WTO Mandated Legal Reform: China's Next Revolution

Pursuant to the Protocol of Accession (Protocol) that will form the basis upon which China enters the World Trade Organization (WTO), China will be obliged to overhaul a wide range of laws, regulations, policies and governmental practices. The draft Working Party Report, which upon finalization will constitute an integral part of the Protocol, sets forth a number of revolutionary legal reforms to be undertaken by China.

Foreign Investment

In response to obligations of member countries under the TRIMs Agreement, China has agreed to eliminate certain FIE performance requirements and to much fanfare has already taken action by amending the PRC Sino-foreign Equity Joint Venture Law (中华人民共和国中外合资经营企业法), the PRC Sino-foreign Cooperative Joint Venture Law (中华人民共和国中外合作经营企业法), and the PRC Wholly Foreign-owned Enterprise Law (中华人民共和国外资企业法)(WFOE Law) as well as the PRC, WFOE Law Implementing Rules in order to abolish the following requirements:

a) mandatory foreign exchange balancing;

b) minimum local content;

c) operations plan government reporting; and

d) export targets and advanced technology transfer obligations as entrance prerequisites for WFOEs.

China has promised not to enforce any non-compliant contractual terms it entered into with certain foreign investors in specific sectors. In particular, the 1994 Auto Industry Policy, which currently requires at least 40% local content for sedans and 50% for commercial vehicles, will be amended.

In response to the concerns of member countries that market access to certain industries, particularly service sectors such as telecommunications, distribution and insurance, is currently subject to the PRC Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) wherein many key industries are classified as "Restricted" or "Prohibited." China confirmed in the draft Protocol that it was in the process of revising the catalogue to reflect multilateral market access commitments.

Foreign Trade

Taking into account member countries' concerns that trading rights in China are presently limited primarily to State-owned trading houses, it is expected that the forthcoming Protocol will commit China to amending the PRC Foreign Trade Law (中华人民共和国对外贸易法). This will gradually move the granting of trading rights from an approval based system to a registration system so that a greater number of domestic and FIE enterprises will be allowed to import and export upon completion of registration formalities.

China has promised to amend the Customs Import and Export Tariff Schedule to reflect its tariff concessions and particularly to eliminate tariffs on information and technology products as required by the Information and Technology Agreement. China also agreed to establish a transparent, streamlined system for quota allocation and license approval to conform with the Import Licensing Procedures Agreement, and agreed to apply the system only to those products that have been listed in China's quota and license schedule.

Intellectual Property

China confirmed in the draft Protocol that recent amendments to the PRC Patent Law  (中华人民共和国专利法) have increased the compensation amount which may be claimed in case of infringement, strengthened enforcement mechanisms and offer the opportunity of judicial review over administrative decisions.

In response to concerns about the existing differences between China's copyright laws and the TRIPS Agreement, China stated that amendments to the PRC Copyright Law  (中华人民共和国著作权法) had been accelerated, particularly in connection with the payment system by broadcasting organizations for the use of recording products, protection of database compilation and strengthening of enforcement measures against infringing activities.

The shortfall of protection in the PRC, Trademark Law was noted as required by the TRIPS Agreement and China promised that amendments would be made to trademark registration of three dimensional symbols, protection of well-known trademarks and judicial review mechanisms.

Fair Competition

While China has committed to progressively liberalize its economic and legal regimes, it will tighten certain protectionist measures permitted under the WTO to safeguard fair competition in its domestic market and protect certain infant industries.

China declared that it would reinforce and supplement the pre-existing anti-dumping and countervailing regulations to provide for more specific complaint handling and investigation mechanisms.

In the draft Protocol, China stated that enactment of a domestic Safeguards Law is under way. This Law will be based on the WTO Safeguards Agreement to enable China to take emergency actions, in the form of increased tariffs or quantitative restrictions, when the import of a product surges to cause or threatens to cause serious disruption to the relevant domestic industry. China also confirmed that it is formulating an anti-monopoly law and improving its PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法).

Legal Reform Process
The most recent National People's Congress (NPC) initiated the first wave of nationwide legal reform. Each ministry, commission and governmental department has been ordered to conduct a top-down review of laws and regulations that fall under its governance, and to put forward proposals to which non-compliant laws and regulations should be revised and which should be repealed, as well as proposals for new laws and regulations to be put into place. The State Legal Affairs Office will coordinate the combined efforts. The NPC or its standing committee will have the final decision on the revision, repeal or passage of relevant laws and regulations, whereas the relevant ministries, commissions and departments will be responsible for internally-issued notices, rules and circulars.

Smooth Reform?

Amending national laws and regulations will certainly be easier than the daunting task of repealing or revising thousands of central, provincial and municipal government notices and circulars to match China's Protocol commitments and establishing a uniform legal regime at all government levels and in all regions of China. Revolutionary legal reform? Yes. Smooth and predictable transition? Unlikely.

 By St¨¦phane Luo and Alex Wang
Jones, Day, Reavis & Pogue, Shanghai