Emergency Committee For American Trade - Publications

SECTION IV.1: CHINA

ECAT has long viewed the United States’ engagement with China and China’s full participation in the global trading system, including China’s commitment to and implementation of the rules of that system, as critical to promoting U.S. commercial interests, as well as promoting our country’s broader interests in development and the rule of law. China’s accession to the World Trade Organization (WTO) in 2001 represented the culmination of years of effort to encourage China’s commitment to the rules of the global trading system. It also represented the first step in the long, complex, but extraordinarily important, process of ensuring that China implements those rules fully and effectively. While significant progress has been achieved in integrating China into the global trading system, more can be done to promote greater integration and, in particular, a more positive U.S.-China commercial relationship.

The United States and China share a robust trade and investment relationship. China represents the United States’ third largest trading partner and could surpass Mexico next year as the United States’ largest trading partner in terms of total exports and imports. For China, the United States is its largest export market, followed closely by the European Union and Hong Kong. The United States represents China’s fifth largest source of imports, after Japan, the European Union, Taiwan, and Korea.

Since China’s entry into the WTO, U.S. exports to China have increased by $15.5 billion or 84 percent, growing from $19.2 billion in 2001 to $41.8 billion in 2005 – an increase of 20.5 percent over 2004 U.S. exports. All other U.S. exports to the world increased at a slower 10.1 percent growth rate. Imports from China have more than doubled, from $102 billion in 2001 to $287.9 billion in 2005, in many cases displacing exports from other parts of the world. China continues to be the United States’ fourth largest export market worldwide and its second largest source of imports. U.S. services trade with China has also grown substantially, to $7.2 billion in U.S. services exports from and $5.6 billion in U.S. services imports from China in 2004. U.S. investment flows have also expanded considerably to $15.4 billion in U.S. foreign direct investment in China in 2004.

Following China’s entry into the WTO on December 11, 2001, much of the focus of the U.S. commercial relationship with China has been on its implementation of its WTO commitments, some of which China was able to implement quickly; others remain at issue, including enforcement of intellectual property rights, accession to the WTO Government Procurement Agreement and other issues. Another important issue in the U.S.-China economic relationship is the role China that will play in the ongoing Doha Development Agenda negotiations, i.e., whether or not it will play a leading role as a major trading nation in support of greater liberalization.

In February 2006, USTR issued its “Top-to-Bottom Review” of the U.S.-China relationship, including initial steps USTR would take to improve the trading relationship. In Congress, several bills relating to China trade relations in particular are pending.

This section covers China’s WTO commitments and its implementation thereof, key issues in the U.S.-China relationship and U.S. trade legislation regarding China.

CHINA AND THE WTO

Background on China’s WTO Commitments

Full and effective implementation of China’s accession to the WTO is critical to providing new opportunities for American goods, services, and agriculture in the world’s largest and fastest growing market. The terms for China’s accession were: (1) comprehensive, removing major trade barriers in all major sectors of the economy, (2) fully enforceable, and (3) designed to produce rapid results. Highlights of some of the key provisions are summarized below.

Agriculture: The bilateral agreement provides expanded market access for U.S. wheat, corn, soybeans, cotton, barley, and rice under a new system of tariff-rate quotas, reduces Chinese tariffs on priority products such as beef, citrus, and dairy from over 30 percent to 12 percent, and eliminates Chinese export subsidies. In a separate side agreement, the Chinese agreed to eliminate non-science-based food safety measures that restrict entry of U.S. beef, pork, poultry, and wheat.
Trading and Distribution Rights: China agreed to provide full trading rights for U.S. and other foreign companies to import, export, and distribute products directly to Chinese customers, including after-sales service and repair, without going through a local trading company or distributor by December 2004.
Tariffs: China agreed to cut tariffs to 9.4 percent by 2005, including major tariff reductions on the farm products noted above. In the auto sector, China agreed to reduce its tariffs on autos to 25 percent by 2006 and to reduce tariffs on auto parts to 10 percent. As it committed to as part of its accession, China has joined the WTO’s Information Technology Agreement (ITA) that requires China to reduce its tariffs on computers, semiconductors, telecommunications, and other high-technology products to zero.
Services: China agreed to provide comprehensive market access for U.S. telecommunications and financial services under the WTO Telecommunications and Financial Services Agreements. China has made specific market-access commitments in all services industries of primary interest to the United States, including the Internet, audio-visual, banking, insurance, securities, and auto finance. U.S. publishing and information services also will benefit from China’s commitment to remove restrictions on distribution and to reduce restrictions on investment.
Safeguards: China also agreed to a 12-year product-specific safeguard provision that ensures that the United States and other countries can take action against increased imports from China that cause market disruption in their economies. The agreement also guarantees the United States the right for 15 years to continue to use special non-market economy methodologies in antidumping cases brought against China.

U.S.-China Relations Act and Congressional-Executive Commission on China

In 2000, Congress passed and the President signed into law the U.S.-China Relations Act. In addition to authorizing the President to determine that Title IV of the Trade Act of 1974 should no longer apply to China, and to proclaim the extension of PNTR treatment to China (after certifying to Congress that the terms and conditions for China’s accession to the WTO are at least equivalent to those agreed by the United States and China on November 15, 1999), it also included the following key provisions:

Import Surge Safeguard. Title II implements the product-specific safeguard included in the November 1999 U.S.-China bilateral WTO agreement and China’s protocol of accession. The safeguard permits a WTO member to impose temporary import restrictions in cases where products from China are being imported into its territory in such increased quantities or under such conditions as to cause or threaten to cause market disruption to competing domestic producers. This special safeguard applies to China for 12 years following China’s accession to the WTO.
Congressional-Executive Commission on China: Title III establishes a Congressional-Executive Commission on China, modeled loosely after the Commission on Security and Cooperation in Europe (Helsinki Commission). The China Commission consists of nine members of each House plus five Presidential appointees. It is charged with monitoring human rights and labor market issues, and monitoring and encouraging the development of the rule of law and democracy-building in China. The House Committee on International Relations is required to hold hearings on the Commission’s annual reports, including any recommendations for legislation or executive action that the Commission makes.
Monitoring and Enforcement: Title IV requires the United States Trade Representative (USTR) to issue an annual report on China’s compliance with its WTO obligations. It also instructs the President to press for a WTO mechanism to review China’s compliance on an annual basis. Title IV also authorizes appropriations for the Departments of Agriculture, Commerce and State, as well as USTR, to monitor and enforce China’s and other foreign governments’ compliance with trade agreements.
Task force on prison labor: Title V instructs the President to establish an interagency task force, chaired by the Secretary of the Treasury, to monitor, investigate, and enforce the prohibition on imports made by prison labor as provided for in section 307 of the Tariff Act of 1930 (which bars imports of goods made with forced or indentured labor).
Technical assistance for China: Title V authorizes appropriations for the Departments of Commerce, State, and Labor to establish programs to provide training and technical assistance in China to develop the rule of law with respect to commercial and labor-market standards. These programs would assist China in bringing its domestic laws into compliance with WTO and International Labor Organization standards.
Broadcasting: Title VII authorizes additional appropriations for Radio Free Asia and Voice of America to expand and enhance U.S. international broadcasting operations throughout China and nearby countries.

China’s Implementation of WTO Commitments and Key Commercial Issues

Since joining the WTO, China has made very significant progress in coming into compliance with many aspects of its WTO commitments, including:

tariff reductions from a base of 25 percent to seven percent.
reductions in non-tariff barriers, where China eliminated hundreds of WTO-inconsistent requirements;
trading rights reforms, where China implemented its commitments six-months early to allow companies to import and export directly;
distribution rights reforms in 2005, where China now allows foreign enterprises to distribute products within China;
new regulations on the regulation of foreign invested insurance companies and the elimination of geographic restrictions on insurance companies in 1994;
TRQ implementation in 2004 for agricultural products which were finally brought closer in line with China’s commitments; and
expanded market access in a number of services areas.

Despite the substantial progress and reform, much more work needs to be done by the Chinese government to open its markets to U.S. goods and services and to implement China’s WTO commitments. In particular, ECAT companies are concerned about the following key issues in the U.S.-China commercial relationship, which need to be addressed:

Intellectual Property Rights Enforcement. While China’s laws on the protection of intellectual property have been improving over time, there remain substantial problems in China’s enforcement of such protections. As a result, piracy and product counterfeiting continue to flourish in numerous sectors. Despite commitments at the U.S.-China Joint Commission on Commerce and Trade (JCCT) in the last two years, the level of piracy and counterfeiting remains extremely high and requires continued intervention and improved market access for suppliers of legitimate products, including lower tariffs, the elimination of restrictions on distribution, and more transparent and timely review of products eligibility for sale.
Government Procurement. China has yet to begin negotiations to join the WTO Government Procurement Agreement (GPA), despite the commitment in its WTO accession Working Party report to do so “as soon as possible.” In 2005, China delayed implementation of discriminatory software procurement regulations and agreed to begin technical consultations with the United States on GPA accession, but still failed to begin actual GPA negotiations. Given the substantial delay, ECAT has urged the Administration to seek concrete commitments from China to initiate GPA negotiations no later than June 2006 and to set a December 2007 target date for completing those negotiations.
Industrial Policy. China’s continued governmental intervention in the marketplace to the advantage of domestic companies is exemplified not only by the new proposed software regulations discussed above, but also through measures in other sectors of the economy. For example, while China’s May 2004 automobile industrial policy corrected some of the major areas of discrimination found in the earlier draft policy, the final policy continues to create discriminatory preferences for domestic parts and technology. As well, ECAT remains concerned by the Chinese government’s continued development of unique standards, in particular regarding encryption. In May 2003, China issued mandatory standards for encryption over Wireless Local Area Networks (WLANs) containing Wi-FI technology that mandated use of WLAN Authentication and Privacy Infrastructure (WAPI) encryption technology that differed significantly from internationally-recognized standards. While China has suspended the use of WAPI as a mandatory standard, in January 2006, China issued a preference for WAPI in government procurements of WLAN products.
Financial Services Liberalization. Continued work is necessary for China to open fully its financial services sector, including ensuring that financial services providers are provided broad national access, transparency and predictability. In insurance, for example, it is important that branching approvals be permitted on a concurrent, not just consecutive, basis for foreign invested insurers, that foreign invested insurers have access to provincial and municipal opportunities, and that flexibility remains for the choice of corporate form (branch or subsidiary).
Other Non-Tariff Barriers. China continues to maintain and create burdensome and opaque entry, regulatory, licensing, customs, customs valuation, and other requirements that place major barriers to agricultural, goods and services trade. Barriers to entry and investment continue to be significant and impede full participation in many sectors, including publishing, financial services and others. As well, China maintains barriers to activities that undermine existing operations of companies that have already entered the Chinese market, including, for example, limiting U.S. credit agencies from providing credit rating for domestic bond issues. While making some progress, China continues to impose non-scientific and non-commercial barriers in agricultural trade in particular, with unnecessary and unfounded phytosanitary barriers to agricultural trade (Decree 73 issued on June 16, 2004, effective July 1, 2004, presents a clear example). As well, China
Transparency. While remarkable progress has been made from the opaque situation that most companies experienced 10 years ago, there remains uneven and inadequate transparency in the promulgation of governmental measures, standards and other governmental actions. Lack of full transparency undermines significantly the ability of U.S. companies seeking new or continued market opportunities in China.
Discriminatory consumption and value-added taxation policies. While China made progress in lifting its discriminatory tax rebate for certain semiconductors, it continues to maintain and erect discriminatory consumption taxes and apply the VAT in an uneven and discriminatory manner that undermines the ability of U.S. and other foreign companies to compete on a level playing field.

ECAT also strongly supports the conclusion of an “open skies” agreement between the United States and China, which would promote enormous benefits to consumers and support continued growth of aviation and aerospace industries as explained in section IV.2.

Mechanisms to Improve the U.S.-China Economic Relationship

China’s accession to the World Trade Organization (WTO) in December 2001 represented the first step in the long, complex, but extraordinarily important, process for China to implement WTO rules and fully integrate itself into the world trading system. ECAT members recognize that China will not automatically be transformed overnight or in a few years, and support the multitude of efforts by the Administration, Congress and private sector that seek to promote in a constructive and concrete manner the changes that were promised under the terms of China’s WTO. The Administration and Congress have set in place a number of mechanisms to address the very significant challenge of monitoring China’s implementation of its WTO commitments and the U.S.-China economic relationship, including:

Trade Policy Staff Subcommittee on China. In December 2001, the Administration created the Trade Policy Staff Subcommittee on China to guide the Administration’s multi-pronged monitoring approach on China. State Department economic officers, Foreign Commercial Service and Multilateral Agreements Compliance officers from the Commerce Department, and Foreign Agricultural Service officers gather information and help companies address day-to-day concerns. 197
Reinvigorated JCCT. First established in 1983, the JCCT provides a government-to-government forum to resolve trade issues and promote bilateral commercial opportunities. Since China’s entry into the WTO, the JCCT has provided a very useful yearly mechanism to address key compliance issues and other commercial issues in a positive and effective manner.
Annual Compliance Reports. Since 2002 and in accordance with the U.S.-China Relations Act of 2000, USTR monitors and issues an annual report on China’s compliance with its WTO commitments. The December 2005 report found that:
While China has made important progress in implementing specific commitments and in adhering to the ongoing obligations of a WTO member, there are still serious problems in some important areas, especially in the enforcement of intellectual property rights (IPR).
Many of the shortfalls in China’s WTO compliance efforts seem to stem from China’s incomplete transition from being a state-owned economy.
WTO cases. In March 2004, the Administration took an historic and heavily considered step – it filed the first WTO case ever filed against China. The U.S. challenge to China’s discriminatory tax treatment of U.S. semiconductors is notable: it involved well-substantiated and clear violations of China’s WTO commitments. After consultations in April 2004, the United States and China reached a mutually agreed settlement that was notified to the WTO on July 14, 2004. Under the agreement, China agreed as of July 2004 not to issue any refunds to any companies for value-added taxes paid on integrated circuits/semiconductors. In 2006, the Administration indicated its willingness to bring another WTO case against China, involving antidumping duties imposed on kraft linerboard. Before a case could be brought, China completely rescinded the antidumping order.
GAO Reports. In December 2000, the Senate Finance Committee and House Ways and Means Committee requested the General Accounting Office (GAO) to monitor China’s compliance with its WTO commitments with a report one year after China’s accession and yearly thereafter. The GAO has already issued a number of reports related to China’s WTO compliance, including:
Opportunities to Improve U.S. Government Efforts to Ensure China’s Compliance with World Trade Organization Commitments (April 2005), making several recommendations to improve the Administration’s monitoring and enforcement capacity.
U.S. Companies’ Views on China’s Implementation of Its Commitments (March 2004), finding that China was making progress in implementing its WTO commitments, but that much work remains.
First Year U.S. Efforts to Monitor China’s Compliance (March 31, 2003), examining the complexity in monitoring fully China’s implementation of its commitments.
Analysis of China’s Commitments to Other Members (October 3, 2002), examining the scope and type of China’s commitments and the interrelationships of those commitments.
Selected U.S. Company Views about China’s Membership (September 23, 2002), examining the private sector expectations, in which approximately 90 percent of companies surveyed expected China’s accession to have a positive impact on their businesses.
Observations on China’s Rule of Law Reforms (June 6, 2002), finding that the U.S. private sector believes China’s rule of law reforms are critical.

On February 14, 2006, USTR issued its “Top-to-Bottom Review” of U.S.-China Trade Relations. The report puts the U.S.-China economic relationship in a broader context and discusses how the relationship has progressed. The report explains that now that many of the deadlines for China’s implementation of its WTO commitments have passed, the relationship is moving into the next stage, where China will still need to implement more fully its WTO commitments and integrate itself into the global trading system. USTR’s initial steps to improve the U.S.-China economic relationship include:

Expanding USTR’s trade enforcement capacity with China through a new Chief Counsel for China Trade Enforcement post and the establishment of a China Enforcement Task Force.
Expanding the information-gathering ability through additional staff in USTR’s China office and creating a China Task Force as part of the Advisory Committee for Trade Policy and Negotiation (ACTPN).
Expanding U.S. trade policy and negotiating capacity in Beijing and in China.
Increasing coordination on China economic issues with other major trading partners
Expanding economic ties with other Asian economies.
Increasing the focus on regulatory reform in China.
Increasing the effectiveness of high-level meetings.
Expanding the U.S.-China dialogue.
Strengthening inter-agency coordination, including through a monthly review.
Strengthening Executive-Congressional relations on China issues through a new briefing series.

USTR is also seeking Congressional input on other areas where it should work to improve the U.S.-China economic relationship. ECAT and its companies work extensively with USTR, other U.S. government agencies and the Chinese government to promote compliance by China of its WTO commitments and an improved U.S.-China commercial relationship.

Legislative Proposals

In addition to the activities of USTR and other parts of the Administration, many pieces of legislation have been introduced in Congress that seek to address the U.S.-China commercial relationship. Several of the most notable pieces of legislation are discussed below. In addition, several pieces of broader trade legislation discussed in section III.1 also have a China component or were spurred in part by interest in rebalancing the U.S.-China commercial relationship.

United States Trade Rights Enforcement Act

Passed by the House of Representatives on July 27, 2005, by a vote of 240-to-186, the United States Trade Rights Enforcement Act (H.R. 3283) primarily, albeit not exclusively, focused on U.S.-China trade issues. In particular, this legislation would:

Amend U.S. countervailing duty law to include explicitly applicability to nonmarket economy countries, providing that the application does not double count duties and is consistent with U.S. international obligations.
Impose bonding requirements on new shippers.
Require monitoring of China’s implementation of specific WTO commitments by USTR and the Commerce Department and biannual and, in some cases, monthly reports on these issues.
Require a Treasury report on currency manipulation, including an analysis of China’s termination of its dollar peg.
Issue a sense of Congress resolution that China should join the WTO Government Procurement Agreement and suspend operation of its government procurement law.
Provide appropriations to USTR.

China Currency Legislation

There have been several Congressional efforts to force China to appreciate its currency in relation to the U.S. dollar under the threat of the imposition of tariffs. As discussed below, ECAT believes that legislative efforts which seek to force China to make substantial changes in its currency system under threat of additional tariffs are misplaced and would do more harm than good to U.S. economic interests.

Until July 21, 2005, China had linked its currency, the renminbi (RMB), to the U.S. dollar. On July 21, 2005, China officially delinked its currency from the dollar, allowing it to move in a managed float tied to a basket of currencies. Following this delinkage, China’s currency moved somewhat higher in relation to the dollar, but has not significantly appreciated. In addition to its modest currency reform, China has been undertaking a much more substantial reform of its financial and banking structure, including strengthening its financial sector and financial regulation, developing foreign-exchange market instruments and increasing the volume of foreign-exchange trading. Each of these reforms is an important prerequisite to China’s full adoption of a market-based exchange rate.

S. 295 and similar legislation seeks to force China to adopt a market-based currency within six months (or make a good faith effort to do so) or face a 27.5 percent tariff on Chinese exports to the United States. Following an April 6, 2005, Senate vote not to table this amendment to the Foreign Operations Authorization bill, the Senate agreed to allow a vote on the stand-alone bill (S. 295); that deadline has been extended several times.

ECAT strongly opposes the approach taken by S. 295:

Imposition of an additional 27.5 percent tariff on imports from China would violate U.S. commitments in the World Trade Organization (WTO). Contrary to the bill’s suggestions, there are no exceptions for this type of action.
This measure would expose U.S. exporters to retaliation of more than $50 billion and would have severe repercussions on the U.S. manufacturing and agriculture sectors. This comes at precisely the wrong time since U.S. exports to China have been increasing.
S. 295 would also undermine U.S. efforts to promote China’s full compliance with its WTO and other obligations. The United States cannot be an effective voice for promoting China’s compliance with the international rules of trade, at the same time that the United States violates its own obligations.
Adoption of such legislation would send precisely the wrong message to China on how most appropriately and effectively to handle complex global issues, suggesting unilateralism, rather than the rule of law, is appropriate.

In short, S. 2956 would undermine the progress that has been made on bringing China into the world trading system. It would produce severe economic costs for the United States, undercut broader U.S. national interests and undermine, rather than promote, progress on its stated goal of promoting a market-based revaluation of China’s currency.

As discussed in section III.1, Senate Finance Committee Chairman Grassley (R-IA) and Ranking Member Baucus (D-MT) introduced the United States Trade Enhancement Act on March 28, 2006. In addition to strengthening the United States’ ability to address trade barriers abroad, this legislation seeks to establish a stronger and more effective process for the U.S. Government to address sustained imbalances in foreign currencies that adversely affect the U.S. economy. The legislation would modify the Treasury Department’s reporting requirements, require Treasury to identify currencies that are misaligned and adversely affect the U.S. economy and require it to take several actions where it finds harmful currency misalignment. Included among the actions that are to be taken are: consultations and negotiations with the government responsible for the currency, request for advice of the International Monetary Fund (IMF) on the issue; and encouragement of other governments to join the United States in seeking appropriate action. If the foreign government fails to enter into bilateral consultations with the United States, then no new OPIC financing will be approved, the U.S. Executive Director of each multilateral bank will be instructed to oppose any new financing and the United States will request the IMF to engage in formal discussions with the government until such time as the Secretary of the Treasury notifies Congress that the government has entered into bilateral consultations. If the Secretary of the Treasury decides within 180 days that the government has failed to adopt appropriate policies to eliminate the misalignment, then OPIC financing shall be denied, the United States will oppose new multilateral bank financing and the United States shall request the Managing Director of the IMF to enter into IMF Article IV consultations. The United States will also oppose any increase in the voting share of such country in any international financial institution. The legislation also amends the antidumping statute to add the Treasury Department's identification of a currency as misaligned as a factor to consider in determining whether to grant the relevant country market economy status. The legislation also would create a new Assistant Secretary of Treasury and establish an Advisory Committee on International Monetary and Financial Policy.

ECAT Position: ECAT supports the full implementation of China’s WTO commitments and other constructive reforms to promote the rule of law and level the playing field for U.S. companies. Of particular importance to ECAT companies are the following issues in the U.S.-China commercial relationship: (1) distribution rights, (2) intellectual property rights, (3) government procurement, (4) industrial policy, (5) burdensome and opaque customs, entry, licensing, regulatory and other requirements, (6) uneven and inadequate transparency, and (7) discriminatory consumption taxes.

ECAT welcomes the constructive and multiple initiatives of the U.S. Trade Representative and the Department of Commerce and other parts of the Administration to promote China’s compliance with its WTO and other commercial commitments, as well as broader reforms in China.