WTO Market Access Report:Two Steps Forward

Overview

The Protocol of Accession for China's entry into the World Trade Organization (WTO) will, for the first time, fully reveal the extent to which this most sought after market will be opened to the rest of the world. The Protocol of Accession consists primarily of three parts:

a) Protocol: Specific commitments required to bring China's legal regime into compliance with WTO principles, particularly issues which WTO member countries believe are not addressed adequately in the WTO Agreements.

b) Working Party Report: An elaboration of protocol commitments, description of China's trade and investment regime, and statement regarding China's intention to implement the Protocol.

c) Market Access Schedules: The Market Access Schedules, which will consolidate the results of all 37 bilateral market access agreements, signed by China with other WTO member countries into one comprehensive schedule of commitments covering agricultural products, goods and services. The Schedules will set forth lengthy tariff rate reduction timetables for goods ranging from lavatory seats to aircraft. The Schedules will also set forth China's commitments to gradually open its services sector and permit foreign investment in key service industries.

WTO practices, particularly the Most-Favoured-Nation treatment requirement that obligates China to treat goods and services sourced from different member countries equally, have effectively coordinated the divergent efforts of China's negotiating partners. The final product is foreseen to incorporate the most favourable terms from each of the 37 bilateral accords, among which the Sino-U.S. and Sino-EU bilateral agreements are the most comprehensive and have achieved the most significant concessions from China.

Trade in Goods

Significant cuts in industrial tariffs will lead to overall tariff rates falling from the current average of 15.3% to 9.4% by 2005. Quotas will generally grow by 15% annually from current levels until being eliminated in 2005. Tariffs on autos, currently 100% and 80%, will be phased down to 25% by 2006, while tariffs on auto parts will decline from a current average of
23.4% to 10%. As a member of the WTO Information Technology Agreement, China will be required to completely eliminate tariffs on high-tech products such as computers, semi-conductors and all internet-related equipment by 2005.

China's tariffs on agricultural products will fall from an overall average of 22% at present to 17% by 2004 in equal annual reductions. China's ability to maintain quotas on agricultural products will be limited as a result of the Tariff-Rate Quota system that it has committed to implement, and certain other non-tariff barriers will be eliminated.

Trading Rights and Distribution

China has agreed to phase in trading rights for foreign investors within three years of accession. China's distribution commitment is comprehensive and includes wholesaling, retailing and franchising, as well as auxiliary services such as maintenance and repair, warehousing and transportation. Within two years of accession, foreign majority equity ownership will be allowed for companies in the wholesaling and retailing sector, and one year later, all geographic, equity and quantitative restrictions will be lifted.

Investment in Service Industries

Although theoretically speaking the WTO regime was not originally meant to regulate foreign investment, the Market Access Schedule will contain commitments by China to gradually open various key services sectors, including:

a) Telecommunications: Investments in telecom services are currently closed to foreign investment in China. In the value-added and paging services sector, foreign investment of up to 30% will be allowed upon accession, 49% within one year and up to 50% within two years. In the mobile services sector, foreign investment will be allowed at up to 25% upon accession, 35% within one year and 49% within three years. With respect to domestic wire-line services, foreign investment will be allowed at up to 25% within three years of accession, 35% within five years and 49% within six years.

b) Financial Services: Upon China's accession to the WTO, foreign currency business will be permitted for foreign banks without geographic restrictions. Renminbi business with foreign customers will be permitted immediately upon accession, with Chinese enterprises after two years, and with Chinese individuals after five years. Foreign investors will be permitted to hold minority stakes in fund management joint ventures. Permitted security-related businesses will include the underwriting of A, B and H shares, government and corporate bonds, as well as the trading of shares (excluding A shares) and bonds.

c) Insurance: China has promised to immediately grant seven new licenses to European insurers. All geographic restrictions will be phased out within three years of accession. Permitted scopes of business will be expanded over two years to include group, health and pension in life insurance, and all non-life insurance business. For non-life insurance, a 51% foreign equity ownership joint venture will be allowed upon accession, and wholly-foreign owned companies will be allowed two years later. For life insurance, a 50% foreign equity ownership will be allowed immediately upon accession.

Conclusion

A fully liberalized and market-oriented China will not be accomplished overnight. Market access commitments made by China in the bilateral agreements and the incorporation of these commitments into the Market Access Schedules are indeed two steps in the right direction. However, foreign companies investing in, and doing business with, China are already used to the two steps forward one step back pace of economic reforms in China, and China's implementation of its WTO undertakings is likely to take a similar path.

Mitch Dudek and Alex Wang,
Jones, Day, Reavis & Pogue, Shanghai