U.S. -China

Table of contents

Nearing an End?

Assessing Zhu's Offer

High-Priority, Policy-Related Problems

A Good Deal for All Sides

Appendix:
Market Access and Protocol Commitments

I. PROCESS OF CHINA'S WTO ACCESSION

II. AGRICULTURE MARKET ACCESS
A. TARIFF REDUCTIONS
B. TARIFF RATE QUOTA SYSTEM FOR BULK COMMODITIES
C. SANITARY AND PHYTOSANITARY (SPS) RESTRICTIONS:
D. EXPORT SUBSIDIES

III. MARKET ACCESS FOR INDUSTRIAL PRODUCTS
A. TRADING RIGHTS AND DISTRIBUTION
B. OVERALL INDUSTRIAL TARIFF REDUCTIONS
C. TARIFF REDUCTIONS IN US PRIORITY AREAS
D. QUOTAS AND OTHER NON-TARIFF MEASURES

IV. SERVICES
A. GRANDFATHERING
B. DISTRIBUTION
C. TELECOMMUNICATIONS
D. INSURANCE
E. BANKING
F. SECURITIES
G. PROFESSIONAL SERVICES
H. AUDIOVISUAL
I. TRAVEL AND TOURISM

V. PROTOCOL AND WORKING PARTY REPORT
COMMITMENTS

SPECIAL PROVISION
A. INVESTMENT AND TECHNOLOGY TRANSFER
B. ANTIDUMPING AND SUBSIDIES METHODOLOGY
C. PRODUCT SPECIFIC SAFEGUARD
D. STATE-OWNED AND STATE-INVESTED ENTERPRISES
E. CONCLUSION

After thirteen years of on-again off-again negotiations, the United States and China came close to finalizing a bilateral agreement on China's accession to the World Trade Organization (WTO) in early April 1999.¹ The dynamics of the negotiations, especially the final discussions between Zhu Rongji and Bill Clinton at a White House Summit meeting April 8, will surely be studied for years to come. Over the long course of the preliminaries, progress in these talks had been interrupted by human rights issues, charges of industrial and military espionage, environmental and labor concerns, the fate of Taiwan, and--not least--campaign politics. It was heartening therefore that both sides had stressed, in the run up to the meeting, that WTO membership was about commercial relations and the economic welfare of myriad consumers and firms, both Chinese and American, that stand to benefit from greater economic freedom and predictability. It was all the more disheartening then that the United States missed the chance to complete the process at that time.

Zhu Rongji came to the United States prepared to conclude a bilateral agreement on China's WTO accession. The package of concession he offered, summarized in the United States Trade Representative (USTR) memorandum appended to this essay and analyzed in terms of U.S. business interests below, exceeded expectations.² In speeches across the United States during his visit he affirmed China's commitment to the rules and norms of the WTO. For arduous months he had painstakingly assembled domestic consensus for the concessions in China. The offer marked a watershed in Chinese readiness to undergo the difficult domestic battles needed to deepen domestic economic liberalization. The U.S. Administration, by contrast, was prepared to walk away from a deal on the assumption that Chinese concessions would be miserly; what Zhu offered was bold, thus provoking confusion and clumsiness on the U.S. side. In the end, the President bluntly offered Zhu three choices: continue to negotiate further concessions; defer further discussions until later in the year; or cease worrying about the accession altogether. None of these was appropriate to the offer Zhu had presented.

Within days the White House reversed course and offered to accept the Chinese offer immediately, but Zhu was counseled to pause and return to China before doing so. In both correcting the U.S. side and advising the Chinese response, private U.S. firms and individuals played a major role. This is a potent reminder that for all the high-power politics in Washington it is the business community that has the greatest interaction with China, and the greatest store of credibility as well.

The objective of this paper is to briefly examine the value of the preliminary agreement for these U.S. business interests, as reflected in the terms of the Chinese offer Zhu proposed (see Appendix). Though it is not, as of this writing, a foregone conclusion that these terms can be agreed upon in 1999, authorities on both sides are working toward that end, and support for this goal is growing in both congressional and commercial quarters.

Assessing Zhu's Offer

With the general scope of the Chinese package clarified, debate over WTO accession in both China and the United States has turned to the implications of Chinese membership. The most substantial impacts of the accession will of course occur in China, where bureaucracies must be destroyed and created, monopolies cut loose, and longtime guarantees to workers and interest groups renegotiated wholesale. In fact, China's obligations are nothing short of revolutionary. Consumers will see lower prices, better quality, and greater selection; entrepreneurs will find new resources at their disposal; and exporters in important sectors like textiles will find expanded markets. In general the debate in China over the costs and benefits to the nation from making WTO concessions will be confined to elite circles, the implications for common citizens handled later as they come. In the United States the debate will be rancorous and hyperbolic, as each and every special interest group airs its demands.

But what really are the economic implications for the United States? In terms of our imports, the United States already extends extremely low "MFN" level tariffs to China.³ Further reductions in import protection in a few sectors will marginally lower prices for Americans of moderate means. The heart of the U.S. debate about Chinese WTO accession will concern export opportunities, however, because the bilateral trade balance is the one datum straightforward enough to capture the public imagination--and the attention of Congress.

In a recently published study,⁴ I argued that the key to U.S. export success in China (among other objectives) lies less with border barriers than with operating conditions beyond those borders inside the Chinese marketplace. Border barriers, notably, are the factor the central government is most in a position to address. And here the agreement looks great. Tariffs and nontariff barriers on industrial goods and merchandise are to be lowered from a simple average of 25 percent in 1997 to below 10 percent by 2005, with two-thirds of the cuts by 2003. For agricultural goods the ceiling will be 17 percent, with substantially all cuts made by 2004. In both cases particularly accommodating treatment will be given in areas of priority to the United States (for example: meat, citrus, and wheat in agriculture; high technology exports, auto parts, and chemicals in goods trade). In terms of levels and phase-ins the Chinese commitments exceed U.S. expectations--that a piecemeal package would extend higher rates for somewhat longer phase periods in many areas. Furthermore, all these commitments will be "bound," that is, they cannot be adjusted upward in the future.

The commercial impediments behind China's borders, in contrast to the external tariff rates, are less under Beijing's control. They include transitional factors such as skilled labor shortages, market structure issues like intra-provincial trade barriers, and the pitfalls inherent in climbing steep cultural learning curves. Further, internal impediments to commerce come from local and provincial policies, which the central government is only partly able to change. If anticompetitive practices within the Chinese market prevent a U.S. firm from distributing, retailing, servicing, and marketing a U.S. export once it clears customs, then tariff cuts will fail to have their beneficial effects on the trade balance.

From extensive interviews and case studies with 88 expatriate professionals at work in China today, my research identified over 60 challenges faced by foreign-invested enterprises in the course of managing 5 business functions:

• negotiation and establishment
• human resources
• plant productivity
• ex-factory issues (such as distribution) and
• legal compliance

Seventeen of the challenges foreign managers grapple with were high-priority, policy-related issues. This means that the issue in question could influence the very success or failure of the venture, and that the issue was connected in some way to the policy environment and not just tough market conditions. By considering whether these problems will be ameliorated as a result of China's WTO accession package, we can assess the impact of the agreement on U.S. business operations in China, and thus for U.S. export growth as well.

High-Priority, Policy-Related Problems

Negotiation and Establishment

U.S. firms face five high-priority, policy-related issues while negotiating establishment in China. These are:

• locating strategically to track market growth,
• dealing with industrial policy requirements, and
• addressing partner issues (these three can be taken together);
• dealing with labor structure negotiations; and
• negotiating adequate scope of operation.

Locating strategically is necessary to sit astride the areas of greatest market growth. In a developing market like China, it may be unclear which region will turn out to enjoy the right industry clustering to promote dynamic production, and anticipating this is a key task for foreign investors. This decision and the choice of the right Chinese partners for the venture are tasks often at odds with China's policy of developing certain locales and certain needy state-owned enterprises (SOEs) as matters of national (or provincial) industrial policy.

Geographical restrictions per se are not covered in the USTR summary in the Appendix, but full compliance with the WTO's agreement on Trade Related Investment Measures (TRIMs) is. Furthermore the summary includes rights for U.S. firms to handle distribution of products imported or manufactured in China, which necessitates the freedom to locate. State enterprises are to be treated on a commercial basis according to the Chinese commitments, so past pressure from authorities to partner with SOEs as a form of commercial welfare must abate (although westerners will continue to partner for their own reasons). In several sectors where geographical restrictions will remain, especially banking and other financial services, phase-outs for the restrictions are specified.

Labor structure issues arising in the establishment process are not clearly addressed in the April 8 release, which raises questions. How will SOEs be treated "according to commercial terms" without displacing labor--a virtual nonstarter in China? Foreign investors should not expect pressures to be sensitive to unemployment worries to disappear overnight. This is one area where there is no elegant policy answer: China will be faced with massive unemployment and nonproductive surplus employment for many years, and foreign investors will have to pull some weight in dealing with that.

Negotiating sufficient scope of operation has been a difficult but crucial aspect of establishment for foreign firms in China. The freedom to bundle together all the activities needed for efficiency was often contingent on other trade-offs, such as technology transfer. The agreement now under discussion deals with this admirably. Foreign investors are to be permitted import-export rights, distribution rights, service rights, and freedom to conduct a host of auxiliary activities key to a modern enterprise. If U.S. negotiators can keep the Chinese side from backsliding on this front, then this concern will largely cease to be a priority problem.

Human Resources

Foreign firms have had to struggle to secure managerial control over human resources in China, while also worrying over the role of new age "compradores" in running their operations as well. As noted above, the WTO package would reduce the need for unsuitable partners, and thus make the human resource situation somewhat easier. With SOEs required to operate on a more commercial basis, more foreign investors will use a wholly foreign-owned investment structure (WOFE), which means far better labor productivity than typical of joint ventures. But the agreement can do little to resolve many human resource issues foreign investors face, because many of these problems are ultimately cultural in nature. This fact also helps explain the prevalence of reliance on compradores to bridge the gap between western-minded executives and locally rooted employees, and to insulate senior staff from corruption problems and strategies to lock in sales through questionable practices.

Plant Productivity

To raise productivity at the plant level, foreign investors grapple with three high-priority, policy-related challenges, the difficulty of which depends on how conscientious and successful the investor was in the negotiating process:

• controlling financial flows among facilities (e.g., use of a cost savings to invest in training instead of paying richer dividends);
• avoiding management discordance between the foreign enterprise and Chinese partners in business or government (e.g., stifling objections that expensive expatriate accountants should be replaced with inexpensive but inexperienced locals);
• assuring adequate economies of scope for the plant (which is to say you must be in the distribution business if you want to be successful in the baking business, because your goods will perpetually arrive stale otherwise).

In all three areas the WTO terms now on the table will help. By removing performance requirements and foreign exchange balancing requirements, by embracing the full TRIMs accord, and by accepting WTO disciplines on forced technology transfer, many of the most contentious areas of disagreement between foreign investors and Chinese partners in the production process will be removed. In many cases, the reason for partnering with an unsuitable company in the first place will have been removed, as many Chinese partners were embraced solely for their distribution networks. This will leave foreign firms more independent to organize and carry out production as they see fit. Distribution and service liberalization will of course mean that the problem of economy of scope is greatly reduced as well and plant level activities can be organized more according to comparative advantage than administrative necessity.

Ex-Factory Issues

Many of the ex-factory issues (the work of commerce taking place once the production process is complete) troubling foreign enterprises in China have already been mentioned. Regulatory restrictions on distribution, marketing, and retailing are to be relaxed. Impediments to service provision--especially financing for purchases and thus credit provision and accounts collection--will be addressed. China has committed to ensure that Chinese SOEs "make purchases and sales based solely on commercial considerations," a step that should ensure that foreign enterprises (and nonincumbent Chinese firms, too) are not hemmed in by allocated market shares that stifle competition.

Economic planning authorities cause allocated market share problems, but private market foreclosure has been a rising problem in China as well. Private market foreclosure occurs when, for example, a group of film manufacturers collude with retail stores to prevent a new, low-priced producer from getting access to customers. In this case, the U.S.-China agreement will not provide much help: private restraints to trade are competition policy problems not yet addressed by the rules of the WTO, though the Organization now has a working group thinking through the nature of this issue set for future discussion. Not even the wealthiest nations have addressed competition policy multilaterally, thus the United States cannot take an aggressive position with China on this issue. However, for its own reasons China should consider a dialogue on competition regimes, and some reference to this topic in the WTO package might be a useful way to accelerate work on the issue domestically.

Laws and Privileges

China's WTO commitments implicitly and explicitly take giant steps toward the rule of law and international regulatory norms. China will fully embrace key WTO conventions including TRIMs and agreement on Trade Related aspects of Intellectual Property (TRIPs), for example, without lengthy phase-ins that might have been granted to a less developed economy. Chinese commitments on investment, subsidies and antidumping methodologies, product specific safeguards, and SOE management open up a significant legal front for challenging anticompetitive policies both in the realm of international trade and within China as well. In sum, the agreement will support foreign and Chinese firms keen for a more legally predictable Chinese marketplace. As Zhu Rongji made clear during his visit, he fully believes in the value of Chinese adherence to such norms.

On the other hand, and somewhat ironically, USTR managed to secure from the Chinese a "grandfather" clause protecting all the preferential and discriminatory treatment foreign firms had elicited in the past. This runs counter to the idea of a level playing field in the Chinese market, and begs the question of how such prior privileges will be squared with the necessity of "national treatment" for new foreign entrants in China. Indeed, this is a good indication that not every foreign investor in China really dislikes the legal ambiguity found in the Chinese marketplace. In order to be consistent with the goals of transparency and fairness, one presumes that each of these special arrangements must now be published as part of the agreement, a challenging task given how peculiar some of these arrangements are. No one should ask foreign investors in China to give up their hard won privileges for only the abstract promise of future fairness, but as China demonstrates its commitment to the rules in the years to come, these foreign advantages will have to be relinquished. Let that not be a contentious process.

A Good Deal for All Sides

Working out the terms of Chinese accession has taken so long because China has a transitional, only partly marketized economy beset by unsecured socialist-era obligations highly vulnerable to the tendency of open markets to redirect scarce resources. In other words, there stand to be many losers from economic reform even while far more wealth and opportunity is created by the new economy than previously existed. How conservatively or aggressively one undertakes structural adjustment is a legitimate policy question. Rhetorically, Chinese leaders have preferred a more gradual course, while the U.S. has espoused rapid opening.

And yet in reality China has opened faster than anyone expected at the start of the economic reform program a mere 20 years ago. At each setback, such as the unrest of 1989 or the global financial turmoil of 1997, observers bet that China would step off the economic liberalization track. To the contrary, China has embraced each downturn as an opportunity to accelerate reform. The WTO commitments China is preparing to assume are indicative of this verve. This will clearly mean more competition from U.S. exports to China, and more competition from U.S. firms set up to do business within China. China's leaders have set out their commitments to the World Trade Organization knowing this full well, while also recognizing that they could have sat out the trade body for some years more without too much risk to their economy (they already enjoy comparable treatment from most nations). The only conclusion one can draw therefore is that China has decided the benefits of real market competition outweigh the adjustment costs--a conclusion that bodes very well both for the future economic strength and independence of China, and for its major trading partners as well.

Whether the seminal opportunity for the United States to support Chinese liberalization was missed in April due to last minute intervention from backward-looking labor leaders, or due to unnecessary hesitance to face the Congress does not matter at this point. What matters is that we make a considered appraisal of Zhu Rongji's commitments with full recognition of nature of the Chinese marketplace, and of the heroic political changes girding that marketplace as well. All indications are that the WTO accession process for China can still be completed this year if such an appraisal can be made expeditiously.

Appendix:
Market Access and Protocol Commitments
(http://www.ustr.gov/releases/1999/04/ch-memo.html)

I. PROCESS OF CHINA'S WTO ACCESSION

China's WTO accession represents an opportunity to address a broad range of unfair trade practices, trade barriers, discriminatory regulatory processes, lack of transparency, and other policies which limit American participation in the Chinese market or unfairly affect American trade. The broad set of commitments China has made today, and the substantial negotiations which remain to be held, will advance American interests in a fundamental way, and complement broader policies intended to move China toward internationally accepted standards of conduct.

China's accession process includes bilateral negotiations including market access (with the United States and other trade partners); bilateral negotiations toward a "Protocol" (i.e., rules) addressing U.S. concerns on issues including dumping, safeguards, and others; and multilateral negotiations on those and the remaining Protocol issues. WTO accession is thus a complex and multi-faceted process. This fact sheet covers the market access; a second (attached) covers the Protocol commitments.

Broadly speaking, the market access commitments China has made will bring China at or above existing WTO standards on issues and sectors of major concern to the U.S. They address each layer of Chinese trade barriers to American exports. For example, at present, an American good faces not only high tariffs and at times quotas, but a web of other barriers which, if unaddressed, could make tariff reductions meaningless. These include application of unscientific sanitary and phytosanitary standards in agriculture, non-tariff barriers to industrial goods, restrictions on distribution and trading rights, and discrimination against imports and foreign-invested companies.

In each case, the U.S. has achieved commitments that address the principal barriers to American products; are highly specific and fully enforceable; are phased-in over a relatively short period of time, with increased market access in every area as of day one of China's ultimate accession; do not offer China special treatment; and meet or exceed commitments made by many present WTO members. The commitments include:

• Significant market access benefits effective immediately on China's accession.
• Full market access for U.S. firms to distribute their products throughout China.
• Tariff reductions immediately upon accession, with further phase-ins over reasonable periods of time to levels below those of most U.S. trade partners.
• Bindings for all tariffs--i.e., China will be unable to raise tariffs again after accession.
• Elimination of quantitative restrictions.
• Resolution of outstanding problems with sanitary and phytosanitary standards for key agricultural products, effective immediately.
• Participation in the three major multilateral agreements negotiated since the Uruguay Round: the Information Technology Agreement; the Agreement on Basic Telecommunications; and the Financial Services Agreement.
• Commitments to more open service sectors which cover the broad range of sectors, including distribution, value-added telecommunications, insurance, computer and business services, environmental services, franchising and direct sales, legal and accounting, sound recordings, and entertainment software.

China's specific commitments in the three strategic areas of agriculture, industrial goods, and services are discussed below.

II. AGRICULTURE MARKET ACCESS

The agricultural market access commitments include measures to address the following problems: trading rights, distribution, high tariffs; quotas; application of unscientific SPS standards; the reliance on state trading companies; and export subsidies.

Taken as a whole, these commitments move China toward a system based almost entirely on tariffs, with extremely low tariff rates (1–3%) in most bulk commodities. More specifically, it reduces tariffs to levels below those of most American trade partners, with the greatest reductions in the areas of top priority to U.S. producers; binds tariff concessions; eliminates quantitative restrictions on imports; requires use of science-based SPS standards; reduces the role of state trading enterprises for key commodities; and eliminates export subsidies.

A. TARIFF REDUCTIONS

China will reduce tariffs immediately on accession, and when fully phased in will result in tariff levels comparable with or better than those of many of our other major trading partners (including developed country trading partners).

Average Rates -- Overall, China will reduce its overall average tariff for agricultural products to 17%. The tariff reduction will be greater for U.S. priority products. In these sectors the average tariff will drop to 14.5%.

Phase-in Periods -- All tariff cuts will be implemented by 2004, the date when all other WTO members will have implemented their Uruguay Round tariff cuts.

All agricultural tariffs will be bound (cannot be increased).
Specific examples include:

Soybeans -- a 3% tariff will be bound on accession.

Meats -- Tariff reductions include:

Fruits -- Tariffs reductions include:

Wine -- Tariffs on wine will be reduced by 70%, from 65% to 20%.

Dairy -- Tariff reductions in dairy include:

B. TARIFF RATE QUOTA SYSTEM FOR BULK COMMODITIES

China's commitments follow WTO standards in eliminating all quantitative restrictions. In particularly sensitive sectors, China will adopt tariff-rate quotas (i.e., a system in which imports up to the quota level are charged a minimal tariff -- usually 1–3% -- and imports above that level a high tariff). This system provides a very strong incentive for state enterprises to purchase bulk commodities at world market rates.

The total levels of these TRQs are substantially above present import levels on accession, and provide for future growth. In all cases, we sought to maximize likelihood that the full quota would be used and ensure opportunity for private traders to participate, both by allocating an initial share of the quota to private traders and providing for reallocation of quota from state enterprises to private traders if state enterprises do not buy the full TRQ amount.

Results in U.S. priority sectors are as follows:

Soybean Oil -- TRQ eliminated by 2006. The TRQ will start at 1.7 million metric tons, rising to 3.3 million tons by 2005. Private sector trade will begin at 50% and rise to 90%.

Wheat -- Quota on accession is 7.3 million metric tons, rising to 9.3 million metric tons. (Compares to present Chinese import level of less than 2 million metric tons.) Private sector will initially receive 10% of this quota, with reallocation of any unused state enterprise portion available later in the calendar year.

Corn -- Quota on accession is 4.5 million metric tons, rising to 7.2 million metric tons. (Compares to present import level of 250,000 metric tons.) Private sector will initially receive 25% of this TRQ, rising to 40% by 2004, with reallocation of any unused state enterprise portion available later in the calendar year.

Rice -- Quota on accession is 2.6 million metric tons, rising to 5.3 million metric tons. Half of this will cover short and medium grain rice, where the U.S. is most competitive. 50% of this TRQ will go to the private sector. (Compares to present import level of 250,000 metric tons.)

Cotton -- Quota on accession is 743,000 metric tons, rising to 894,000 tons by 2004. (Compares to present import levels of 200,000 metric tons.) Private sector will have 67% of this TRQ.

Barley -- No TRQ, and reduction of tariffs to 9%.

Other products in which TRQs will be applied are products in which the U.S. has little or no trade interest. These include wool, sugar, palm oil and rapeseed oil.

C. SANITARY AND PHYTOSANITARY (SPS) RESTRICTIONS:

China agrees that sanitary and phytosanitary disputes should be settled scientifically.

BILATERAL AGREEMENTS ON WHEAT, CITRUS AND MEAT

China has also agreed to lift immediately, with the signature of three bilateral agreements, (concluded in parallel with the market access agreement but effective immediately on signature) unjustified SPS bans on wheat, citrus fruits and meat. These bilateral agreements resolve longstanding disputes between the U.S. and China and can lead to rapid export growth. Furthermore, they provide a strong indication that China is willing to implement the obligations of the WTO SPS agreement.

Meat -- China will open its market to U.S. pork, beef and poultry by agreeing to accept USDA certification for meat safety for U.S. exports.

Citrus -- China will open its market to U.S. oranges, grapefruit and other citrus fruits, eliminating a current ban and establishing a science-based phytosanitary system. Industry estimates that trade will reach $1.2 billion in a year, an increase of $700 million over current imports through informal channels.

Wheat -- China will eliminate restrictions on imports of wheat from the Pacific Northwest imposed because of unjustified concerns about TCK smut.

D. EXPORT SUBSIDIES

China has committed not to provide any export subsidies for agricultural products. This is particularly important for corn, cotton and rice. It also provides a strong foundation for the next WTO Round, in which total elimination of agricultural export subsidies worldwide is a major U.S. goal, already articulated by the Vice President.

III. MARKET ACCESS FOR INDUSTRIAL PRODUCTS

With respect to market access for industrial goods, China has agreed to allow freedom for U.S. firms to import, export and distribute their goods within China; significant tariff reductions to bring tariff levels to levels comparable with major trading partners and below those of most developing countries; binding of all tariff concessions; and phase-out of all quantitative restrictions on imports.

Some areas of particular interest to the U.S. include Chinese participation in a number of existing international zero-tariff agreements (including the Information Technology Agreement) as well as individual sectors including, but not limited, to autos, wood and wood products, chemicals, fishery products and others. As in agriculture, most results in industrial goods compare favorably to those of other major trading partners, particularly those in developing countries.

.A. TRADING RIGHTS AND DISTRIBUTION

Trading rights and distribution are the major priority of the manufacturing sector. At present, China severely restricts trading rights (the right to import and export) and distribution (wholesaling, retailing, maintenance and repair, transportation, etc.) As in agriculture, such restrictions give China a layer of protection against imports which if unaddressed would make tariff concessions of little value.

The U.S. thus has sought and won agreement for elimination of these restrictions. China will provide, for the first time, full trading rights and distribution rights to U.S. firms. These will be progressively phased in over three years. Even for its most sensitive and protected industries, such as chemical fertilizers, crude oil and processed petroleum, China will provide for trading rights and distribution. Distribution services are discussed in more detail in the following section on services trade

B. OVERALL INDUSTRIAL TARIFF REDUCTIONS

China also agreed to provide significant tariff reductions which would be bound.

Rates -- China will reduce average tariffs from the 24.6% average in 1997 to 9.44%. The average tariff for our priority products will be even lower, reaching 7.1%. This is a 56% cut from applied rates in 1998 and a 71% cut since the beginning of market access negotiations in 1994.

All Tariffs Bound -- China will bind its entire tariff schedule, meaning it will accept a legal commitment not to raise tariffs in the future above the bound level. Very few countries have done this; many retain rights to raise tariffs significantly above the rates they now apply.

Phase-in -- Two thirds of tariff cuts will be implemented by 2003. The balance will be phased in by 2005, with a limited number of exceptions.

C. TARIFF REDUCTIONS IN US PRIORITY AREAS

As noted above, China's tariff cuts are larger in U.S. priority areas. Some provisions in areas of special interest to the U.S. include:

High Technology -- China will implement the Information Technology Agreement (ITA). This will reduce tariffs from present levels averaging 13.3% to zero for semiconductors, computers, computer equipment, telecommunications equipment and other information technology products. Most of these tariff eliminations will be phased in by 2003 with some exceptions until 2005. All other ITA participants will have implemented tariff cuts by 2005.

Autos -- In the auto sector, China will reduce tariffs from the current 80-100% levels to 25% in 2005, with the cuts phased in equally each year. Auto parts tariffs will fall to an average of 10%.

Note -- in this sector, tariff restrictions are augmented by quotas under China's industrial policy for autos. These quotas will be progressively eliminated, with the point of departure China's level of imports before creation of the auto industrial policy. See below under "Quotas and Non-Tariff Measures". In addition, auto retail rights will be provided for the first time (see services section.)

APEC Sectors -- China has agreed to implementing the early voluntary sectoral liberalization initiative of APEC now under consideration in the WTO, when the WTO accepts these sectors for implementation. This would eliminate tariffs on forest products (wood and paper), environmental goods and services, energy and energy equipment, chemical harmonization, fish, toys, gems and jewelry, and medical equipment and scientific instruments..

Wood & Paper -- China will reduce tariffs from present levels of 12-18% for wood and 15-25% for paper generally to levels between 5% and 7.5%. This is a sector in which tariff concessions, along with distribution and trading rights, can expand sales rapidly.

Chemicals -- China has committed to the lion's share of chemical harmonization -- reducing its tariffs to the levels of other WTO members -- for 70% of chemicals, generally at 5.5% and 6.5%. (At present China's tariffs range up to 35%.) A key reduction is in soda ash, to 5.5%. Tariffs on cosmetics, pharmaceuticals, film, and certain plastics will also be cut substantially below current levels.

Fish -- China will reduce tariffs from over 20% to 10% on products of importance to the United States.

Distilled spirits -- China will reduce tariffs from 61% to 10%.

D. QUOTAS AND OTHER NON-TARIFF MEASURES

WTO rules bar quotas and other quantitative restrictions. China has agreed to eliminate these restrictions immediately on accession for top U.S. priorities and with phase-ins limited to five years for others.

Quotas -- China will eliminate existing quotas upon accession for the top U.S. priorities (e.g. some fertilizers and optic fiber cable). It will phase-out remaining quotas, generally by 2002, but no later than 2005.

Quotas will grow from current trade level at a 15% annual rate in order to ensure that market access increases progressively, and reduces the effect of quantitative restrictions.

Auto quotas will be phased out by 2005, in the interim, the base level quota will be $6 billion (the level prior to China's industrial auto policy), and this will grow by 15% annually until elimination.

IV. SERVICES

China today is among the markets most closed to services exports anywhere in the world. Our goals in services thus included negotiation of commitments in a broad array of services sectors; ensuring Chinese accession to the two major existing multilateral services agreements on Basic Telecommunications and Financial Services; and creating a base from which to negotiate future improvements for access to the Chinese services market in the next WTO Round.

China's commitments on services, while we have some further work to do, are comparable to those of most WTO members. They include commitments in all major service categories (with further talks planned on banking, securities and audiovisual), reasonable transitions to eliminate most foreign equity restrictions (especially in sectors where the U.S. has a strong commercial interest), agreed to accede to the Basic Telecommunications and Financial Services Agreements, and full "grandfathering" of current market access for U.S. service providers. Specific commitments are as follows:

A. GRANDFATHERING

China will grandfather all existing current market access and activities in all services sectors. Many companies enjoy benefits given by provincial and central authorities. All these will be protected, even if China's commitments in its services schedule provide for approval by Central Government authority. This will protect existing American distribution services, financial services, professional and other service providers in China, including those operating under contractual or shareholder agreements or a license, from restrictions as Chinese commitments phase in.

B. DISTRIBUTION

In China today, foreign firms have no right to distribute products other than those they make in China, or to own or manage distribution networks, wholesaling outlets or warehouses. China also now frequently issues businesses licenses which limit the ability of American firms to conduct marketing, after-sales service, maintenance and repair and customer support. As the section on industrial goods noted, this is a severe barrier to goods exports as well as to services exports.

China's commitments address all these issues. They reflect a comprehensive commitment on distribution, including wholesaling, direct sales, retailing, maintenance and repair, and transportation. Thus Americans will be able to distribute imported products as well as those made in China, offering significant opportunity to expand U.S. exports of goods. As noted above, China will phase out all restrictions on distribution services within three years. Even in its most sensitive and protected sectors, China has agreed to provide distribution rights in five years for chemical fertilizer, crude oil, and processed petroleum products.

Services Auxiliary to Distribution

Chinese commitments in services auxiliary to distribution include express delivery services, rental and leasing, air courier, freight forwarding, storage and warehousing, advertising, technical testing and analysis, and packing services. All restrictions will be phased-out in 3 to 4 years, at which time U.S. service suppliers will be able to set up 100% wholly owned subsidiaries.

C. TELECOMMUNICATIONS

China now severely restricts sales of telecommunications services and bars foreign investment. China's commitments mark its first agreement ever to open its telecommunications sector, both to the scope of services and to direct investment in telecommunications businesses. Through these commitments, China will become a member of the Basic Telecommunications Agreement. Specific commitments include:

Regulatory Principles -- China now allows its telecommunications bureaucracies very wide discretion to apply arbitrary and discriminatory standards. China will now agree to implement the pro-competitive regulatory principles embodied in the Basic Telecommunications Agreement (including cost-based pricing, interconnection rights and independent regulatory authority), and agreed to technology-neutral scheduling, which means foreign suppliers can use any technology they choose to provide telecommunications services.

Scope of Services -- China will phase out all geographic restrictions for::

-paging, value added, and closed user groups: 4 years

-mobile/cellular: 5 years

-domestic wireline services: 6 years.

China's key telecommunications services corridor in Beijing, Shanghai and Guangzhou, which represents approximately 75% of all domestic traffic, will open immediately on accession in all telecommunications services.

Investment -- Under present circumstances, China allows no foreign investment in telecommunications services. With this agreement, China will allow 49% foreign investment in all services, and will allow 51% foreign ownership for value added and paging services in 4 years..

D. INSURANCE

In insurance, China now restricts foreign companies to Shanghai and Guangzhou. Only two U.S. firms are permitted to participate even in these markets. Thus we sought to eliminate geographic and numerical limitations -- that is, to ensure that foreign insurance companies can operate in each part of China and without artificial limitations on their activities or number of companies -- and end restrictions on foreign investment. The results include:

Prudential Criteria -- China agrees to award licenses solely on the basis of prudential criteria, with no economic needs test or quantitative limits on the number of licenses issued.

Geographic Limitations -- China will permit foreign property and casualty firms to insure large-scale risks nationwide immediately upon accession, and will eliminate all geographic limitations for future licenses over five years, allowing access to the key cities of priority U.S. interest in two to three years.

Scope -- China will expand the scope of activities for foreign insurers to include group, health and pension lines of insurance, which represent about 85% of total premiums, phased in over five years.

New Licenses -- China has recently issued four licenses, including two to American companies.

Investment -- China agreed to allow majority ownership, remove onerous joint venture requirements on foreign life insurers, and phase out internal branching restrictions. Life insurers may now choose their own joint venture partners (as opposed to the present policy, under which partners are chosen for insurers by Chinese authorities), will allow 50% ownership on accession, and will phase in the right to 51% share in a joint venture in one year. For non-life and reinsurance, China will allow 51% ownership on accession and form wholly owned subsidiaries in 2 years.

E. BANKING

In the banking sector, China imposes severe geographic restrictions -- for example, only nine foreign banks can conduct business in local currency, and these only in the Shanghai Pudong area. Our negotiations sought full rights for foreign banks to handle both local and foreign currency business transactions (the latter obviously a major factor in opening markets to U.S. goods exports as well as services); the rights to serve Chinese as well as foreign customers; and liberalize investment. This sector remains under discussion.

F. SECURITIES

This sector remains under discussion.

G. PROFESSIONAL SERVICES

In the professional services, China currently tightly restricts operation of foreign law firms and accounting firms. With respect to these areas, we sought commitments in all significant areas, including both the right to offer services and the right to invest, and binding commitments on the already liberal policies respecting architecture and engineering.

China offers broad coverage for legal, accountancy, taxation, management consultancy, architecture, engineering, urban planning, medical and dental, computer-related services. It will permit foreign majority control except for practicing Chinese law (an exception common to many WTO members.) For accountancy, China has agreed to eliminate a mandatory localization requirement and will now allow unrestricted access to its market to professionals licensed as CPAs in China. China has agreed to apply national treatment in issuing CPA licenses and follow transparent procedures.

H. AUDIOVISUAL

Presently, China severely restricts distribution of sound recordings, videos, movies, books and magazines, and does not allow foreign ownership, construction or operation of cinemas. While this area remains under discussion, China's commitments cover the right to distribute video and sound recordings; and cinema ownership and operation. They include:

Video and Sound Recordings -- China will allow 49% foreign participation for the distribution of video and sound recordings.

Cinemas -- China will allow majority ownership in 3 years for construction, renovation, ownership and operation of cinemas.

I. TRAVEL AND TOURISM

Finally, China until now has imposed a number of restrictions on travel and other tourist-related services. Notably, foreign firms are limited to 11 areas in China, and cannot establish full-service travel agencies. Our goal here was a set of commitments comparable to or better than the relatively high level of commitments made by WTO members. Results include:

Hotels -- China will allow unrestricted access to the Chinese market for hotel operators with the ability to set up 100% foreign owned hotels in 3 years, with majority ownership allowed upon accession.

Travel Services -- Foreign travel operators can provide the full range of travel agency services. For travel agency services, China will allow access to government resorts as well as Beijing, Shanghai, Guangzhou, and Xian.

V. PROTOCOL AND WORKING PARTY REPORT
COMMITMENTS

Commitments in China's WTO Protocol and Working Party Report establish rights and obligations enforceable through WTO dispute settlement procedures. We have agreed on key provisions relating to antidumping and subsidies, protection against import surges, technology transfer requirements and offsets as well as practices of state-owned and state-invested enterprises. While we must still address the duration of some of these provisions and resolve other issues, agreement on the substance of these rules is of special importance to U.S. workers and business. We will also continue work on textile issues and a mechanism to ensure full implementation of commitments.

China will be presenting agreed provisions to the WTO Working Party for incorporation into the accession Protocol and Working Party Report. We will also be addressing the many other rules-related issues, such as specific provisions on China's standards, customs valuation, and national treatment in this multilateral process.

SPECIFIC PROVISIONS

During the negotiations, China has agreed that it will, upon accession, make the following commitments:

A. INVESTMENT AND TECHNOLOGY TRANSFER

First, it will take a set of specific measures to ensure fair treatment for businesses operating in China. This will include eliminating policies to block foreign firms doing business in China from importing inputs for production (i.e., auto firms operating in China would be able to import American-made parts). Measures here include:

• comply with the TRIMs Agreement upon accession, without any developing country transition period;
• eliminate and cease enforcing trade and foreign exchange balancing requirements;
• eliminate and cease enforcing local content requirements;
• refuse to enforce contracts imposing these requirements; and

only impose or enforce laws or other provisions relating to the transfer of technology or other know-how, if they are in accordance with the WTO agreements on protection of intellectual property rights and trade-related investment measures.

These provisions will also help protect American firms against forced technology transfers, as China has also agreed that, upon accession, it will not condition investment approvals, import licenses, or any other import approval process on performance requirements of any kind, including:

• local content requirements,
• offsets,
• transfer of technology, or
• requirements to conduct research and development in China.

These are significant commitments that go a long way in addressing concerns about the terms and conditions of investment in China, and the government's role in what should be commercial decisions.

B. ANTIDUMPING AND SUBSIDIES METHODOLOGY

Second, the Protocol ensures guarantees that American firms and workers will have strong protection against unfair trade practices including dumping and subsidies.

Here, the U.S. and China have agreed that we will be able to maintain our current antidumping methodology (treating China as a non-market economy) in future anti-dumping cases. Moreover, when we apply our countervailing duty law to China we will be able to take the special characteristics of China's economy into account when we identify and measure any subsidy benefit that may exist. While the duration of this provision remains under discussion, reaching agreement on the substance provides necessary assurance to U.S. industries that they can have effective protection against unfairly traded imports.

These provisions recognize both the ongoing reform program in China and that special difficulties may exist in making necessary determinations under the antidumping and countervailing duty laws.

C. PRODUCT SPECIFIC SAFEGUARD

Third, the Protocol ensures that American domestic firms will have strong protection against unpredicted surges of imports.

To do this, the Product-Specific Safeguard provision sets up a special mechanism to address increased imports that cause or threaten to cause market disruption to a U.S. industry. China is a major exporting country that enjoys open access to U.S. markets. This mechanism, which is in addition to other WTO Safeguard provisions, differs from traditional safeguards in that it permits.

• China to address imports that are a significant cause of material injury through measures such as voluntary restraints.
• the United States to apply restraints unilaterally based on standards that are lower than those in the WTO Safeguards Agreement.

While the duration of this provision is still under discussion, this safeguard provides an effective and expeditious means to address injurious import surges.

D. STATE-OWNED AND STATE-INVESTED ENTERPRISES

Fourth, the Protocol will allow us to address China's unusually high degree of state involvement in the economy.

State-owned and state-invested enterprises have a greater role in China's economy than in any other major economy. As part of its WTO accession, China needs to ensure that these enterprises act on a commercial basis. Moreover, we need to ensure that we can apply WTO rules to these enterprises in a meaningful fashion.

China has agreed that it will ensure that state-owned and state-invested enterprises will:

• make purchases and sales based solely on commercial considerations, such as price, quality, availability and marketability;
• provide U.S. firms with the opportunity to compete for sales and purchases on non-discriminatory terms and conditions.

China has also agreed that it will not influence these commercial decisions (either directly or indirectly) except in a WTO consistent manner.

With respect to applying WTO rules to state-owned and state-invested enterprises, we have clarified in several ways that these firms are subject to WTO disciplines.

• Purchases of goods or services by these state-owned and state-invested enterprises are not government procurement and thus are subject to WTO rules.
• We have clarified the status of state-owned and state-invested enterprises under the WTO Agreement on Subsidies and Countervailing Measures. This will help ensure that we can effectively apply our trade law to these enterprises when it is appropriate to do so.

E. CONCLUSION

These provisions will ensure that American workers and companies can take full advantage of both U.S. law and WTO rules in their dealings with China. While much remains to be done, bilaterally and multilaterally, on reaching agreement on all of the Protocol issues, China's commitments on these important Protocol and Working Party provisions are an important step in the WTO accession process.

Notes

1. The United States is not the only member of the WTO, the premier regime governing international trade, but it is the most important for clearing the way to formalizing China’s accession to the Organization–or blocking it.
   
   
2. It is interesting to consider the decision of the USTR Office to post the summary of Chinese commitments on-line. The Chinese side complained publicly about the unilateral decision to leak its commitments, but privately Chinese officials and economists noted the tactical value of releasing the document in terms of turning around public opinion and mobilizing lobbying in favor of an accession agreement. This is a good example of the emerging role of the Internet in shaping public policy outcomes.
   
   
3. MFN–or “most favored nation” status–remains a term of art in WTO parlance. It means treatment no less favorable than that extended to any other nation. In U.S. proceedings the acronym has been changed to NRT for “normal trade relations” because it sounds less preferential.
   
   
4. Behind the Open Door: Foreign Enterprises in the Chinese Marketplace. Institute for International Economics, Washington, DC: 1999

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