of the Chinese people depend on an open financial system that offers the promise of financial security and independence.
China’s capital controls misallocate the country’s wealth and compromise the widespread prosperity that an industrious and entrepreneurial people like the Chinese would otherwise be creating.
The unsound banking practices that are funded through the fruits of the capital controls are equally troubling.
China’s state-run banks have routinely extended loans to state-owned-enterprises that are not expected to be repaid. And right now, the big four state banks in China are, for all practical purposes, insolvent.
This month, the Commerce Department held preliminary hearings to gather information about China’s economy.
Based on multiple submissions and testimony, it’s clear that U.S. industry feels that many of China’s policies, including its currency practices, place American companies at a significant competitive disadvantage.
We also heard testimony that Chinese enterprises were operating without bearing the costs associated with operating in a market economy. Under state control, many Chinese state-owned manufacturers are operating with the benefit of state sponsored subsidies, including: rent, utilities, raw materials, transportation, and telecommunications services. That is not how we define a level playing field.
China has a lot of work to do but we know they are moving in the right direction. We’re committed to working with the Chinese leadership to adopt the sweeping changes that can begin the first steps on the path toward free-market principles. It won’t be easy. It won’t happen overnight.
But we’re committed to staying the course because the day that market forces govern China’s economy will be a great day for both the Chinese and the American people.[111]
In addition, Commerce Assistant Secretary Jochum indicated in July 2004 that China was aware that it had to make extensive changes to its economy before the U.S. would change China’s NME status. Jochum stated that, in June 2004:
[China had presented] to the U.S. a number of internal reforms China has undertaken, after which Chinese officials implied that China is well on its way toward creating a market economy. However, Jochum said China did not press for an immediate decision from the U.S., and seemed to understand that the U.S. is not ready to consider China a market economy until much deeper reforms are made.[112]
D. Status of U.S. Policy Regarding Application of Countervailing Duty Law to China and Other Non-Market Economy Countries
Current U.S. Commerce Department policy is that countervailing duty law is not applicable to non-market economy countries. The United States considers China to be a non-market economy country. Therefore, at present the Commerce Department views U.S. countervailing duty law is not applicable to China. This means that, at present, U.S. industries cannot petition for the imposition of countervailing duties when they are injured by reason of Chinese imports benefiting from government subsidies.
The current position of the U.S. Department of Commerce is not required by the statute. Rather, it was established by an administrative determination (which determination was affirmed in court litigation) and could be reversed or changed by administrative action.
1. Definition of a Non-Market Economy Country
A “non-market economy country” is defined by statute in Section 771(18) of the Tariff Act of 1930, as amended; 19 U.S.C. § 1677(18). It provides:
(18) Nonmarket economy country.
(C) In General.
The term ‘nonmarket economy country’ means any foreign country that the administering authority determines does not operate on market principles of cost or pricing structures, so that sales of merchandise in such country do not reflect the fair value of the merchandise.
(D) Factors to be considered.
In making determinations under subparagraph (A) the administering authority shall take into account –
(i) the extent to which the currency of the foreign country is convertible into the currency of other countries;
(ii) the extent to which wage rates in the foreign country are determined by free bargaining between labor and management,
(iii) the extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country,
(iv) the extent of government ownership or control of the means of production,
(v) the extent of government control over the allocation of resources and over the price and output decisions of enterprises, and
(vi) such other factors as the administering authority considers appropriate.
2. Background to Current Policy
Since 1984, the U.S. Department of Commerce, International Trade Administration, the administering authority of U.S. countervailing duty (CVD) law, has considered that CVD law is not applicable to exports from a Non-Market Economy (NME) country because subsidization is a market economy phenomenon and cannot exist in an NME.
The two proceedings in which Commerce first made this determination were Carbon Steel Wire Rod from Czechoslovakia, 49 Fed. Reg. 19370 (May 7, 1984) (final negative CVD determination) and Carbon Steel Wire Rod from Poland, 49 Fed. Reg. 19374 (May 7, 1984) (final negative CVD determination). As a result of its determination in the Wire Rod cases, Commerce then rescinded initiations of CVD investigations on imports of potash from the Soviet Union and the German Democratic Republic. At that time, all four countries (Czechoslovakia; Poland; Soviet Union; German Democratic Republic) were considered non-market economies because each was characterized by central government control over prices and the allocation of resources.
Commerce's NME classification was founded on an economic analysis that concluded that “markets” did not exist in countries that relied on government central planning to allocate resources and prices. Commerce said in the Wire Rod cases:
We believe a subsidy (or bounty or grant) is definitionally any action that distorts or subverts the market process and results in a misallocation of resources, encouraging inefficient production and lessening world wealth.
In NMEs resources are not allocated by a market. With varying degrees of control, allocation is achieved by central planning. Without a market, it is obviously meaningless to look for a misallocation of resources caused by subsidies. There is no market process to distort or subvert. Resources may appear to be misallocated in an NME when compared to the standard of a market economy, but the resource misallocation results from central planning, not subsidies.
It is this fundamental distinction -- that in an NME system the government does not interfere in the market process, but supplants it -- that has led us to conclude that subsidies have no meaning outside the context of a market economy.[113]
In countries with pervasive control of prices and resources, Commerce said it could not disaggregate government actions so as to identify the exceptional action that is a subsidy. In sum, Commerce believed that, in an NME country where “markets” did not exist, there would be no way to quantify subsidies.
On appeal, Commerce's determination was reversed by the U.S. Court of International Trade (CIT).[114] Subsequently, however, the U.S. Court of Appeals for the Federal Circuit (CAFC) reversed the CIT's decision and affirmed Commerce's determination.[115] The CAFC affirmed Commerce’s determination because it could not say that Commerce’s decision was “unreasonable, not in accordance with law, or an abuse of discretion” in view of the discretion accorded administrative agencies.[116]
Thus, Commerce’s policy is based on the view that while a subsidy is a government action that distorts markets, there is no “market” in an NME, so it is not possible for subsidies to distort that which does not exist.
3. Possible Ways to Address Chinese Subsidy Practices
In the context of countervailing duty law, the U.S. can address Chinese subsidies if (1) the statute is amended to expressly direct Commerce to apply CVD law to NME countries, or (2) Commerce changes its present policy (which it has discretion to do). Outside the context of CVD law, the U.S. can address Chinese subsidies in the WTO pursuant to the Agreement on Subsidies and Countervailing Measures. Indeed, the U.S. Commerce Department position is bizarre at the present time in light of the heavy emphasis the U.S. placed on eliminating subsidies as part of China’s accession process to the WTO. If subsidies in modern day China don’t distort markets, why did the U.S. insist time and time again that such subsidies had to be eliminated, reduced, identified and/or reported?
a. Statutory amendment
Congress could amend the countervailing duty law to expressly provide that CVD law applies to non-market economy countries. In the 108th Congress, bills were introduced in both the House and Senate to make such a change. The House bill (H.R. 3716) and the Senate bill (S. 2212) both would have amended the law as follows: “Section 701(a)(1) of the Tariff Act of 1930 (19 U.S.C. 1671(a)(1)) is amended by inserting `(including a nonmarket economy country)' after `country' each place it appears.”
b. Change in policy by Commerce
The present U.S. policy that CVD law does not apply to NME countries was established by Commerce in 1984 and Commerce has the discretion to change that policy so as to apply CVD law to NME countries such as China. There are a number of factors that would support such a change.
First, in 1984, the term “subsidy” was not defined. GATT Article XVI, paragraph 1, referred to “any subsidy” as including “any form of income or price support, which operates directly or indirectly to increase exports of any product from, or to reduce imports of any product into" a country. The 1979 Subsidy Code used the terms “subsidy” and “subsidize” without elaboration. This definitional gap was filled in 1994 by the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). Article 1 (“Definition of a Subsidy”) of the SCM Agreement provides that a subsidy shall be deemed to exist if:
(a) (1) there is a financial contribution by a government or public body,[117]
or
(a) (2) there is any form of income or price support in the sense of Article XVI of GATT 1994;
and
(b) a benefit is thereby conferred.[118]
Article 2 of the SCM Agreement requires that, to be actionable, a subsidy must be given to a specific enterprise or industry or group of enterprises or industries.
Significantly, the SCM Agreement, unlike Commerce's 1984 working definition and GATT Article XVI, defines a subsidy based on what it is, instead of whether it distorts a market. This approach is practical because if a subsidy can be identified by its characteristics, it is not necessary to examine the market effects of a subsidy in order to determine whether, in fact, a subsidy exists. Compared to the SCM Agreement’s definition of a subsidy, the Commerce policy’s focus on economic effects to determine whether a subsidy exists would appear to be outdated.
Second, with respect to China, the accession agreements acknowledged that subsidies exist in China, as they identify Chinese domestic and export subsidies and provide alternate methods of subsidy measurement. Neither the U.S. nor any other Member expressed a belief that that subsidies do not or could not exist in the present Chinese economy.
In fact, the U.S. successfully negotiated to impose disciplines on Chinese subsidies. In the Protocol of Accession, China agreed to eliminate all export subsidies.[119] China also agreed that WTO Member Authorities could use non-Chinese benchmarks for subsidy quantification if Chinese benchmarks were not available or could not be adjusted.[120] In addition, Annex 5A of the Protocol listed 24 existing domestic subsidy programs maintained by China (which some Members considered to be incomplete).[121] And, in Annex 5B to the Protocol, China listed three export subsidies that it agreed to phase out (although some members considered this list to be incomplete as well).[122]
Third, the question of quantifying subsidies in NME countries absent benchmarks can be practically addressed. A common benchmark in CVD investigations in measuring preferential loans or identifying the discount rate for grants is the market rate of interest. To the extent the International Monetary Fund publishes interest rates for various non-market economy countries, that measure could be used. For China, for example, the IMF’s International Financial Statistics publishes three rates: the Bank Rate, Deposit Rate, and Lending Rate. Moreover, specifically with respect to China, the Protocol of Accession, Item 15(b) provides that WTO Members may use alternative valuation approaches for Chinese subsidies, including external benchmarks.[123]
Finally, given that Commerce's policy is not required by statute, should Commerce determine to change its policy so as to apply CVD law to NME countries, the change is likely be upheld by Commerce's reviewing courts as long as Commerce supports the change with reasoned analysis.
c. Action at the WTO
Notwithstanding the current U.S. policy not to apply CVD law to NME countries, the U.S. could address Chinese subsidies at the WTO through the consultation and dispute settlement procedures set out in the SCM Agreement. Notably, in the third Transitional Review Mechanism, the U.S. requested that China provide detailed information regarding a number of programs and practices that appeared to constitute subsidies. In one request, the U.S. asked why China had not yet submitted any subsidy notifications required under Article 25 of the SCM Agreement, and also asked for information regarding the status of certain programs that appeared to involve subsidies:
· Semiconductors – whether China grants VAT rebates on semiconductor exports;
· Copper – whether China grants VAT rebates on imports of copper scrap or on exports of copper-based, semi-fabricated or finished products;
· Subsidies to State-Owned Enterprises Running at a Loss – whether China has eliminated these subsidies as promised in the accession agreement;
· Non-Performing Loans – China’s injection of US$ 45 billion into the Bank of China and the China Construction Bank; China’s debt forgiveness as part of the Northeast Revitalization Programme;
· Price Controls – whether certain price control programs provide subsidies.[124]
In another submission,[125] the U.S. identified a number of programs and practices that appeared to constitute prohibited subsidies under Article 3 of the SCM Agreement (subsidies contingent upon export performance; subsidies contingent upon the use of domestic over imported goods), as well as other programs that appeared to constitute subsidies under Article 1 (financial benefit) and Article 2 (specific) of the SCM Agreement. They were:
· Subsidies Contingent Upon Export Performance
o Honourable Enterprises – preferential benefits
o Export-Contingent Tax Reduction for FIEs in Special Zones
o Income Tax Refund for Foreign Investors Investing in Export-Oriented Businesses
o Special Steel for Processing Exports Policy
o Export-Contingent Income Tax Reduction for FIEs or Tax Allowance for FIEs
o Export Subsidies for High-Technology Products
o Customs Duty and VAT Refund on Imported Capital Equipment Used for Production of Products for Exports
o Government Assistance to Increase Fabric Exports
o Tax Incentives for Dehydrated Garlic Exports
o Guangdong Grants Provided for Export Performance
o Low Interest Loans for Processors of Agricultural Products in Henan Province
· Subsidies Contingent Upon the Use of Domestic Over Imported Goods
o VAT Rebate on Purchases of Domestic Equipment by FIEs
o Enterprise Income Tax Reduction for Purchase of Domestically Made Machinery and Equipment
· Other Programmes
o Assistance Provided to Forest Products:
§ Financing for development of fast-growth-high-yield plantations
§ Financing for technology renovations of state-owned paper mills
§ Financing for wood processing projects
§ Local government development policies for the pulp, paper, and wood industries
o Assumption of Interest on Loans for Technology Upgrades
o Assistance for Capacity Expansion in the Soda Ash Industry
o Assistance Provided to the Textile Industry
o Chendu Assistance to the Semiconductor
o Reduction in VAT for Sino-Russian Border Trade
o Subsidies Listed in Annex 5A of China’s Protocol of Accession
E. Intellectual Property Rights
1. Problems of Infringement and Enforcement
One of the most serious issues that face U.S. companies vis-à-vis China is the problem of intellectual property piracy and counterfeiting. As the Department of Commerce noted in its report Manufacturing in America, the importance of IPR enforcement to U.S. manufacturers cannot be overstated:
For U.S. manufacturers, protection of intellectual property is not an abstract concept. America’s competitive edge ensues directly from innovation and rising productivity. Intellectual property protection is the best means for ensuring that American manufacturers enjoy the benefits of their investments in research and development and of their efforts to raise productivity. It is also the means best calculated to ensure that they can enjoy the investment they make in customer service and creating a brand name that distinguishes them from other manufacturers.[126]
The two principal problems with protecting intellectual property in China are continued rampant piracy and China’s failure to enforce intellectual property rights. The rate of piracy and counterfeiting in China is enormous, estimated to be about 90 percent over the last 15 years for certain types of products. USTR’s 2004 WTO compliance report notes that “current estimates of U.S. losses due to the piracy of copyrighted materials alone range between $2.5 billion and $3.8 billion annually.”[127]
As noted in testimony by the President of the International Intellectual Property Alliance (an IP trade association):
Copyright piracy dominates the local market almost completely. Piracy rates have consistently been over 90 percent in China for the last 15 years, and that is despite massive raiding and seizures ... throughout China and particularly in the Southern part, where piracy has been the worst.
* * *
[T]he bottom line is that with piracy rates over 90 percent, China is not in compliance with its TRIPS obligations under Articles 41 and 61 of the WTO agreement, TRIPS agreement. Put simply, the Chinese enforcement system has failed to significantly lower piracy levels in any significant way over the last few years.
* * *
We estimate losses to U.S. companies through copyright piracy in China to be at least $1.8 billion annually, and if you add that up over the last 15 or 20 years, it’s massive losses to the U.S. economy.[128]
Since acceding to the WTO, China has taken some steps to decrease piracy and better enforce intellectual property rights, but unacceptably high levels of piracy and counterfeiting have continued. While China has promulgated intellectual property laws (copyright; patent; trademark) that generally comply with its WTO obligations, there has been a chronic problem in enforcement. For example, the U.S. Commercial Service has noted:
While industries report improved cooperation with administrative enforcement agencies in regard to raids, the administrative penalties for IPR violations, often no more than confiscation of the counterfeit products or nominal fines, are generally insufficient to deter counterfeiters. Very few cases are referred to criminal prosecution because the threshold for initiating criminal cases for IPR infringements remain very high. China’s criminal sanctions against IPR violations are seldom used, in part because of restrictions on types of admissible evidence and unclear mandates for law enforcement authorities with little experience in prosecuting IPR violations.[129]
U.S. industry representatives generally acknowledge that China’s legal framework of intellectual property laws are adequate but that enforcement is fundamentally deficient. For example:
China has no equal either as a source of counterfeit and pirated goods to the world or as a market in which fakes are produced and sold locally. Despite significant improvements in China’s IP legal regime over the last few years, ... the enforcement system continues to be fraught with weaknesses and inefficiencies that facilitate massive counterfeiting and piracy.[130]
* * *
The shortfall in China’s intellectual property protection lies not in its legal framework but more in the area of intellectual property rights enforcement.[131]
2. U.S. Efforts to Address IPR Problems
USTR has stated that “addressing weak IPR protection and enforcement in China is one of the Administration's top priorities.”[132] The U.S. made IPR one of its highest priorities for the April 2004 meeting of the U.S.-China Joint Commission on Commerce and Trade (JCCT). At the JCCT meeting, the U.S. secured a commitment from China's Vice Premier Wu Yi that China would undertake a series of actions to significantly reduce IPR infringements throughout the country.
As an outcome of the JCCT meeting, the U.S. and China agreed to set up a working group on IPR issues, and China agreed to step up its efforts at IPR enforcement, particularly by promising to reduce IPR infringement levels, increase criminal penalties, apply criminal sanctions, conduct nation-wide IPR enforcement actions, increase customs enforcement actions, and launch an education campaign in China.
In particular, China agreed to the following:
Intellectual Property
China presented an action plan designed to address the piracy and counterfeiting of American ideas and innovations. Under this plan, China has committed to:
· Significantly reduce IPR infringement levels.
· Increase penalties for IPR violations by taking the following actions by the end of 2004:
o Subject a greater range of IPR violations to criminal investigation and criminal penalties.
o Apply criminal sanctions to the import, export, storage and distribution of pirated and counterfeit products.
o Apply criminal sanctions to on-line piracy.
· Crack down on violators by:
o Conducting nation-wide enforcement actions against piracy and counterfeiting – stopping the production, sale and trade of infringing products, and punishing violators.
o Increasing customs enforcement action against the import and export of infringing products and making it easier for rights-holders to secure effective enforcement at the border.
· Improve protection of electronic data by:
o Ratifying and implementing the World Intellectual Property Organization (WIPO) Internet Treaties as soon as possible.
o Extending an existing ban on the use of pirated software in central government and provincial agencies to include local governments.
· Launch a national campaign to educate its citizens about the importance of IPR protection (campaign started on April 6). The campaign will include press events, seminars and outreach through television and print media.
· Establish an intellectual property rights working group under the JCCT. Under this working group, U.S. and Chinese trade, judicial and law enforcement authorities will consult and cooperate on the full range of issues described in China’s IPR action plan. [133]
In addition, at the JCCT meeting, China pledged that it “would undertake a series of near-term actions with the objective of significantly reducing IPR infringement levels.” In particular, China agreed to:
Promulgate a judicial interpretation before the end of the year from the Supreme People's Court and the Supreme People's Procuratorate that:
· appropriately lowers thresholds for applying criminal sanctions for acts of IPR infringement; and
· stipulates guidelines for applying criminal sanctions for the import, export, storage, and transport of counterfeit and pirated products and for online piracy.
The new judicial interpretation is an attempt to remedy China's failure to make effective use of its criminal enforcement regime to address IPR issues.[134]
China did not issue the judicial interpretation until December 21, 2004 and did not provide the U.S. with any drafts of the document before issuance. Early press reports indicate that the new judicial interpretation “falls short of U.S. government demands in at least three areas.” [135]
{T}he interpretation in many cases only slightly lowers the thresholds that IPR violators need to exceed before criminal penalties can be applied ....
* * *
Secondly, the interpretation maintains China’s previous system of subjecting corporations and individuals to different thresholds ....
* * *
In addition, sources noted that while the interpretation talks about the possibility of fines, it does not spell out what these fines will be.
* * *
In light of these shortfalls, industry sources said the interpretation means China will essentially maintain the same IPR enforcement regime that has led to increasing complaints from the U.S., and in some cases will only slightly modify the thresholds triggering criminal sanctions.[136]
Regarding follow-up to the JCCT meeting, USTR reports that the U.S. and China have had several bilateral meetings where the U.S. “has pressed China to move forward aggressively in pursuit of significantly reduced IPR infringement levels.”[137] In addition, “Vice Premier Wu pledged that China would move forward with the legislative and judicial measures needed to improve China’s IPR protection regime.”[138] Despite these optimistic statements, however, in September 2004, in comments submitted to the U.S. Trade Representative concerning China’s WTO compliance, numerous U.S. industry groups said that “China has so far done little to improve intellectual property rights protections,” despite the JCCT promises to do so.[139]
As a follow-up to the JCCT’s IPR agreements, in September 2004, the U.S. Trade Representative announced that, in early 2005, it would be conducting an out-of-cycle Special 301 review of China to evaluate China’s implementation of the commitments announced at the JCCT meeting on April 7, 2004 and whether China’s actions are achieving results.[140] USTR indicated that it would publish a Federal Register notice in the coming months regarding the review and that it would be seeking from U.S. industry information about the prevalence of IPR infringement in China and examples of specific cases of IPR infringement.[141]
In addition, on October 4, 2004, the U.S. Trade Representative announced, in conjunction with the Departments of Commerce, Justice and Homeland Security, a new coordinated government-wide initiative, the Strategy Targeting Organized Piracy (STOP), to block the importation of counterfeit and pirated goods.[142] The STOP initiative is targeted at worldwide counterfeiting, but China is clearly one of the major targets of the program.
3. Potential Ways to Reduce Infringement and Improve Enforcement of IPR
The problem of rampant IPR infringement in China coupled with poor and inadequate IPR enforcement is clearly a primary target that needs improvement. USTR and private sector groups have recommended a number of actions that China could take to reduce infringement and improve enforcement. Representative among these are the following:
- China should “revise its IPR legal framework to provide for substantially higher administrative fines, and the administrative authorities then need to impose and publicize them so they will have a deterrent effect, including facilitating referrals for criminal prosecution.” (USTR at 65)[143]
- China should “revise its laws, regulations and other measures, including judicial interpretations, and investigate, prosecute, convict and sentence a much higher percentage of IPR infringers, particularly those engaged in commercial-scale counterfeiting or piracy and repeat offenders. China also needs to increase the criminal penalties available.” (USTR at 66)
- China should eliminate or substantially lower criminal liability thresholds for IPR violations. (USTR at 66; U.S. Chamber at 8)[144]
- China should seize and destroy infringing products and, where appropriate, the equipment used in producing or packaging counterfeit goods. (U.S. Chamber at 9)
- China should clarify the standards for obtaining preliminary injunctions in civil disputes involving IPR. (U.S. Chamber at 9)
- China should circulate for comment draft judicial interpretations on IPR violation criminal thresholds. (U.S. Chamber at 9)
- China should increase resources for police investigations into counterfeiting and piracy. (U.S. Chamber at 9)
· China should accede to the 1996 WIPO Internet-related treaties. (USTR at 62; U.S. Chamber at 9)
· The U.S. should continue to work with China’s central and local government officials to improve China’s IPR enforcement, through regular bilateral discussions and technical assistance programs for central and local government officials on TRIPS Agreement rules, IPR enforcement and rule of law issues. (USTR at 64)
· The U.S. should intensify efforts to block counterfeit and pirated goods at the U.S. border. (USTR at 64)
F. Areas of China’s WTO Non-Compliance That Should Be Considered For Possible WTO Challenges
Three years have passed since China acceded to the WTO. In that time, “while China’s efforts to fulfill its WTO commitments are impressive, they are far from complete and have not always been satisfactory, and China at times has demonstrated difficulty in adhering to WTO rules.”[145] As a new member of the WTO, other Members, understandably, have allowed China a grace period to adjust and conform its trade policies and practices to WTO rules before asserting dispute settlement challenges. So far, only one WTO dispute settlement case has been filed with respect to China. That case, filed by the U.S. in March 2004 concerning China’s discriminatory VAT policies that favored domestic over imported semiconductors, was settled at the consultation stage.
After three years, however, the U.S. should give serious consideration to filing dispute settlement cases at the WTO on a number of outstanding issues where China is not in compliance with its commitments. Used prudently, WTO dispute settlement cases are a means to induce and encourage China to come into full compliance with its commitments to the U.S. and other WTO Members. As USTR has stated:
The Administration is ... committed to working with China to resolve problems in our trade relationship before they become broader bilateral irritants. When this process is not successful, however, the Administration will not hesitate to employ the full range of dispute settlement and other tools available through China’s WTO accession agreement.[146]
The following areas of China’s non-compliance should be considered as potential topics for WTO dispute settlement cases. They are presented in the order in which they appear in USTR 2004 compliance report.
|
Category |
Issue |
Problem |
|
Trading Rights and Distribution Service |
Sales Away from a Fixed Location
|
· China committed to end market access and national treatment restrictions for sales away from a fixed location (direct selling) by December 11, 2004. During 2004, MOFCOM drafted three regulations to implement the direct selling commitment, but China did not make these draft regulations available for public comment. · Problems: § National treatment: the draft regulation permits direct selling of domestically-produced goods, but restricts selling of imported goods to a fixed location. § Other provisions have requirements that appear to make direct selling commercially unviable. See USTR 2004 Report at 20-21 |
|
Import Regulation |
Customs Valuation |
· Upon accession, China assumed the obligations of the WTO Agreement on Customs Valuation and agreed to implement these without a transition period. In January 2002, China issued customs valuation regulations. In addition, by December 11, 2003, China had committed to value digital products (e.g., floppy disk, cd-rom) based on the value of the underlying carrier medium, rather than the imputed value of the content. · Problems: § China has not uniformly implemented its regulations with the result that U.S. exporters are still encountering valuation problems at Chinese ports. These problems include: (1) valuation based on reference pricing instead of transaction value; (2) addition of royalties and license fees to the dutiable value of imported software; (3) non-uniform valuation by ports of particular digital products; and (4) valuation of high-value electronic media to be used to produce multiple copies of products (e.g., DVDs) based on the estimated value of the future copies instead of the value of the carrier medium itself. See USTR 2004 Report at 22-24 |
|
Export Regulation |
Export Quotas on Fluorspar |
· China agreed to maintain export restrictions in accordance with WTO rules, which generally prohibit (with exceptions) export restrictions (other than duties, taxes or other charges) (GATT Article XI). · Problem: § China has continued to impose export restrictions on fluorspar. China imposes quotas and license fees on fluorspar exports, but does not restrict domestic users of fluorspar. See USTR 2004 Report at 34 |
|
Internal Policies Affecting Trade |
Nondiscrimination |
· Problems: § U.S. pharmaceutical manufacturers have experienced national treatment problems regarding price controls on medicines and drug reimbursement. § From accession, China has continued to discriminate in applying SPS measures. § With respect to fertilizer, China exempts all phosphate fertilizers except DAP (a fertilizer the U.S. exports to China) from a 13% VAT. So far, China has not changed this policy. See USTR 2004 Report at 35-37 |
|
Internal Policies Affecting Trade |
Consumption Taxes
|
· Problem: § The effective consumption tax rate on imported products (e.g., spirits/alcoholic beverages, tobacco, cosmetics and skin/hair care preparations, jewelry, fireworks, rubber, motorcycles and automobiles) is substantially higher than the rate applied to domestic products because China uses different tax bases to compute consumption taxes for domestic and imported products. See USTR 2004 Report at 38 |
|
Internal Policies Affecting Trade |
Standards Testing |
· Problem: § Despite China’s changes to its standards testing regime, in some sectors, foreign products are tested in specially designated laboratories that are separate from those laboratories used to test domestic products. This disparate testing can lead to uneven treatment. See USTR 2004 Report at 41 |
|
Internal Policies Affecting Trade |
Conformity Assessment Procedures |
· China has established one safety mark (“China Compulsory Certification” or “CCC” mark), issued to both Chinese and foreign products. · Problem: § Despite national treatment commitments, to date, China has accredited 68 Chinese enterprises to test for and certify the CCC mark, but has not accredited any foreign-invested conformity assessment bodies. See USTR 2004 Report at 44-45 |
|
Investment |
Auto Industrial Policy |
· Although China had committed, by accession, to revise its Industrial Policy for the Automotive Sector to make it WTO-consistent, China missed the deadline. China circulated a draft revised automobile industrial policy in 2003 and issued the final version in May 2004. · Problem: § The new auto industrial policy contains discriminatory provisions that discourage the importation of auto parts and encourage the use of domestic technology. See USTR 2004 Report at 48-49 |
|
Agriculture |
Sanitary and Phytosanitary |
· Through the SPS Agreement, China committed that SPS measures would address legitimate scientific-based concerns, not discriminate arbitrarily, and not be disguised restrictions on trade. · Problems: § Regarding raw poultry and meat, China applies certain non-science-based standards (e.g., zero tolerance for pathogens) to imports that are not applied to domestic raw poultry and meat. This violates national treatment and has slowed imports from the U.S. § Regarding food additives, China imposes overly restrictive standards that block imports of many U.S. processed food products. The banned food additives are widely used in other countries and are approved by the World Health Organization (WHO). See USTR 2004 Report at 56 |
|
Services |
Financial Services – Insurance |
· Problem: § China has been issuing concurrent branch approvals (more than one at a time) for Chinese insurers, but only approving branches of foreign firms consecutively (one at a time). See USTR 2004 Report at 72 |
|
Services |
Express Delivery Services |
· Problems: § In July-November 2003, China circulated draft amendments to the postal services law, which (1) gave China Post a monopoly on letters under 500 grams (a horizontal commitment violation as it restricted existing scope of activities), and (2) failed to establish an independent regulator. At the April 2004 JCCT, China indicated that the weight restriction would not resurface as a problem. However, the July 2004 draft amendment still contained a weight restriction (reduced to 350 grams). See USTR 2004 Report at 76-78 |
Please note that we have not listed intellectual property rights as an area that the U.S. should consider as ripe for a near-term WTO complaint. This is because we think that the working group on IPR established between the U.S. and China as a result of the JCCT meeting and the internal program initiated by China to reduce IPR infringement and improve IPR enforcement should both be given sufficient time to put their programs into full effect toward achieving their targets. The area of IPR enforcement is also an area where the U.S. should work closely with other WTO Members (e.g., EC, Japan, and others) to provide China with stepped up training and technical assistance and to coordinate increased pressure on China to make the legal modifications necessary to improve IPR enforcement. Of course, if this course ultimately fails to achieve real progress, the U.S. should then consider WTO dispute settlement.
G. Cooperation and Competition Between the U.S. and Other Members Regarding China Issues
1. Areas Where the U.S. Can Work Jointly With Other WTO Members to Encourage China’s Compliance With its WTO Obligations
There are a host of areas concerning China’s WTO compliance where the interests of the U.S. coincide with the interests of other WTO Members. In its efforts to monitor and encourage China’s compliance with WTO commitments, the U.S. often finds itself allied with the European Communities and Japan, among others. To an extent, on a case-by-case basis, the U.S. and other Members have consulted in order to coordinate their strategies toward China. This has occurred, for example, in the context of the Transitional Review Mechanism process where the U.S., the EC and Japan have been the most active participants. As illustrated by the following table, the USTR’s 2004 WTO compliance report identifies a multitude of areas where the U.S. was joined by other Members in pushing for greater compliance by China in the context of the TRM process.
|
Areas |
Other Members Supporting U.S. |
USTR 2004 Report |
|
Wholesaling and Commission Agents’ Services |
EC; Japan |
18 |
|
Retailing Services |
EC; Japan |
20 |
|
Import Licensing |
EC; Japan |
25 |
|
Antidumping – transparency and fair procedures |
EC; Japan |
29 |
|
Export quota on coke |
EC; Japan |
34 |
|
Export quota on fluorspar |
Japan |
34 |
|
VAT on semiconductors |
EC; Japan; Mexico |
37 |
|
Subsidies Notification |
EC |
39 |
|
Conformity Assessment Procedures |
EC; Japan |
45 |
|
Investment – technology transfer, export performance, and local content requirements |
EC; Japan |
48 |
|
Auto Industrial Policy |
EC; Japan |
48 |
|
IPR Enforcement |
Japan |
64 |
|
Banking Services |
Australia; Canada; EC; Japan |
70 |
|
Insurance Services |
Canada; EC; Japan; Switzerland |
71 |
|
Motor Vehicle Financing Services |
Australia; Canada; EC; Japan |
73 |
|
Legal Services |