Emergency Committee For American Trade - Publications

ECAT 2008 AGENDA

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.

This section covers the U.S.-China economic relationship, China’s WTO commitments and its implementation thereof, key issues in the U.S.-China economic relationship, and mechanisms, including the Strategic Economic Dialogue and U.S.-China Joint Commission on Commerce and Trade (JCCT), to promote improvements in the U.S.-China economic relationship. The end of this section reviews several of the key U.S.-China trade legislative proposals that could be considered in 2008.

U.S.-China Economic Relationship

With 1.3 billion people, China will be one of the most important world markets for decades to come, providing important economic opportunities to U.S. farmers, manufacturers, service providers and their workers.

Since China’s entry into the WTO, U.S. exports to China have more than tripled, growing by $46 billion, from $19.2 billion in 2001 to $65.2 billion in 2007, surpassing U.S. exports to Japan, Germany, the United Kingdom, and Korea. In the last year alone, U.S. merchandise exports grew by 18 percent or $10 billion, faster than exports to the rest of the world. Nineteen U.S. states exported more than $1 billion in agricultural and manufactured goods to China in 2007 and thirty-nine states exported more than $250 million in goods to China in 2007.

At the same time, imports from China have more than tripled, from $102 billion in 2001 to $321.5 billion in 2007, in many cases displacing exports from other parts of the world. America’s imports from China increase the variety and availability of products to all Americans, increasing U.S. purchasing power and our standard of living.

U.S. services trade with China has also grown substantially, and the U.S. services surplus has widened. In 2006, U.S. services exports to China totaled $10.9 billion and U.S. services imports from China totaled $7.3 billion, resulting in a $3.6 billion surplus. U.S. investment flows have expanded considerably to $22.2 billion in U.S. foreign direct investment in China in 2006.

Following China’s entry into the WTO, much of the focus of the U.S. economic 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 (GPA) and other issues. Another important issue in the U.S.-China economic relationship is the role that

China 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. New to the agenda last year are bilateral discussions between the United States and China about whether to set in place strong rules to promote greater investment and increased protection for each other’s investors.

The United States is China’s 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. China is also in the process of deepening its economic relationships with other countries in the Asia-Pacific region and more broadly. In November 2001, China and the 10-member country Association of South East Asia Nations (ASEAN) began negotiations to set up a free trade area (FTA). In 2002, a framework agreement was signed with a target date of 2010 for the FTA to be completed and comet into force. Implementation of the framework agreement would occur in stages. China is also in FTA discussions with Australia, New Zealand, Pakistan, Chile, the Southern Africa Customs Union and the Gulf Cooperation Council. China is further trying to open discussions with Brazil, Iceland, India, Japan and South Korea. China and Thailand have a partial FTA (completed in 2003) covering agricultural products.

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 U.S.-China bilateral WTO 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. Fulfilling another commitment, China has joined the WTO’s Information Technology Agreement (ITA) that requires it to eliminate, in staged reductions, and bind at zero duties covered information-technology products, including 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 most services sectors 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, significant barriers remain. For example, China’s WTO accession permits it to maintain a foreign film quota, permitting only 20 foreign films per year.
Intellectual Property Rights: China agreed to the adhere to the obligations of the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement that sets forth the basic rules for protecting and enforcing intellectual property rights. China committed to adopt laws consistent with those rules and strengthen its enforcement of intellectual property rights by its courts and the responsible administrative agencies.
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 significant progress in coming into compliance with many aspects of its WTO commitments, including:

tariff reductions from a base of 25 percent to under 10 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 (IPR) Protection and Enforcement. While China’s laws on the protection of intellectual property have been improving over time, there remain areas where the standards for protection need to be improved and substantial problems in China’s enforcement of existing protections. In terms of standards of protection, it is particularly important for China to provide protection for clinical test data for pharmaceutical products. With regard to enforcement, problems exist across numerous sectors. Despite commitments at the JCCT in the last four years, the level of piracy and counterfeiting remains extremely high. Overall, ECAT seeks greater intellectual property (IP) enforcement activity, as well as other changes that will improve market access for suppliers of legitimate products (including lower tariffs, the progressive reduction and eventual elimination 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). China also needs to improve IP enforcement in the pharmaceutical sector by ensuring that infringing products do not receive product approvals.
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. As noted below, in April 2007, the United States formally requested WTO consultations with China on several IP issues and a WTO panel is currently reviewing this case. At the December 2007 JCCT meeting, China reported its progress on these measures and agreed to strengthen enforcement of laws against company name misuse and to exchange information on seizures and counterfeit goods with the United States. Work in this area is ongoing and requires heightened attention.
Government Procurement. At the request of the United States, China formally initiated its negotiations to join the WTO Government Procurement Agreement (GPA) in December 2007. Much more work is required, however, for China to adopt comprehensive, transparent and non-discriminatory government-procurement rules that will benefit U.S. manufacturers and service providers. As well, China’s recent release of Ministry of Finance procurement regulations shows it moving backwards, rather than towards a non-discriminatory, open procurement system. 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 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. As a result of a WTO challenge by the United States in 2007, China also agreed to eliminate certain subsidies.
Financial Services Liberalization. Liberalizing China’s financial-services sector is an important area 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 that U.S. financial services currently enjoy, 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 equity limitations in the life insurance sector and consecutive versus concurrent licensing issues remain unresolved.
As discussed below, the United States has also brought a WTO challenge to China’s regulations that limit the ability of U.S. and other foreign financial-information suppliers to sell their information to banks, government agencies and other customers in China.
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 quota allowing only 20 foreign films per year also represents a substantial limit on the access of U.S. entertainment products to China, which compounds by widespread audio-visual piracy given the high demand for foreign content that cannot be satisfied under existing distribution limits.
Food, Feed and Product Safety. While efforts to promote the safety of foods and products imported into the United States must address all countries, concerns have increased in the past year about foods, feeds and consumer products from China. The United States and China have worked together and individually to develop stronger mechanisms to address these concerns and promote greater food, feed and product safety. Recent agreements reached between the United States and China on these important issues are discussed below. Broader food and product safety issues are also discussed in section III.10.
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, judicial proceedings 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 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. In addition to the Strategic Economic Dialogue addressed in more depth below, these mechanisms include:

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.
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.
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.
WTO cases. The Administration continues to evaluate potential dispute settlement cases pursuant to the WTO. Seven 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 intention 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 and the panel was established on October 26, 2007. A final 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 provide market-distorting subsidies, including refunds, reductions, or exemptions from taxes and other payments owed to the government. China committed to eliminate and modify its laws to address these issues in an agreement with the United States, which took effect on January 1, 2008.
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 particular, the United States argued that China is not meeting is WTO requirements as a result of inadequate penalties for the unauthorized reproduction and distribution of copyrighted works, the release back into commerce of confiscated infringing products and the denial of copyright and related rights protection and enforcement to creative works of authorship, sound recordings and performances that have not been authorized for publication or distribution within China. A panel to review the case was established on September 25, 2007.
In April 2007, the United States requested consultations with China over market access barriers, particularly trading rights and distribution rights, for certain copyrighted products. A panel to review the case was established on November 27, 2007.
In March 2008, the United States requested consultations with China over its denial of market access to financial-information suppliers.

On February 14, 2006, USTR issued its “Top-to-Bottom Review” of U.S.-China Trade Relations. The report identified USTR’s initial steps to improve the U.S.-China economic relationship including:

Expanding USTR’s trade-enforcement capacity 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 Negotiations (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.

Strategic Economic Dialogue

On September 20, 2006, the United States and China announced the establishment of the Strategic Economic Dialogue (SED) as the most overarching mechanism to focus on bilateral and global strategic economic issues of common interest to the two countries. Meetings are held twice a year and have already produced progress and deeper working relationships.

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:
Developing efficient and innovative service sectors and 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 considering a possible joint economic study on energy and environment.
Invigorating ongoing work within the JCCT on high-tech trade, intellectual property rights, and market-economy status/structural issues.
Increasing bilateral cooperation on energy use, facilitation of personal and business travel, development assistance, and multilateral development bank (MDB) lending.
support China's membership in the Inter-American Development Bank (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 second SED meeting was held in Washington, D.C., in May 2007 and focused on market access, opening China’s financial sector, promoting greater energy security, environmental protection and the rule of law. The United States and China agreed to:
Expand the existing bilateral aviation agreement through liberalization of air-services rights.
Launch negotiations to facilitate Chinese groups’ leisure travel to the United States.
Expand U.S. exports through promoting loan guarantees for the export of large-scale capital goods from the United States to China.
Financial sector reform, including through China’s agreement to (1) remove barriers on the entry of new foreign securities firms; (2) resume the licensing of securities companies, including joint-ventures; (3) allow foreign securities firms to expand their operations in China to include brokerage, proprietary trading and fund management; (4) allow foreign-invested banks to offer their own brand of RMB-denominated credit and debit cards; and (5) consider pending applications for non-life branch-subsidiary conversion; and (6) streamline the application and licensing process for the provision of enterprise annuities by financial institutions.
Promote energy security and protect the environment through a variety of new technologies and work together in the WTO Doha negotiations to reduce or eliminate tariff and non-tariff barriers to environmental goods and services.
Strengthen the rule of law, through increased protection of intellectual property rights, including through the exchange of information and strategies on counterfeit-good seizures.
The third SED meeting was held in China in December 2007 and focused on trade and product safety, balanced economic development, energy efficiency and security, environmental sustainability and bilateral investment. In particular, the United States and China agreed to:
A Memorandum of Agreement between the U.S. Department of Health and Human Services (HHS) and China's General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) under which China agreed to strengthen requirements for registering and regulating companies that export food and feed products to the United States and to certify products that meet the HHS requirements.
Expand cooperation to promote the safety of drugs and medical devices.
A Memorandum of Agreement to strengthen cooperation on sound environmental-management practices related to imports and exports.
Renew their commitment to recent agreement to increase the safety of consumer products, including toys, fireworks, lighters, and electrical products, motor vehicles and pesticides.
Financial-sector reform, including through China’s agreement to allow foreign companies doing business in China, including banks, to issue RMB-denominated stocks and bonds; and complete studies with recommendations on policies governing foreign-equity participation in the banking sector and recommendations on adjusting the extent of foreign equity participation in the securities sector.
Exchange of letters allowing mutual funds administered by Chinese banks to invest in the U.S. stock market
Conduct extensive cooperation over a 10-year period to address the challenges facing the International Energy Agency (IEA).
A Memorandum of Understanding (MOU) to combat illegal logging and associated trade and to promote sustainable forest management.
A high-level exchange on investment that covers investment policies, practices and climates.
Intensify ongoing discussions regarding the prospects of negotiating a Bilateral Investment Treaty providing meaningful investor protections.
Publish in advance any measure covered by its WTO obligations that are proposed for adoption, and provide where applicable interested persons a reasonable opportunity to comment on such proposed measures.

China-Related Trade Legislation

During the 110th Congress, numerous legislative proposals have been introduced to address concerns raised about the U.S.-China economic relationship. Some of them are specific to China and others have a more global reach, but are intended to address China in particular. The major types of legislation proposed cover such issues as competitiveness, currency, countervailing-duty law, safeguards, and Internet security, each of which is discussed below.

U.S.-China Competitiveness Agenda Legislation

Four separate pieces of legislation were introduced in 2007 to enhance U.S. competitiveness in the China market, by helping small and medium-sized businesses export to China, expanding diplomatic efforts, promoting Chinese language programs in the United States and expanding U.S.-China cooperation on energy security and climate change.

H.R. 3272, the U.S.-China Diplomatic Expansion Act of 2007, will

Increase funding for public diplomacy, emphasizing Internet communications;
Provide funding to establish another consulate and establish 10 American presence posts;
Increase funding for State Department student-exchange and teacher-exchange programs;
Increase funding for Rule of Law Initiatives; and
Increase funding for the Asia Pacific Economic Cooperation Forum.

H.R. 3273, the U.S.-China Market Engagement and Export Promotion Act of 2007, will

Help states establish and operate offices in China to promote exports;
Establish China Market Advocate Positions in U.S. Export Assistance Centers around the country;
Provide assistance to small businesses for trade missions to China; and
Authorize Small Business Administration grants for Chinese business education programs.

H.R. 3274, the United States-China Energy Cooperation Act of 2007, will -

Establish a grant program to encourage joint American-Chinese research and development and policy education; and
Fund grants for joint energy and climate change policy-education programs and related programs by joint ventures comprised of Chinese and American private business entities, academics and/or federal, state, or local governments.

H.R. 3275, the U.S.-Chinese Language Engagement Act of 2007, will -

Increase Chinese cultural studies and language acquisition for U.S. students through grants to Local Education Agencies (LEAs);
Fund grants to support joint ventures with LEAs and institutions of higher education; and
Encourage LEAs seeking grants to develop programs that include intensive summer Chinese language instruction, link bilingual Chinese and English speakers with students, begin instruction at an early age, and include Chinese cultural studies.

These proposals address several important issues that can strengthen U.S. participation in the China market. ECAT and ECAT companies support this legislation.

Currency Proposals

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. Since July 2005, China’s currency has appreciated more than 16 percent vis-à-vis the U.S. dollar. Notably, China had earlier considered market-based reforms to its currency, but following the 1997 Asian financial crisis, China has been reluctant to move quickly and potentially create domestic instability. China has, however, increasingly been laying the groundwork for further market-based reform of its currency through fairly 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. These measures and further reform are important to China to enable it to move to a market-based valuation in a stable fashion.

Numerous House and Senate bills seek to force China to appreciate its currency more quickly through a variety of mostly import-related actions: The major bills include:

H.R. 2942, the Currency Reform for Fair Trade Act of 2007
S. 1607, Currency Exchange Rate Oversight Reform Act of 2007
S. 1677, Currency Reform and Financial Markets Access Act of 2007
H.R. 782 and S. 796, Fair Currency Act of 2007

Defining Currency Misalignment as a Countervailable Subsidy. H.R. 2942 directs the Commerce Department to increase the countervailing duty margin applicable to imports by the percentage of currency misalignment, as determined unilaterally by the United States. Since this legislation basically mandates a finding of a countervailing duty margin in all cases that might be filed against China, it could have very negative impacts on U.S. consumers and the U.S. economy by increasing prices for many imports from China (if there is a showing of injury to a domestic industry) or chilling imports each time a case is filed. This provision also violates WTO rules by redefining what may be considered an actionable subsidy and relies upon unilateral currency analysis that will put the United States at risk for unilateral assessments by China and other countries.

Defining Currency Misalignment as Antidumping. H.R. 2942 and S. 1607 direct the Commerce Department to increase antidumping duties by the percentage of currency misalignment. Like the countervailing duty provision, this provision basically mandates an antidumping margin in any case brought against China, which will increase prices, chill imports and add to inflationary pressures. This provision is also of questionable WTO-legality and similarly creates an inappropriate unilateral methodology. By using both the countervailing and antidumping law, H.R. 2942 has the added problem of double-counting, which exacerbates the problems associated with each individual provision.

Defining Currency Misalignment as a Condition to Justify the Imposition of Safeguard Remedies. H.R. 782 and S. 796 would define currency misalignment by China as a condition that would warrant the imposition of a safeguard remedy on imports from China under section 421 of the Trade Act of 1974, whenever the International Trade Commission (ITC) found that imports caused or threatened to cause “market disruption” to domestic producers. Given the very low threshold of injury for section 421 cases and combined with other provisions discussed below that would make the imposition of a remedy automatic, this provision would essentially provide for direct action in the form of additional tariffs or even quotas on imports from China, even where they are decreasing or remaining stable. Like the other provisions, the inflationary and negative effects on the U.S. economy and consumers could be very high. This provision is also likely inconsistent with U.S. obligations on its use of the safeguard provisions with respect to imports from China.

Other Penalties for Misaligned Currency. Several pieces of legislation include other penalties for misaligned currency, such S. 1607 which prohibits U.S. procurement of any good from China if it defined as a country for priority action. This provision in particular has the unintended impact of harming goods with U.S. input, while helping out goods with no U.S. content from countries such as Japan.

Congressional Override of the Treasury Department’s Determination of Currency Manipulation. S. 1607 and S. 1677 provide that Congress may override the Administration’s determination of currency practices of China and other countries. While Congress has a vitally important role in the oversight of currency-related issues, use of a congressional disapproval resolution is inappropriate and counterproductive. The decision as to whether a country is manipulating its currency is a complex, factual one. Authorizing Congressional disapproval resolutions would undermine this objective analysis, particularly in the eyes of U.S. trading partners who may seek to replicate such Congressional intervention, at the expense of the United States and our trading relationships.

Bringing a WTO Case on Currency Misalignment. S. 1677, S. 1607, H.R. 2942 and other legislation require that the USTR shall request WTO consultations with a country that has been found o persistently fail to bring its currency into alignment. Mandating a WTO case, particularly here where the WTO rules regarding currency are quite limited, is neither appropriate nor effective. Requiring the launch of a WTO case, when it is not clear that there is any legal basis for that case, will damage U.S. credibility and undermine the use of the WTO to deal with legal commitments.

Each of these proposals to try to “force” China to appreciate its currency more quickly and substantially is neither appropriate, nor effective. They will more likely hurt the United States, by raising costs and adding inflationary pressures to the U.S. economy – not to mention subjecting the United States to retaliation for violating our international commitments. China’s currency valuation is the result of many complex factors that these microeconomic “remedies” cannot begin to address or resolve. ECAT recommends continued work by the Administration and international institutions, particularly the International Monetary Fund, to work constructively with China to help it continue its already significant work in bringing its currency to a market-based valuation.

Application of the Countervailing Duty Law to China

In 2007, the Commerce Department reversed its longstanding policy and began to apply countervailing duty law to imports from China and other so-called non-market economy (NME) countries. Its first affirmative decision was released in October 2007, providing that additional duties would be imposed on imports of coated free-sheet paper from China if the ITC found that such imports caused or threatened material injury. (The ITC made a negative decision.) Commerce is currently considering several additional countervailing duty cases against imports from China.

H.R. 1229 and S. 974 were introduced before the Commerce Department reversed its methodology and some suggest the legislation is no longer required. These proposals include three main provisions to:

Indicate explicitly that the countervailing duty law applies to NMEs.
Create a presumption that special difficulties exist in calculating the subsidy benefit in cases involving China, such that Commerce is required to use benchmarks outside China to determine the benefit, as long as China is classified as an NME country. No current requirement exists in U.S. law in regard to this calculation, but the WTO requires the precise opposite presumption.
Require Congressional approval of the Administration’s decision to graduate a country from NME to market-economy status.
If this legislation moves forward, three key changes are required:
Elimination of Legislative Veto on NME Graduation. These proposals violate the Constitution’s presentment clause by allowing Congress to veto an Administration action (the graduation of a country from NME to market-economy status) by failing to pass a joint resolution. This is a form of a legislative veto that the Supreme Court has rejected. This provision also undermines the ability to use the graduation criteria to promote economic reforms sought by Congress (such as currency convertibility) and sends the wrong signal to other countries, which are increasingly blocking U.S. exports through the misuse of trade-remedy provisions. Far preferable would be a consultation and layover process that requires that a country’s graduation to market-economy status can only take effect 60 days after the Administration provides Congress with a full explanation of how the graduating country meets the criteria.
Elimination of Subsidy Benchmark Presumption. The current provisions explicitly violate the WTO terms under which subsidy benchmarks are to be calculated. The United States (and all other WTO members) agreed to use benchmarks within China, unless special difficulties exist as part of China’s accession. Similarly, the 2004 WTO Appellate Body decision in Final Countervailing Duty Determination with Respect to Softwood Lumber from Canada (WT/DS257/AB/R) found that out-of-country benchmarks in subsidy cases could only be used in “limited” circumstances where in-country benchmarks are “distorted.” Both bills effectively reverse this presumption and violate U.S. WTO obligations. To avoid unnecessary WTO challenges and promote continued U.S. credibility as the United States seeks to promote improved WTO compliance by China and other countries, this benchmark provision must be dropped or modified in a manner consistent with U.S. obligations.
Addition of Language to Promote Fair and Proper Calculations. As U.S. companies are increasingly facing antidumping actions for goods exported to China and elsewhere, it is imperative that the United States seek to maintain the fairest possible trade-remedy laws. Given the use of surrogate methodology for NMEs under the AD laws, application of the CVD laws on the same products raises a strong possibility of double-counting the same subsidy (since under the AD methodology, costs and prices are based on non-NME costs and prices from surrogate countries that are not subsidized). It is critical to provide Commerce explicit authority to ensure fair calculations that avoid double-counting.

The Administration has already moved on this key issue. If legislation proceeds, however, these three key changes are required to avoid it being found unconstitutional and in violation of U.S. international commitments.

Modifications to Section 421 Safeguard Provisions

Section 421 of the Trade Act of 1974 provides the President authority to provide relief in the form of quotas or increased tariffs or adjustment assistance to address market disruption or the threat thereof caused by increasing imports of goods from China. The ITC makes the market disruption determination, but it is not authorized to consider the effect of such disruption on consumer industries and the overall economy. Given the low standard of injury and the lack of any requirement to show that the imports are competing unfairly, the President has the final authority to determine what remedy to impose or not to impose any remedy where such relief is not in the “national economic interest of the United States” or would cause serious harm to U.S. national security. In the five cases decided since 2003, the ITC has found no injury in two cases and the President has not imposed remedies in the others.

Section 401 of S. 346 and other legislation propose fundamental changes to this framework that should be rejected:

Elimination of National Security and National Economic Interest Waiver. S. 346 eliminates Presidential discretion not to impose the ITC’s remedy for national security or national economic interests that outweigh the application of relief. Denial of these waivers will subject the United States to unnecessary harm. Given the low injury standards and complexity, the final judgment should by made by the President.
Elimination of President Discretion to Determine Appropriate Remedy. S. 364 also eliminates presidential discretion to waive or modify remedies for economic interest reasons. It requires the ITC recommendation to be applied and eliminates USTR’s ability to make its own recommendations or the President the ability to adopt a different, more appropriate remedy. This is far too restrictive an approach, especially, as here, where the threshold for injury is exceedingly low and there is no suggestion that the imported goods are being unfairly traded.
Treatment of Divided Commission Decision as Affirmative. S. 364 also mandates that a divided Commission decision be treated as an affirmative decision. Such an outcome, particularly given the low standards of proof, would lead to the inappropriate imposition of remedies that hurt the United States.

Given that section 421 involves fairly-traded goods and a very low injury threshold, each of the changes proposed is inappropriate and would lead to the misuse of these provisions and the disruption of other major parts of the U.S. economy.

Internet Restrictions

H.R. 275, the Global Online Freedom Act of 2007, seeks to ensure that the Internet and the related information networks do not become vehicles for undermining human rights and freedom, but its overly restrictive provisions appear likely to undermine that goal. Introduced on January 5, 2007, and reported by the House Committee on Foreign Affairs on December 7, 2007, this legislation would:

Require the President to identify annually Internet-restricting countries.
Prohibit U.S. businesses from locating, within such designated Internet-restricting countries, any electronic communication that contains any personally identifiable information and provide a private right of action against such businesses.
Require U.S. businesses to report Internet censorship information involving Internet-restricting countries.
Establish civil and criminal penalties for violations.
Allow limited Presidential waivers of these provisions.
Require the Secretary of Commerce to conduct a feasibility study regarding the development of export controls and export-licensing requirements relating to end-users in Internet-restricting countries.

This legislation would restrict substantially U.S. participation in global Internet operations, including by prohibiting U.S. companies from maintaining basic information about employees or customers on computers located in a number of foreign countries. Indeed, it could force any U.S. company with a website in such foreign countries to move it outside that country or face civil or criminal penalties. Since China is clearly a primary object of this legislation, it is expected that if adopted, this legislation would have a huge negative impact on the ability of the United States to participate in China’s market, leading to greater trade imbalances as U.S. exports and sales in China will drop, as U.S. companies are no longer able to do business effectively. In so doing, it will limit communication and speech, rather than promote it.

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, 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.

ECAT supports legislative approaches that will improve the U.S.-China economic relationship and create new opportunities for the United States to succeed in China’s market, such as those that are part of the U.S.-China Competitiveness Agenda. A number of legislative proposals made on currency, application of the countervailing duty law, Section 421 safeguards and Internet security (H.R. 275), however, will undermine U.S. success in its relationship with China and several are likely to lead to retaliation against U.S. farm and manufactured goods and U.S. services.