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 nearly tripled, growing by $36 billion, from $19.2 billion in 2001 to $55.2 billion in 2006. In the last year alone, U.S. merchandise exports grew by 32 percent. All other U.S. exports to the world increased at a much slower 13.8-percent growth rate. Imports from China have more than doubled, from $102 billion in 2001 to $287.9 billion in 2006, 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 $9.1 billion in U.S. services exports in 2005 from and $6.5 billion in U.S. services imports from China in 2005. U.S. investment flows have expanded considerably to $16.9 billion in U.S. foreign direct investment in China in 2005.

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. In September 2006, the United States and China agreed to a new Strategic Economic Dialogue to focus on bilateral and global strategic economic issues of common interest.

This section covers China’s WTO commitments and its implementation thereof, key issues in the U.S.-China commercial relationship, and mechanisms, including the Strategic Economic Dialogue, to promote improvements in the U.S.-China commercial relationship.

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) substantial, removing major trade barriers across China’s economy; (2) fully enforceable; and (3) designed to produce concrete and 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 equipment, 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, 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. While committing to reduce audio-visual barriers, China’s WTO accession permits it to maintain a 20 foreign film quota.

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 company activity;
TRQ implementation in 2004 for agricultural products which was 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 Protection and 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 three 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 progressive elimination, or at a minimum significant reduction, of numerical restrictions on the importation of products, elimination of restrictions on distribution and interference in other commercial decisions, and more transparent and timely review of products’ eligibility for sale. At the April, 2006, JCCT meeting, China agreed to a broad action plan to improve its protection of intellectual property rights, including by improved enforcement, and education. As well, China agreed to a series of steps to improve action against optical disk counterfeiting and infringing goods, to require the installation of legitimate software by government agencies and government enterprises, and to ensure more vigorous pursuit of individual IPR cases.

Government Procurement. At the 2006 JCCT meetings with the United States, China committed to initiate formal negotiations to join the WTO Government Procurement Agreement (GPA) and to submit its initial offer of coverage by December 2007. Technical discussions between the United States and China have intensified. ECAT is working with the Administration to ensure that China’s GPA accession moves both as quickly as possible and as comprehensively as possible to address the areas of access at the central and sub-central level that are important for U.S. companies.

Industrial Policy. China’s continued governmental intervention in the marketplace to the advantage of domestic companies is exemplified not only by the proposed discriminatory procurement software regulations, 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. For example, ECAT is concerned that China’s 2006 auto parts regulations continue to perpetuate prohibited local content requirements, which is the subject of a U.S. WTO case. Other issues that have arisen in 2006 include very problematic policies and regulatory activity over foreign mergers and acquisitions and state control of “critical” equipment manufacturers. ECAT remains concerned by the Chinese government’s continued development of unique standards, in particular regarding encryption and telecommunications. 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. Liberalizing China’s financial services sector is an important component that will help improve U.S.-China trade relations. In particular, expanding China’s consumption of U.S. financial services would not only increase the surplus financial services currently enjoys, but also help China meet many of its reform goals and foster conditions that would encourage China to re-value its currency.

There has been positive reform of China’s banking sector, including steps toward the, elimination of the single-bank system, implementation of a viable commercial lending system and the establishment of interbank, equity and forex markets. The issuance in November 2006 of Regulations for the Administration of Foreign-Funded Banks raised, however, additional issues, including inappropriate restrictions on incorporation and on the activities in which foreign banks can engage. As well, new restrictions were imposed in 2006 on foreign providers of financial news.

Improvements have been slower in the insurance sector, where long-standing industry issues, including non-life subsidiary conversion and branch licensing issues remain unresolved.

Other Non-Tariff Barriers on Agriculture, Manufactured Goods and Services. China continues to maintain and create burdensome and opaque entry, regulatory, licensing, customs, customs valuation, and other requirements that place major barriers on agricultural, goods and services trade. For example, China’s Compulsory Certification (CCC), which took effect in 2003 and now applies to nearly 130 product categories, represents a costly, non-transparent and increasingly significant and discriminatory barrier to products being sold in the Chinese market. Barriers to entry and investment also 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 ratings 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, including China’s ban on the importation of beef. China’s maintenance of a 20 foreign film quota also represents a substantial limit on the access of U.S. entertainment products to China, which is compounded by widespread audio-visual piracy.

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. As discussed in section III.8, the United States is also considering new export control rules with respect to exports of technology products to China. As discussed in section III.1, there are also several legislative trade remedy proposals relating to non-market economy countries such as China. At the end of March 2007, the U.S. Department of Commerce issued a preliminary determination applying the countervailing duty law to imports of coated free sheet paper from China, the first time that the countervailing duty law has been applied to a non-market economy country since the 1980’s.

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 accession. 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.

Reinvigorated JCCT. First established in 1983, the U.S.-China Joint Commission on Commerce and Trade (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.

WTO cases. The Administration continues to evaluate potential dispute settlement cases pursuant to the WTO. Several cases have moved forward:

In March, 2004, the Administration took an historic and heavily considered step, filing the first WTO case ever 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 January, 2006, the Administration indicated its willingness to bring another WTO case against China, involving antidumping duties imposed by China on imports of kraft linerboard from the United States. Before a case could be brought, China completely rescinded the antidumping order.

In March, 2006, the United States requested WTO consultations with China over its policies that discriminate against imported automobile parts. Canada and the European Union filed similar requests. After consultations were unsuccessful, the United States requested in September, 2006, the establishment of a WTO dispute settlement panel regarding China’s discriminatory treatment of imported automobile parts. This is the first panel request ever made with respect to China. Canada and the European Union filed simultaneous requests. A decision will not be issued in this case until later this year.

In February, 2007, the United States requested consultations with China over several measures that appear to provide market-distorting subsidies, including refunds, reductions, or exemptions from taxes and other payments owed to the government. In requesting the consultation, the United States has argued that these measures appear to be contrary to a number of WTO rules, including the prohibitions on export subsidies and import substitution subsidies set forth in the WTO Agreement on Subsidies and Countervailing Measures.

In April 2007, the United States requested consultations with China with respect to the protection and enforcement of intellectual property rights for copyrighted and trademarked products, including books, magazines, newspapers, movies and other audio-visual products.

In April 2007, the United States requested consultations with China over market access barriers, particularly trading rights and distribution rights, for certain copyrighted products.

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 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 elsewhere 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.

Strategic Economic Dialogue

On September 20, 2006, the United States and China announced the establishment of the Strategic Economic Dialogue (SED) to focus on bilateral and global strategic economic issues of common interest to the two countries. Meetings will be held twice a year.

The first SED meeting was held on December 14-15, 2006 in Beijing, with Treasury Secretary Henry Paulson leading the effort for the United States and Vice Premier Wu Yi leading the effort for China. At that meeting, the United States and China:

Reaffirmed their commitment to pursuing macroeconomic policies, such as China's exchange rate regime reform and increasing the U.S. savings rate, to promote balanced and strong growth and prosperity.
Agreed on the importance of establishing open and competitive markets, accelerating development and job creation, stimulating domestic and international trade and investment, and promoting sustainable development through energy security, environmental protection, and access to health care.
Committed to taking steps to strengthen the WTO, including the conclusion of the Doha Development Agenda negotiations.

The United States and China also agreed to prioritize work before the next SED on the following key areas:

Development of efficient innovative service sectors and on ways to improve health care.
Launching of a bilateral investment dialogue with exploratory discussions to consider the possibility of a bilateral investment agreement, enhancing cooperation on transparency issues, and a possible joint economic study on energy and environment.
Invigorate ongoing work within the JCCT on high-tech trade, intellectual property rights, and market economy status/structural issues.
Increase bilateral cooperation on energy use, facilitation of personal and business travel, development assistance, and MDB lending.
support China's membership in the IADB.

In addition, the United States and China concluded an agreement to facilitate financing of U.S. exports to China and agreed to re-launch bilateral air services negotiations.

The next SED meeting will be held in Washington, D.C. in May 2007.

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) intellectual property rights, (2) government procurement, (3) industrial policy, (4) financial services barriers; (5) non-tariff barriers on agriculture, manufactured goods and services; (6) uneven and inadequate transparency, and (7) discriminatory consumption taxes.

ECAT welcomes the constructive and multiple initiatives of the U.S. Trade Representative, the U.S. Department of the Treasury, 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.