China's Accession to the WTO: Ready and Willing ..... But Able?

• General Agreement on Tariffs and Trade (GATT)

• General Agreement on Trade in Services (GATS)

• Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS)

Such paramount agreements are further supplemented by a series of auxiliary agreements to which China has also acceded, including:

• Agreement on Agriculture

• Agreement on Trade-related Investment Measures (TRIMs Agreement)

• Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade (Anti-dumping Agreement)

• Agreement on Safeguards

• Agreement on Import Licensing Procedures

• Agreement on Technical Barriers to Trade (TBT Agreement)

GATT

The GATT sets forth the general principles governing trade in goods, including non-discrimination, tariff limitations, elimination of quantitative restrictions and transparency requirements. Under GATT, China is required to accord most favoured nation (MFN) treatment to foreign goods, which effectively prohibits China from discriminating between products originating from different WTO member countries. China is also required to accord national treatment to foreign goods. Consequently, China is not permitted to treat domestic products more favourably than imported products. China committed in the Protocol to cut tariff rates for all products specified in its schedules. Such tariff rates cannot be increased except in a very few special circumstances allowed under WTO rules. China is required to gradually phase out most quantitative restrictions such as import bans, licences and quotas. In addition, as a result of transparency requirements under GATT, all of China's foreign trade and investment-related laws and policies will have to be published or otherwise made publicly available to other WTO members.

GATS

The GATS establishes rules in relation to trade in services. The GATS obligations can be categorized as two types: general principles and specific commitments. MFN treatment and transparency, as general principles, will cover all types of services and will generally be applied in the same way as these principles are applied under GATT. Nevertheless, the requirement of national treatment and market access will only apply to specific service sectors that China has included in its schedule. The extent to which China has agreed to open its services and foreign investment market is thus a result of prior bilateral and multilateral negotiations. Nevertheless, these specific commitments are, like tariffs, binding on China and cannot be modified or withdrawn. More liberalized market access can still be achieved on a progressive basis through subsequent rounds of negotiation among WTO member states.

TRIPS

The TRIPS regulates member countries' protection and enforcement of intellectual property rights. China is obliged to improve its intellectual property legal regime in accordance with the TRIPS, as well as other international intellectual property treaties that China has joined. National treatment must be given to foreign intellectual property rights holders and a tighter protection and enforcement system must be put into place.

WTO agreements and principles, by their nature, will not be legally applicable or enforceable on the domestic level. China is required to undertake a wide range of legal reforms in order to bring its current laws, regulations, policies and governmental practices into WTO compliance. To enhance transparency, the Chinese government has initiated an effort to make the Ministry of Foreign Trade and Economic Development's MOFTEC Gazette a formal place for publication of new and amended laws and regulations. Also, the government has initiated construction of various government websites to publicize WTO-related legislation.

Market Access Schedules

China's agreement to adhere to the legal principles embraced in various WTO agreements goes hand-in-hand with its substantive investment, trade, and structural economic concessions. A majority of the accession package is actually devoted to China's specific market access commitments. The final market access schedule consolidates the most favourable terms from the 37 bilateral accords signed by China with other WTO member countries, including the most comprehensive and significant Sino-US and Sino-EU agreements.

Trade In Goods

Goods are covered in the market access schedules in the form of binding tariff tables on industrial products and goods in general, and combinations of tariffs and quotas for agricultural products.

Pursuant to the market access schedules, China's tariffs on industrial goods will be significantly cut from the current average rate of 15.3% to 8.9% by 2006, although the range will vary from zero to 47%. As a member of the WTO Information Technology Agreement, China will by 2006 eliminate tariffs on a variety of high-tech products such as computers, semiconductors and most internet-related equipment.

China's tariffs on agricultural products will fall to 15% by 2005, from the current average rate of 22%, with the range being from zero to 65%. Relatively higher rates will apply to cereal products. China's ability to maintain quotas on agricultural products is also limited as a result of the Tariff-Rate Quota (TRQ) system, which it has committed to implement.

Trading Rights and Trade in Services

Although the WTO regime was not originally envisaged to regulate foreign direct investment, China's services market access commitments have in fact forced it to gradually lift foreign investment restrictions in a number of priority sectors.

Trading Rights and Distribution

China's current ban on trading and distribution rights has long been one of the most frustrating problems faced by foreign investment enterprises (FIEs) in China. Within three years of accession, China must eliminate restrictions on trading rights for all domestic enterprises, including FIEs. FIEs will by that time have the right to export and import all goods except for cereals, tobacco, fuel, salt and a few other products under a state trading monopoly. With respect to distribution services, by December 11 2002 foreign investors will be allowed, as minority shareholders, to establish joint ventures to engage in retailing, wholesaling, and franchising, as well as auxiliary services such as maintenance and repair, warehousing and transportation. Foreign majority equity ownership will be allowed by December 11 2003.

Telecommunications

Foreign investors are permitted to establish joint ventures with up to 30% foreign equity ownership in value-added telecom services and in paging services upon accession, up to 49% within one year and up to 50% within two years. In the mobile voice and data services sector, 25% foreign equity ownership is allowed upon accession, 35% within one year and 49% within three years. With respect to other basic telecom services such as domestic and international voice services, foreign equity ownership will be allowed up to 25% within three years of accession, 35% within five years and 49% within six years. Geographic restrictions on basic telecom services will also be eliminated within six years of accession.

Financial Services

For foreign-invested banks and foreign bank branches, all client and geographic restrictions on foreign currency businesses will be eliminated immediately upon accession. Renminbi business with foreign clients will be permitted upon accession, with Chinese enterprises after two years and with Chinese individuals after five years. Criteria for authorization to engage in the financial services sector must be solely prudential without quantitative limits on licences, and any existing non-prudential controls will be eliminated within five years of accession. Upon accession, foreign investors are permitted to establish joint ventures with up to 33% foreign equity ownership to conduct domestic securities investment fund management businesses, and up to 49% equity ownership within three years of accession. Permitted securities-related businesses will include the underwriting of A, B and H shares, government and corporate bonds, as well as the trading of B and H shares and bonds.

Insurance

China will permit foreign insurers to engage in life, health and pension or annuities insurance, non-life insurance, reinsurance and other services auxiliary to insurance. Upon accession, foreign non-life insurers are permitted to establish a branch or a joint venture with 51% foreign equity ownership. Wholly foreign-owned subsidiaries will be permitted in the non-life insurance sector within two years of China's accession. For life insurance, 50% foreign equity ownership will be allowed immediately upon accession.

Domestic Legal Reform

Perhaps most important to the ultimate success of China's membership in the WTO is domestic legal reform. The Chinese central government has taken serious and positive steps to implement a nationwide overhaul of its legal regime governing trade and investment, while each ministry and local government has committed to a top-down review of laws and regulations that fall under its governance. Yet significant gaps remain, and the commitments contained in the Working Party report will continue to serve as the guidelines for China's ongoing legal reforms over the next few years.

Foreign Trade

With respect to foreign trade, amendments to the PRC Customs Law (中华人民共和国海关法) took effect on January 1 2001. The amendments have rectified and strengthened China's customs practices in line with the WTO Customs Valuation Agreement. Under the Protocol, China committed to amend the Customs Import and Export Tariff Schedule to reflect its tariff reduction. On January 15 2001, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) removed quotas and licences on 21 types of electronic appliances, medical equipment and vehicles. For those products that have been listed in China's quota and licence schedule, China also promised in the Protocol to establish a transparent, streamlined system for quota allocation and licence approval in conformity with the Import Licensing Procedures Agreement.

Foreign Investment

China currently maintains the PRC Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) which channels foreign investment into designated industries and at the same time classifies some industries as restricted or prohibited so the government can limit foreign involvement. China confirmed in the Protocol that it was in the process of revising the catalogue to reflect its multilateral commitments including its market access concessions in numerous service sectors.

In response to the prohibition of local content and other FIE performance requirements under the TRIMs Agreement, China has already amended 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 Enterprises Law (中华人民共和国外资企业法) as well as the implementing rules in order to abolish the following requirements:

• mandatory foreign exchange balancing;

• minimum local content;

• government reporting of operations plans; and

• export targets and advanced technology transfer obligations as entrance prerequisites for wholly-foreign-owned enterprises.

Under the Protocol, China also committed to amend other FIE performance requirements in specific industries. An example is the 1994 Auto Industry Policy, which presently requires at least 40% local content for sedans and 50% for commercial vehicles.

Intellectual Property

Amendments to thePRC Patent Law (中华人民共和国专利法) which took effect on July 1 this year, increase the compensation amount which may be claimed in case of infringement, strengthen enforcement mechanisms and offer the opportunity of judicial review over administrative decisions. Amendment to the PRC Copyright Law (中华人民共和国著作权法) was adopted on 27 October 2001, just two weeks prior to the Doha meeting. The amended Copyright Law clarifies a number of areas such as the payment system by broadcasting organizations for use of recording products and protection of database compilation, and strengthens enforcement measures against infringing activities. The PRC Trademark Law(中华人民共和国商标法) was amended on the same day as the Copyright Law and took effect on December 1 2001. Amendments have also been made with respect to trademark registration of three-dimensional symbols, recognition and protection of well-known trademarks, and a formal judicial review mechanism has been put into place.

Fair Competition

China's progressive liberalization of its economic and legal regimes will be accompanied by new and reinforced protectionist measures that are permitted under the WTO for the purpose of safeguarding fair competition in its domestic market and protecting certain infant industries.

The Working Party report reveals that the pre-existing anti-dumping and countervailing regulations are being amended to provide for more specific complaint handling and investigation mechanisms. A new safeguards law has been drafted which when promulgated will enable China to take emergency actions, in the form of increased tariffs or quantitative restrictions, when import of a product rises so as to cause or threaten to cause serious disruption to the affected domestic industry. A new anti-monopoly and anti-trust law is under review, as are amendments to the current PRC Anti-unfair Competition Law ((中华人民共和国反不正当竞争法)).

WTO Dispute Settlement

The mandatory WTO dispute settlement procedures are delineated in the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). Although the DSU will for the first time subject China to an international arbitration tribunal, there are relatively few direct actions that a foreign company can take if China fails to honour its WTO commitments. As the DSU only provides for inter-governmental dispute resolution, foreign companies have no standing to raise a claim themselves against China.

A number of non-trade considerations will influence a government's decision to initiate a claim against another WTO member state, for example, the possibility of aggravating bilateral political tensions and possible friction in respect of informal non-tariff barriers. A foreign company that is adversely affected by China's non-compliance may seek redress in the following ways:

• negotiate directly with the Chinese government;

• lobby its home government to raise the non-compliance with China through bilateral government-to-government negotiations;

• lobby its home government to initiate a formal claim under the DSU; and

• if the Dispute Settlement Body (DSB) of the WTO determines that China is in violation of its obligations, assist its home government to consider adequate compensation; and if retaliation is authorized by the DSB, lobby its home government in respect of the type and severity of retaliation.

The primary stages of a formal WTO dispute settlement include consultation, panel proceedings, appellate review and implementation of rulings. Implementation of rulings may be effected through rectification, compensation or retaliation. If China does not rectify its non-compliant measures expeditiously or within a reasonable grace period, and China cannot reach an agreement with the complaining state on satisfactory compensation, the complaining state may request authorization from the DSB to impose unilateral sanctions against China in various forms such as increased tariffs on certain types of Chinese products. The sanctions could be imposed across different sectors or WTO agreements. China has the right to formally challenge the type and severity of sanctions.

Although the DSU establishes a streamlined and relatively short time frame for completion of proceedings, normally less than one year to reach the first level panel ruling or 15 months in case of an appeal, protracted company-to-government and government-to-government negotiations may drag on for months and possibly years prior to the submission of a formal claim.

Even if the DSB or Appellate Body issues an award in favour of the complaining state, neither the WTO nor the complaining state can directly force China to rectify its non-compliance or fulfil its WTO obligations. The last and perhaps only recourse available to an aggrieved WTO member state is the imposition of unilateral sanctions against China if formal authorization is granted by the WTO.

Conclusion

China is opening its own markets with the hope that it will, in turn, gain broader access to the markets of its trading partners. The Protocol makes it clear that all prohibitions, quantitative restrictions or other measures maintained by other member states against imports from China in a manner inconsistent with the WTO rules must be eliminated as agreed. As an example, under the WTO Agreement on Textiles and Clothing, all WTO member states are now forced to phase out quotas on textiles against Chinese textile products. China's proactive role with the World Bank and International Monetary Fund further suggests that China's entry will almost certainly become an impetus for world trade liberalization, as well as an active participant and powerful force in international economic policy making.

China's creation of a liberal, market-oriented economy and rule of law system to support it will not be accomplished overnight. The application and transmission of central government laws and policies to the local level in all regions of China will make this process an even more daunting task. While China is obviously ready, willing and motivated to aggressively continue its economic and legal reforms, given the magnitude and structural nature of the overwhelming reforms required, China may not be able to honour its market access commitments as quickly or as completely as it has agreed. Yet promising reforms are taking place on a daily basis and there certainly are plenty of reasons to remain optimistic.