WORLD TRADE  
ORGANIZATION  G/MA/W/56 
6 August 2004 
 (04-3364) 
Committee on Market Access Original:   English 
   
CHINA'S
 TRANSITIONAL  REVIEW  MECHANISM  
 
Communication from the European Communities  
  
 The following communication, dated 5 August 2004,  is being circulated at the request of the 
Delegation of the European Commission. 
 
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1. The EC is transmitting comments and questions well in advance of the meeting of the Market 
Access Committee of 20 September 2004, in order for the Chinese authorities to reply to and complete any outstanding information.  2. Once the information to be provided by China in accordance with paragraph 8 and 
paragraph IV.3 (a) of Annex 1A of  its Protocol of accession has been received, the EC might come 
back with additional questions. 
 3. The EC’s comments and questions relate to the following priority items: the Revised Foreign 
Trade Law, Chinese exports restrictions on raw materials, and the New Automobile Policy. 
 Revised Foreign Trade Law  
4. The EC noted the adoption on 6 April 2004 of the Revised Foreign Trade Law (hereafter 
“Revised FTL”) and its entry into force on 1 July 2004.  It welcomed the fact that the final version of 
the Revised FTL takes into account some of the comments provided on the draft text by the EC and other WTO members. However, the Revised FTL still raises a number of concerns and requires some 
clarification. 
 
• As a general rule, the EC would like China to confirm that all FTL provisions will be 
implemented in a way which is compliant with  all WTO commitments undertaken by China. 
 5. More specifically, the EC would like to str ess two issues, namely the granting of trading 
rights and the possible restrictions on imports and exports: 
 i) Trading rights
 (article 9 of the Revised FTL) 
 6. The EC understands that the precise procedure for the granting of trading rights will be set out 
in an implementing regulation. The EC would like to stress that, in line with the commitments taken 
by China in the context of its accession to the WTO,  this procedure should be simple, subject to clear 
criteria and conducted without delay.  7. Moreover, article 9 of the Revised FTL stipulat es that registration will not be required “where 
laws, administrative regulations and provisions by th e department in charge of foreign trade under the 
State Council provide otherwise”. The EC is concerne d that such a provision might be implemented in 
a way which could lead to discrimination between operators. G/MA/W/56 
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8. In this context, the EC would be grateful if China could: 
 
• explain when and in which form the detailed provi sions for the granting of trading rights will be 
made public; 
• provide an indication of the content of these provisions; 
• explain precisely the cases where registration will not  be required and confirm that this will not 
lead to any form of discrimination. 
 
ii) Restrictions on imports and exports
 
 9. The Revised FTL contains a number of provisi ons dealing with restrictions on imports and 
exports (notably in articles 16 to 20). Since these restrictions are clearly disciplined under several 
WTO rules, and since the language used in the Re vised FTL differs from such disciplines, the EC is 
concerned about the consistence with WTO rules of  possible restrictions introduced by China under 
the Revised FTL.  
 
• In this context, the EC would be grateful if Ch ina could confirm that all possible restrictions it 
might take under the Revised FTL will be in strict conformity with WTO rules. 
 
10. The Revised Foreign Trade Law also raises a numb er of very serious concerns with regards to 
the services sectors. These will be raised by the EC in  its submission to the Council for Services in the 
context of the TRM exercise.  
Chinese exports restrictions on raw materials 
 11. In the context of its accession to the WT O, China committed itself to eliminate, upon 
accession, export restrictions unless they could be justified under WTO rules (§ 165 of the Working 
Party Report). In the Protocol of accession (Part I-Sections 8 (b) and 18 a nd Part IV-Section 5 of 
Annex 1A related to “export restrictions”), China undertook to notify any possible export restrictions 
to the WTO. 
 
12. Since the TRM exercise of 2002 the EC has re quested justification for such measures from 
the Chinese authorities. To the knowledge of the EC , the only document transmitted so far by China 
to the WTO on this issue is the list of products subject to export restrictions notified to the WTO 
Committee on Market Access on 18 September 2002 and 17 October 2003. The Chinese authorities 
indicated in a letter of 17 October 2003 that they were “still verifying the WTO justification which 
will be provided to the Secretariat later”. To the knowl edge of the EC, this justification has never been 
transmitted to the WTO.  13. The EC is deeply concerned that a number of the export restrictions maintained by China 
cannot be justified under WTO rules and urges China to  bring its export regime into conformity with 
WTO rules and the commitments taken in the cont ext of its accession to the WTO as soon as possible. 
The EC attaches particular importance to tw o products, namely coke and rare earths. 
 14. In this context, the EC would like to urge China  
• to notify in line with Part I-Section 8 (b) of  the Protocol of accession the quantities associated 
with the export restrictions imposed on the produc ts listed in the Chinese document of 17 October 
2003 (and on any other product that may not be included in this list); 
• to transmit to the WTO the justification for theses export restrictions; 
• when no such justification exists, to explain when  and how it intends to bring its export regime in 
line with WTO rules, in particular w ith regards to coke and rare earths.  G/MA/W/56 
 Page 3 
 
 
Automobile 
 
15. The EC has taken note of the publication of the New Automobile Policy (hereafter “NAP”) on 
1 June 2004. Given the framework nature of this  new policy and the opaque manner in which it was 
developed, the EC would appreciate if China, in line with the transparency  requirements under WTO, 
could notify any definitive text of the soon to be  published implementation regulations that will 
supplement the new policy sufficiently in advance so  as to allow all WTO members to comment on it. 
 16. As a general rule, the Commission is quite c oncerned by the multiple forms of governmental 
interventions characterising nearly every area of the automobile sector. The wide scope for state 
intervention implied in the policy and the uncertain ty regarding implementati on regulations are cause 
for grave concerns to the EC. More specifically, th e EC would like to get clarification already now on 
the three following issues:  i) Distribution
 (paragraph 34 of the NAP) 
 
17. The conditions imposed on distributors remain unclear. The EC would therefore be grateful if 
China could confirm that it will be possible to distribute through the same network:  
• imported and locally produced cars; 
• cars produced by different joint-ventures; 
• cars of different ‘brands’, regardless of the defi nition the Chinese authoriti es are attaching to this 
word as contained in the NAP. 
 
ii) Customs classification
 (Chapter XI of the NAP) 
 18. New localisation rules reclassify spare parts/kits for tariff purposes. The EC is very much concerned by the interpretation that the Chinese authorities are applying to define a “complete 
vehicle”, especially in view of the specific commi tments for vehicle parts China has entered into 
through its Protocol of accession. The EC is also ve ry much concerned at the type of procedures 
Chinese authorities apply for the identification of “complete vehicles” or “auto assemblies” and by 
references to an unspecified “regulated amount” in  connection with such identification procedures. 
 19. In this context, the EC would be grateful if China could: 
 
• explain how it intends to implemen t the provisions of the NAP relating to customs classifications 
in a way which will comply with WTO accession co mmitments undertaken by China in respect of 
tariff reduction for vehicle “parts”; 
• indicate the precise point in time when the iden tification of complete vehicles and assemblies 
occurs after importation; 
• explain the meaning of the reference to a “regulated amount” in respect of classification of 
assemblies and complete vehicles, and its consistency with WTO rules; 
• explain how it intends to implemen t the provisions of the NAP relating to customs classifications 
in a way which will comply with classification principles enshrined in the Harmonized System 
Convention under the World Customs Organization. 
 iii) Joint venture ownership limitation
 (Chapter X of the NAP) 
 20. The EC understands that under the new Chinese Automobile Policy maximum foreign 
participation in joint ventures remains capped at  50% and that under the new Chinese Automobile 
Policy the maximum number of joint ventures per investor is capped at two. The EC further 
understands that for operations in the export processing zones none of the above restrictions apply.  
 G/MA/W/56 
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21. Paragraph 3 of the Protocol of accession stipulates that: “(…) China shall ensure that (…) the 
right of investment (…) is not conditioned on: (…) export performance (…)”. 
 
22. In the light of the above understanding of the relevant features of the new Chinese 
Automobile Policy and the Chinese undertaking containe d in the Protocol of accession, the state of 
affairs may be summarised as follows: fully fore ign-owned production is on ly allowed in export 
processing zones and approval of such investments will only be granted for investment in such zones. 
In other words, in order to obtain approval of i nvestment beyond 50% foreign ownership, foreign 
producers will have to locate their production in an export processing zone. The approval or actual 
right could, therefore, be conditional upon accepta nce and fulfilment of an export performance 
requirement.  
 
23. In this context, the EC would be grateful if China could:  
• confirm the relevant features of its new Autom obile Policy and provide additional details about 
features relevant for the approval of investments in the export processing zones and for the operation of businesses established in those zones, including the extent to which export (and the 
volume of such exports) is actually required a nd/or necessary for enterprises located in those 
zones with the consequence that such export pe rformance becomes a condition for approval of 
foreign majority-owned investment and/or  the unlimited number of joint ventures. 
 
• clarify which government ministry or agency is responsible for export processing zones and 
which regulation foresees the abolition of otherwise applicable joint venture restrictions provided 
the investment is located in an export processing zone. 
 
 
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