First Step in the Long March - Year One of China's WTO Accession

January 31, 2003 | BY

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2002 was a banner year for China: it made its WTO debut; enjoyed soaring levels of foreign investment; and basked in the limelight of its successful bids…

2002 was a banner year for China: it made its WTO debut; enjoyed soaring levels of foreign investment; and basked in the limelight of its successful bids for the Beijing 2008 Olympics and the Shanghai 2010 World Expo. But as 2002 drew to a close, it was China's efforts in implementing its commitments under the WTO agreements and the Protocol of Accession (Protocol) that were largely the focus of the international business community. Generally, China's WTO efforts have been lauded, but many have adopted a "wait and see" approach for 2003.

Trade of Goods

With the second round of tariff reductions as of January 1 2003, China has now reportedly cut its overall industrial tariffs to an average of 11.1%. But even in this area, implementation has not been without incident: China's attempt to condition tariff reductions for several types of IT products on the completion of an end-use certificate - a violation of the WTO Information Technology Agreement - is still under bilateral negotiation.

In Customs administration, shortly after China's WTO accession the General Administration of Customs issued legislation abandoning the old "minimum pricing" system in favour of what is hopefully a more predictable "transaction value" basis for determining dutiable value as required by the WTO Customs Valuation Agreement. The Ministry of Foreign Trade and Economic Cooperation (MOFTEC) also promulgated provisions bringing licensing procedures generally in line with the WTO Import Licensing Procedures Agreement, although the benefits from these efforts remain largely untested.

Trading Rights and Distribution

China agreed in the Protocol to liberalize the scope and availability of trading rights but, in reality, 2002 offered little guidance on the implementation of full trading rights. Indeed, while a July 2001 MOFTEC-issued circular permits manufacturing foreign-invested enterprises (FIEs) with an annual export of more than US$10 million to purchase and export certain products that are not self-manufactured, further legislation is still pending and internal governmental jostling may well take the roll-out of this commitment up to the 2005 WTO wire.

In distribution, China's WTO commitment to permit foreign minority joint ventures (JVs) in retailing and wholesaling was laid out in the revised Foreign Investment Guidelines but not otherwise statutorily implemented in 2002 (thus, leaving the severely restrictive 1999 Procedures for Pilot Projects for Commercial Enterprises with Foreign Investment in place). More positively, in July 2002 MOFTEC published the Issues Relevant to the Launch of Pilot Projects for the Establishment of Foreign-Invested Logistics Enterprises Circular (关于开展试点设立外商投资物流企业工作有关问题的通知) allowing JVs in international logistics and third-party logistics businesses in certain regions. While foreign participation in such ventures is capped at 50% and is subject to geographic restrictions, the permitted scope of business includes import/export, shipping agency, transportation, warehousing, packaging, and related consulting services.

Services

In 2002 China also began the long process of opening its service markets per the GATS and the Protocol. Telecoms, banking and insurance, no doubt due to the ingrained domestic monopolies and high stakes for foreign investors, remained the highest profile access items. Other services sectors - most notably the express delivery industry - have had to fend off significant domestic opposition to encroaching foreign competition.

In telecoms, the promulgation of the Administration of Foreign-funded Telecommunications Enterprises Provisions (外商投资电信企业管理规定) (effective January 1 2002), paved the way for JV telecom operators, although for certain services (namely value-added services) complaints were voiced over the authorities' narrow interpretations of the permissible scope of services.

In banking, the People's Bank of China promulgated the Administration of Foreign-funded Financial Institutions Regulations and implementing rules (外资金融机构管理条例实施细则) early in 2002, which though imposing high working capital requirements and prudential criteria, did allow foreign-invested banks and foreign banks to conduct foreign currency business without geographic or clientele restrictions and to extend their Renminbi business. A number of foreign bank branches have since been granted a full foreign currency business license and an expanded scope of Renminbi business.

In insurance, legislation for market access included the State Council's late 2001 Administration of Foreign-funded Insurance Companies Regulations (外资保险公司管理条例). While the China Insurance Regulatory Commission lifted certain geographic restrictions applicable to foreign life insurers in 2002 (ahead of schedule), the Regulations were criticized for the redundant capitalization requirements and non-compliance with China's branching commitments.

Intellectual Property Rights

2002 saw promulgation of implementing regulations for the amended Trademark Law and the Copyright Law as part of China's continued efforts to bring its domestic intellectual property regime in line with TRIPS requirements. Still China's IPR have been criticized for a failure to effectively enforce new legislation.

Rule of Law

Transparency, judicial review and related issues have continued to be thorny issues in any assessment of China's WTO compliance. The establishment in 2002 of the WTO Enquiry Centre and the adoption of new legislative procedures (which, inter alia, permits solicitation of public comments by legislative bodies) are significant steps towards the systemic developments required by WTO "rule of law" principles. But tackling systemic problems, enhancing the transparency of the legislative process, clearly delineating various ministries' roles, and cracking down on local protectionism all must be undertaken.

Conclusion

The business world has been watching China and the implementation of its WTO commitments very closely and, though there have been some complaints, progress has been made. Year two of China's long WTO march will likely be even more telling, with deeper market entry commitments continuing to test the resolve of the central government in addressing resistance from local players, regulatory and commercial alike.

By Mitch Dudek, Beth Bunnell
and Alex Wang

Jones Day,
Shanghai

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