China's Foreign Trade Law Revised for WTO Era

Who is Affected?

"Foreign trade" in the Law means import or export of goods or technology or international provision of services (Article 2). The definition of a "foreign trade operator" is stated narrowly as meaning only entities and individuals that comply with the Law and other laws and regulations (Article 8), but the Law's restrictions and penalties are clearly also meant to govern foreign trade activities by non-compliant entities and individuals.¹ Notwithstanding the definition's inclusion of individuals, foreign individuals may only engage in foreign trade in the PRC through establishment of a foreign-invested enterprise (as discussed below).

Access to Trading Rights

The right to engage in foreign trade in the PRC can now be obtained, by a Chinese individual or Chinese owned enterprise, through a "filing for the record".² This type of filing is in principle a mere clerical procedure, as is required by WTO obligations. While PRC government departments in other contexts have sometimes rejected such filings for substantive reasons,³ the implementation of foreign trade filings will be subject to a high level of foreign scrutiny that is likely to ensure relatively simple and smooth implementation.

Services, Projects and Cooperation

The Law acknowledges the importance of foreign-related services, projects and cooperation. The Law generally attempts to address international services in parallel with trade in goods, and specifically states that conduct of international services must comply with other relevant laws and administrative regulations (Article 10). For foreign-related construction contracting and "foreign-related labour cooperation", the Law states that participants must have "corresponding qualifications or ability", and contemplates detailed rules to be issued by the State Council (Article 10).

Foreign Participation in China

A foreign-invested enterprise (FIE) has for many years been automatically entitled to import directly items for use in its operations, and to export directly items that it has produced. This entitlement may continue without the FIE needing to make a filing for the record. As for the question of how an FIE can obtain the right to import (or to purchase domestically) items for resale, or to export (or to sell domestically) items that it has not produced itself, the Law is silent, but recent commercial FIE regulations⁴ state that approval must be obtained from the Ministry of Commerce (MOFCOM),⁵ and also state that an FIE is the only vehicle through which foreign companies and/or foreign individuals may engage in foreign trade or other "commercial" (reselling) activities in the PRC.⁶ No special minimum level of registered capital will be required for an FIE to obtain approval for a business scope including foreign trade - the FIE need only satisfy the general requirements in the PRC Company Law (Rmb500,000 for a company engaged in wholesaling, and Rmb300,000 for a company engaged in retailing).⁷

Interaction with other Laws and Regulations

Certain provisions of the Law raise the spectre of parallel and possibly inconsistent investigations, findings and actions by different government departments. The Law grants to MOFCOM various enforcement powers that appear to overlap with powers of other government departments. Intellectual property infringement (Article 29), monopolistic abuses (Article 32) and unfair competition (Article 33), if they harm (or endanger)⁸ "the foreign trade order"⁹, are subject to investigation and action by MOFCOM under the Law "in accordance with other relevant laws and regulations". The reference to other laws and regulations was inserted in several provisions of the Law at a late stage of drafting, apparently in response to concerns expressed by foreign commentators about overlaps and potential inconsistency with other laws and regulations.

Intellectual Property Licensing

Licensing of intellectual property is an area where the Law appears to create new potential non-tariff barriers. The Law authorizes MOFCOM to take necessary measures to eliminate harm (or danger)¹⁰ to the "fair competition order of foreign trade"¹¹ resulting from contract provisions (a) preventing licensees from challenging (or perhaps even raising questions about)¹² the validity of intellectual property rights, (b) requiring various items to be licensed as a "package", or (c) containing exclusive grant-back licences (Article 30). Such clauses are relatively common in international practice and are not mentioned by existing PRC regulations governing technology imports.¹³ Moreover, restricting such clauses in inbound cross-border licensing agreements would breach the WTO's non-discrimination principle, unless similar restrictions are applied to technology agreements between parties located in the PRC. It is to be hoped that MOFCOM will quickly publicize a clear definition and high threshold of "harm to the fair competition order of foreign trade", and of the causal link with these types of contract provisions, in order to avoid disruptive uncertainty in this area.

Investigations and Confidentiality

The Law omits any description of or reference to the procedural rights of parties likely to be affected by remedies, enforcement actions or investigations. This omission led foreign commentators to criticize a lack of transparency and predictability in the earlier draft revision of the Law, but the final issued version hasn't made many changes to address this point. It will be prudent for foreign trade operators to keep abreast of new developments by monitoring the "foreign trade public information service system" contemplated by the Law (Article 54).

Confidentiality protection, in the course of government investigations, is mentioned only vaguely (Article 49), despite requests from foreign commentators that definitions of this protection be expanded to improve transparency, fairness and compliance with WTO obligations.

An early warning system is contemplated by the Law, to protect national economic security from sudden and abnormal situations in the import or export of goods, technology or services (Article 49).

Compliance with WTO Obligations

Compliance with the PRC's WTO obligations is a stated goal of the Law, but the text defines MOFCOM's powers so vaguely as to permit a variety of actions that would breach these obligations. Full compliance will depend on more detailed rules and on MOFCOM's interpretations.

Until a clear body of rules and interpretations is developed, foreign trade operators will need to refer to WTO documents to understand their rights and to respond effectively to MOFCOM investigations. The Law states that detailed rules will be issued by the State Council to govern the selective use of quotas, tariff-quotas and licences (Article 19), which are subject to strict restrictions under WTO documents. The Law does not expressly contemplate the issuance of new rules to govern other key areas. Potential areas of concern include the following:

• The Law states that restrictions or prohibitions may be imposed in order to establish or accelerate the establishment of a particular domestic industry (Article 16), although the WTO requires China not to take any such action without first submitting a special application to the other WTO members.¹⁴
• The Law contemplates safeguards against surges not only of imported goods but also foreign services (Articles 44 and 45), although safeguards against services are not currently contemplated by WTO agreements.
• The Law contemplates measures to redress injuries from imports from one country that result from a third country's import restrictions (Article 46), although this goes beyond the conditions recognized by WTO agreements as a justification for safeguard measures.
• The Law states that import or export of certain goods (to be specified in a catalogue issued by MOFCOM) may be reserved to state-operated entities (Article 11), although such reservations are narrowly restricted by the WTO.
• The Law states that the import or export of certain goods or technology may be restricted or prohibited for numerous vaguely stated reasons,¹⁵ and international services may be restricted or prohibited for a shorter list of vaguely stated reasons (Article 26), although such restrictions and prohibitions are subject to a detailed WTO protocol that includes a phased elimination of non-tariff barriers.

Promotion of Foreign Trade and Associations

The Law affirms the PRC's desire to encourage increased foreign trade and cross-border services and cooperation, including participation by small and medium-sized domestic enterprises (Article 58), and activities in minority autonomous regions and economically underdeveloped areas (Article 59).

Foreign trade operators are encouraged to participate in associations or chambers of commerce, which are also entitled to protect their members, e.g., by submitting applications for foreign trader remedies (Article 56).

Conclusion

The revised version of the Law reaffirms the PRC's progress towards full participation in the WTO. The Law's reservation of all rights permitted by the WTO - and perhaps more - may result in more aggressive investigations and stronger penalties and corrective measures, but the range of foreign trade barriers will be reduced and will become more predictable. Like other members, the PRC will take its own approach to implementing WTO obligations, and may occasionally assert its own interpretations of their meaning, subject to the WTO's dispute resolution procedures. Thus, the environment for foreign companies will not be free from future surprises, but in general will be more familiar, and will reward companies for conforming their PRC trading practices with their practices in other major markets and with WTO principles.

Endnotes

1 It is customary for PRC legislation to state key definitions in this narrow manner, while their actual meaning has a broader application.

2 The phrase "filing for the record" (备案登记) indicates a non-substantive filing procedure, although this meaning would be clearer if the phrase was shortened to 备案. Previously, the right to engage in foreign trade was limited to a company possessing specially approved foreign trade authority, although a foreign-invested enterprise (FIE) was automatically entitled to import items for use in its operations, and to export its own products.

3 For example, an attempt to file a trademark licence agreement for the record (备案) will normally be rejected by the PRC Trademark Office if the agreement fails to address certain mandatory contract terms. Use of even vaguer standards sometimes results in rejection of registration (登记)of technology import agreements by local departments under MOFCOM.

4 See the Administration of Foreign Investment in the Commercial Sector Procedures (Commercial FIE Procedures), issued April 16 2004 and effective June 1 2004.

5 This requirement that an FIE obtain approval in order to engage in import or export of all lawful goods has been criticized by foreign commentators as improper discrimination.

6 See the Commercial FIE Procedures, Article 3.

7 See the Commercial FIE Procedures, Article 7. The final issued version of the Commercial FIE Procedures omits a requirement, contained in an earlier draft, for higher levels of registered capital. This requirement would have constituted discrimination against foreigners. Many local governments have set their own minimum levels for FIE registered capital, which will need to be dropped for Commercial FIEs in order to comply with the Commercial FIE Procedures and to avoid discrimination.

8 The phrase 危害 is ambiguous as to whether the harm must have already occurred or merely be threatened.

9 "Foreign trade order" (对外贸易秩序) is not defined. The closest the Law comes to defining this phrase is a reference to the impact on domestic industry and its competitiveness, national security and the public interest, mentioned in Article 37, as part of a list of items that will justify investigation by MOFCOM.

10 See discussion of the phrase 危害 in Note 8 above.

11 "Fair" (公平) is included in the phrase 对外贸易公平竞争秩序 in the provision on licensing of intellectual property, but is omitted from the provisions on infringement of intellectual property, monopolistic abuses and unfair competition. This difference appears to hint at a feeling among the Law's drafters that licensees are being pressured to accept unfair provisions. It remains to be seen whether this difference in wording will have any practical effect.

12 The phrase 提出质疑 can be translated either as "challenge" or as "raise questions about".

13 At present, technology import agreements are only prohibited from containing provisions that (a) require the assignee to accept conditions "not indispensable" to the imported technology, (b) restrict the assignee from acquiring competitive or similar technology from another source, (c) restrict the assignee from improving the technology or from using the improved technology, or (d) require the assignee to pay for, or undertake obligations related to, an expired or cancelled patent. See the Administration of Technology Import and Export Regulations, effective January 1 2002.

14 China's freedom to restrict imports in order to establish or accelerate the establishment of a particular domestic industry is limited, because China agreed not to be treated as a country in the early stages of development, as a condition of its entry into the WTO.

15 Reasons for restriction or prohibition of imports or exports (besides gold or silver, which are separately specified) can include not only national security, social and public interest, common morality, lives or health of people, animals or plants, environmental protection, domestic supply shortage, protection of exhaustible natural resources, but also limited capacity of foreign markets, chaotic conditions, maintenance of the state's international financial status, or preservation of the balance of international payments. See Article 16.