USTR Reports on China's WTO Compliance Problems & Troubling Trends

Troubling Trend Toward State Capitalism, not Economic Reform

In addition to the specific concerns laid out in the report, Assistant USTR noted in her testimony a troubling trend over the past five years in China toward intensified state intervention in the economy. She said that increasingly, trade frictions with China can be traced to its pursuit of industrial policies that rely on trade-distorting government actions to promote or protect China’s state-owned enterprises and domestic industries. In fact, in recent years, she says that China seems to be embracing state capitalism more strongly, rather than continuing to move toward the economic reform goals that originally drove its pursuit of WTO membership.

Imports: Inconsistent Customs Procedures, Non-transparent TRQs, AD/CV, Etc.

China has timely implemented its tariff commitments for industrial goods each year; issued measures that bring its legal regime for making customs valuation determinations and rules of origin determinations into compliance with WTO rules; adhered to the agreed schedule for eliminating non-tariff measures; and largely brought its antidumping (AD) and countervailing (CV) duty regime into compliance with WTO rules.

However, the following significant problems remain:

• Inconsistent customs procedures - implementation of customs valuation determinations has been inconsistent from port to port, both in terms of customs clearance procedures and valuation determinations;
• Import licensing compliance - there are continuing compliance issues on China’s import licensing procedures such as those for iron ore imports;
• Transparency of TRQs - concerns about transparency and administrative guidance have plagued China’s tariff-rate quota system for industrial products, particularly fertilizer, since China’s accession to the WTO;
• Fairness of AD/CV rules - China still needs to issue additional procedural guidance such as rules governing expiry reviews. It appears that China also needs to improve its commitment to the transparency and procedural fairness requirements embodied in WTO rules and avoid invoking AD/CV duties under “troubling circumstances.”

Export Restraints: Serious Concern on Restrain of Raw Material Exports

USTR states that China maintains numerous export restraints that raise serious concerns under WTO rules, including specific commitments that China made in its Protocol of Accession to the WTO. USTR states that in 2011, China continued to deploy export quotas, export license restrictions, minimum export prices, export duties and other export restraints on a number of raw material inputs where it holds the advantage of being one of the world’s leading producers.

Through these export restraints, it appears that China is able to provide substantial economic advantages to a wide range of downstream producers in China, at the expense of foreign downstream producers, while simultaneously creating incentives for these foreign downstream producers to move their operations and technologies to China.

Trade Policies: Maintains Subsidies & Price Controls, Unique Standards, Etc.

While China has revised many laws, regulations and other measures to make them consistent with WTO rules relating to Most Favored Nation (MFN) and national treatment, USTR has concerns about China’s WTO compliance in the following areas:

• Uses taxes to discriminate against imports. China has used its taxation system to discriminate against imports in certain sectors, raising concerns under WTO rules relating to national treatment.
• Maintains & doesn’t report subsidies. China continues to provide injurious subsidies to its domestic industries, and some of these subsidies appear to be prohibited under WTO rules. Although China filed a long-overdue WTO subsidies notification in 2011, its notification was far from complete. (See ITT’s Online Archives 11100720 and 11101347 for summaries of USTR charging China with not reporting nearly 200 subsidies.)
• Still has price controls. China has progressed slowly in reducing the number of products and services subject to price control or government guidance pricing.
• Lighter enforcement for domestics. China has restructured its regulators for standards, technical regulations and conformity assessment procedures in order to eliminate discriminatory treatment of imports, although in practice China’s regulators sometimes do not appear to enforce regulatory requirements as strictly against domestic products as compared to imports.
• Unique national standards. China continues to pursue the development of unique Chinese national standards, despite the existence of well-established international standards, apparently as a means for protecting domestic companies from competing foreign technologies and standards.
• Requiring in-country testing. China appears to be turning more and more to in-country testing for a broader range of products, which does not conform with international practices that generally accept foreign test results and conformity assessment certifications.
• Not all regulations notified. China has made progress but still does not appear to notify all new or revised standards, technical regulations and conformity assessment procedures as required by WTO rules.

Agriculture: SPS and Inspection Requirements Impede Market Access

While China has timely implemented its tariff commitments for agricultural goods, a variety of non-tariff barriers continue to impede market access, particularly in the areas of Sanitary and Phytosanitary (SPS) measures and inspection-related requirements such as:

• Poor functioning of bulk commodity TRQs. China’s administration of TRQs on bulk agricultural commodities still does not seem to be functioning entirely as envisioned in China’s WTO accession agreement, as it continues to be impaired by inadequate transparency.
• Biotech approval problems. There are continuing problems with China’s biotechnology approval process.
• Non-transparent, non-scientific SPS measures. In 2011, China’s regulatory authorities continued to impose SPS measures in a non-transparent manner and without clear scientific bases, including bovine spongiform encephalopathy (BSE) -related bans on U.S. beef and beef products, pathogen standards and residue standards for raw meat and poultry products, and Avian Influenza bans on poultry. Meanwhile, China has made some progress but still does not appear to have notified all proposed SPS measures as required by WTO rules.
• Arbitrary inspection requirements. China’s regulatory authorities continue to administer inspection-related requirements in a seemingly arbitrary manner.
• Domestic support. In recent years, China has been significantly increasing domestic subsidies and other support measures for its agricultural sector.
• Possible export subsidies. USTR states that it is difficult to determine whether China maintains export subsidies on agricultural goods, in part because China has not notified all of its subsidies to the WTO.

IPR: Improving Laws & Regulations but Lacks Enforcement

China is in the process of revising its legal regime and updating a comprehensive set of laws and regulations aimed at protecting the intellectual property rights of domestic and foreign entities in China, but some key improvements in China’s legal framework are still needed, such as further improvement of its measures for copyright protection on the Internet and deficiencies in its criminal enforcement provisions. However, China has continued to demonstrate little success in actually enforcing its laws and regulations in the face of the challenges created by widespread counterfeiting, piracy and other forms of infringement.

Gov’t Procurement: Should Apply Indigenous Innovation Progress to Other Areas

While China is moving slowly toward fulfilling its commitment to accede to the WTO Government Procurement Agreement (GPA), it is still maintaining and adopting government procurement measures that give domestic preferences.

In addition, policies aimed at promoting “indigenous innovation” continued to represent an important component of China’s efforts, creating worldwide concerns. In a major step, China agreed to issue a State Council measure mandating that provincial and local governments eliminate any remaining linkages to indigenous innovation by December 1, 2011. However, this significant reform now needs to be matched by eliminating a range of discriminatory indigenous innovation preferences proliferating outside of the government procurement context.

Trading Rights: Still Restricts Copyrights for Imported Theatrical Films

China appears to be in compliance with its trading rights commitments in most areas. However, one significant exception has involved restrictions on the right to import copyright-intensive products such as books, newspapers, journals, theatrical films, DVDs and music, which China reserved for state trading. China agreed to remove those restrictions in 2011 in order to comply with the rulings in a WTO case brought by the U.S. To date, China has taken steps to comply with those rulings to the extent that they apply to books, newspapers, journals, DVDs and music, but not theatrical films.

Distribution Services: Restricts Direct Sellers & Distribution of Certain Products

China has made substantial progress in implementing its distribution services commitments, although significant concerns remain in some areas such as the distribution of the copyright-intensive products described above and concerns about restrictions on the distribution of other products, such as theatrical films, pharmaceuticals, crude oil and processed oil. In addition, significant regulatory restrictions imposed on the operations of direct sellers continue to generate concern.

Investment: State Intervenes in Decisions, Encourages Technology Transfer

China has revised many laws and regulations on foreign-invested enterprises to eliminate WTO-inconsistent requirements relating to export performance, local content, foreign exchange balancing and technology transfer, although some of the revised measures continue to “encourage” one or more of those requirements. China has also issued industrial policies covering the auto and steel sectors that include guidelines that appear to conflict with its WTO obligations. In addition, China has added a variety of restrictions on investment that appear designed to shield inefficient or monopolistic Chinese enterprises from foreign competition. In addition, the Chinese government has heavily intervened in the investment decisions made by state-owned and state-invested enterprises in certain sectors.

(See ITT’s Online Archives 11081210 for summary of USTR seeking comment on China’s WTO compliance.

See ITT’s Online Archives 11051933 for summary of industry recommending action on China’s restrictive industrial policies.)

Testimony of Assistant USTR Reade before the Congressional Executive Commission on China, dated 12/13/11, available here.

USTR press release, dated 12/12/11, available here.