WORLD TRADE  
ORGANIZATION  G/L/708 
8 November 2004 
 (04-4737) 
Committee on Trade-Related Investment Measures  
  
 
TRANSITIONAL REVIEW MECHANISM PURSUANT TO PARAGRAPH 18 OF THE 
PROTOCOL OF ACCESSION OF THE PEOPLE'S REPUBLIC OF CHINA TO THE 
WORLD TRADE ORGANIZATION 
 
REPORT OF THE CHAIRMAN 
 
 
1. Pursuant to Paragraph 18 of the Protocol of Accession of the People's Republic of China, the 
Committee held the third annual review under China' s Transitional Review Mechanism (TRM) at its 
meeting on 26 October 2004.   
2. Written comments and questions in connection w ith China's TRM were submitted in advance 
of the review by the European Communities a nd the United States.  These submissions were 
distributed in documents G/TRIMS/W/36, and G/TRIMS/W/35 and 37, respectively.   
3. In a communication dated 25 October 2004, Chin a submitted information on Annex 1A of its 
Protocol of Accession in the context of the TRM.  This submission was circulated as document G/TRIMS/W/40, dated 26 October 2004. 
4. Reproduced as Annex 1 to this document are th e relevant sections of the Minutes of the 
TRIMs Committee meeting held on 26 October 2004 in  which the substantive discussions on China's 
TRM are reflected.   
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 G/L/708 
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 Annex 1
 
           
 
Relevant Sections of the Minutes  
of the meeting held on 26 October 2004  
 
(G/TRIMS/M/19 ) 
 
 C. T
RANSITIONAL REVIEW MECHANISM PURSUANT TO PARAGRAPH 18 OF THE PROTOCOL OF 
ACCESSION OF THE PEOPLE 'S REPUBLIC OF CHINA TO THE WORLD TRADE ORGANIZATION  
12. The Chairman  recalled that under Paragraph 18 of Chin a's Protocol of Accession, the TRIMs 
Committee was required to review annually, over a pe riod of eight years after China's accession, the 
implementation by China of the TRIMs Agreement a nd the related provisions of the Protocol and to 
report to the Council for Trade in Goods (CTG) on the results of its review.  The second annual 
review had taken place in October 2003 and the corre sponding report had been forwarded to the CTG 
as document G/L/648.  With regard to this year's review ,  he said that in order to carry out its task in a 
timely manner the TRIMs Committee would need to undertake the review and submit its report in 
advance of the meeting of the CTG scheduled for 25 November 2004.  The Council for Trade in 
Goods would, in turn, report to the General Council by the end of the year.  He then said that the Committee had received communications from the European Communities and the United States 
which contained comments and questions submitted in  connection with China's Transitional Review 
Mechanism (TRM).  These submissions had been  circulated in documents G/TRIMS/W/36, and 
G/TRIMS/W/35 and 37, respectively.  Information submitted by China on Annex 1A of its Protocol 
of Accession had been circulated in document G/TRIMS/W/40.   
13. He then proposed to conduct the review as fo llows: he would first give the floor to the 
delegations that had addressed writte n questions to China, and to any other delegation that wished to 
comment on this item. He would then offer the floor  to the delegation of China to respond and provide 
any other comments they might wish to make.  With  regard to the Committee's reporting obligation to 
the Council for Trade in Goods, he said that it was his understanding that Members would wish the Committee to follow the same procedure it had adopted  for the previous year's review.  In other 
words, he would draft a brief, factual report to wh ich the relevant parts of the Minutes of the present 
meeting would be attached.  The report would be ci rculated to all Members before it was submitted to 
the Council for Trade in Goods. 
14. The Committee agreed
 on the proposed procedure to discharge its reporting obligations. 
15. The representative of the European Communities  recalled that his delegation had submitted 
two questions in connection with China's current TRM relating to TRIMs.   One of the questions that 
had previously been raised by his delegation a nd to which China had responded, related to the 
amendment of clauses contained in various contract ual arrangements that were incompatible with the 
TRIMs Agreement.  In his delegation's submissi on (G/TRIMS/W/36), attention was drawn to the 
explicit undertaking that China had assumed upon join ing the WTO in terms of such contractual 
arrangements.  Quoting the releva nt paragraph of China's Accession Protocol, he said that China had 
undertaken "...not to enforce provisions of contract s imposing such requirements."  In light of the 
answer that had been provided to the European Co mmunities, his delegation felt the need to reinforce 
and put the question once again to China and looke d forward to receiving additional information on 
that matter.  The second question related to th e New Automobile Policy adopted by China this 
summer.  As laid out in document G/TRIMS/W/ 36, the question called upon China to specify and 
clarify to the Committee and the CTG the relevant features of the New Automobile Policy, and in 
particular as regards two questions.  One was whic h government ministry or agency was responsible  G/L/708 
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 for export processing zones in China and which re gulations foresaw the abolition of otherwise 
applicable joint venture restrictions provided the investment was located in an export processing zone. 
The other question called upon China to provide furt her details about the characteristics of the export 
processing zones, including the possibility of im porting goods processed in the zones into the 
mainland, and also whether there were circumstan ces under which such importation could take place 
on a duty-free basis.  His delegation looked forward to hearing China's responses to those questions.  
16. The representative of the United States  said that his delegation believed that the TRM could 
be a useful exercise for both China and other WT O Members.  It allowed China and other WTO 
Members to exchange information, review implem entation progress and clarify points of agreement 
and disagreement.  He thanked China for its submission on Annex 1A information and looked 
forward to China's explanation of the document.  He  first referred to the questions his delegation had 
submitted in connection with China's auto policy.  His delegation noted that  with regard to new 
automobile production plans and new automobile e ngine manufacturing plans, Article 47 of China's 
New Automobile Policy required an investment in  research and development (R&D) facilities.  His 
delegation also noted that in China's Protocol of  Accession and in commitments in its Working Party 
Report, China had agreed that the right of i nvestment would not be conditioned on, among other 
things, the conduct of research and development in China.  His delegation sought some clarification 
from China as to the meaning of this provision and how it would be applied.  His delegation also noted that in Annex II to the New Automobile Polic y, among the documents required to be filed with 
the approval authorities was any technology transfer ag reement.  In China's Protocol of Accession and 
in commitments in its Working Party Report, China had agreed not to condition the right of 
investment on the transfer of technology.  His de legation looked for an explanation from China as to 
the meaning of this provision of the New Automob ile Policy.  The other questions submitted by his 
delegation dealt with the Catalogue  for Foreign Investment, which China had issued in March 2002.  
In this regard, his delegation sought information about China's plans for issuing a new or revised catalogue, and specifically whether China had any plans to remove biotechnology seed development 
and production from the prohibited investment category.  
17. The representative of Chinese Taipei
 said that a communication from his delegation would be 
forthcoming. His delegation also had a number of questions regarding China's Automobile Industry 
Development Policy (hereafter the Policy), publishe d in May 2004, and would appreciate if China 
could provide further clarification in  this regard.  The first question related to Article 36 of the Policy, 
which stated that China was to abolish the existi ng approval management method for the sales right of 
passenger cars, and that it would draft the implementation rules for management of brand marketing 
for automobile products.  He asked if China could pr ovide information on the status of its drafting of 
the implementation rules for management of bra nd marketing for automobile products and also 
provide details of the main content of these rules.   The second question related to Article 39 of the 
Policy, which stated that "Transferring the right of sales links to another impersonal entity is regarded 
as a major change in the feasibility study report in the original investment project, and should be 
approved by the Ministry of Commerce and reported to the original project examining and approving 
unit for approval." In his delegation's view, transferring the right of sales from a motor vehicle production enterprise to another impersonal entity was generally regarded as normal business practice 
and should be respected. However, China regarded th is transfer as a major ch ange in the original 
investment project and required it to be approved by  the relevant authorities.  His delegation asked if 
China could confirm that these requirements would not hinder or interfere with the autonomy of 
business enterprises to transfer the right of sales and th e right of marketing. Moreover, he asked if, in 
light of normal international business practice, Ch ina could consider removing these requirements. 
18. He said that his third question related to Ar ticle 47 of the Policy, which set out strict 
requirements for new investment projects.  This aspect  had been referred to by previous speakers, so 
he did not need to mention the details of these requirements.  His delegation asked if China could 
explain how the requirements relating to total inv estment and after-tax profits did not amount to G/L/708 
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 investment barriers for new investors.  The fourth  question related to para graph 203 of the Report of 
the Working Party on China's Accession, under which China had committed to eliminate local content 
requirements. However, Articles 55, 56, and 57 of  the Policy gave a strict definition and scope of 
complete vehicle features.  He asked if China could confirm that these stipulations did not aim at 
increasing the rate of localization of automobile products, and that they would not constitute new 
trade barriers on vehicle imports. His delegation's l ast question concerned Article 58 of the Policy, 
according to which the State had designated four coastal ports and two land ports as well as the 
Xinjiang Alataw Pass, to be the ports handling impor ts of complete vehicles.  Therefore, imported 
complete vehicles must enter China via these ports . His delegation was interested in knowing the 
reasons why China had designated these particular ports for the handling of imports of complete 
vehicles and whether China planned to d esignate more ports in the future.   
19. The representative of China
 said that, prior to this meeting, China had submitted information 
required by Annex 1A of the Pr otocol of Accession to the TRIMs Committee.  Before passing the 
floor to her colleague to respond to the written sp ecific questions from the Members, she would like 
to provide some illustrative information on the issues of concern to some Members. Firstly, 
immediately upon accession, China had amended the Industrial Guideline Catalogue for Foreign 
Investment in a comprehensive manner according to the WTO rules and China's commitments. The 
existing Catalogue had a distinctive feature. It expanded the degree of opening up and took 
encouraging foreign investment as a general policy.   The industries falling under the "encouraged" 
category had increased from 186 to 262, and the number of "restricted" industries had been reduced to 
75 from 112. China had also further loosened equity  limits on foreign investment.  For example, the 
requirement of majority equity holding by the Ch inese side in the public dock facilities of ports had 
been relinquished.  Furthermore, some previous prohibitions for foreign investment in areas like 
telecom, supply of gas and water had been lifted.  Secondly, on 1 June 2004, China had promulgated 
the Policy on the Development of Auto Industry.  In drafting the Policy, the Chinese Government had 
broadly solicited the opinions and comments from both domestic enterprises as well as foreign 
investors through the internet and various sympos iums.  The Policy had only been finalized after 
repeated revisions based on the inputs from these industries.  The new policy had two major 
improvements over the old Policy on Auto Industry.  It had removed provisions inconsistent with 
WTO rules.  The requirements on foreign exchange balance, local content and export performance 
had been abolished.  It had also greatly deregul ated administrative approvals.  The policy had based 
the auto industry administration more on the laws and technology standards, and less on the 
government authorities, aiming to guide the healthy development of the industry.  This new policy 
had met the requirements of the development of  China’s auto industry, as well as the specific 
commitments China had made upon accession.  She added that 2004 was the third year of China’s 
WTO membership.  In the past years, China’s faith ful and complete implemen tation of its obligations 
with regard to the TRIMs had created a favourable environment and a level playing field for foreign 
investors.  In the year of 2003, with an inflow of  foreign direct investment of US$ 53.5 billion, China 
had become one of the most attractive destinations of global FDI.  Her delegation believed that the 
affirmation from investors was the best testimony to China’s liberal investment regime and its 
successful implementation of commitments on TRIMs.  She then passed the floor to her colleague.  
20. Before replying to the specific questions ra ised by Members, the representative of China  said 
that written questions should be submitted to China at least ten days before the meeting in which the 
TRM would take place.  This would enable Chin a to have adequate time to mobilize domestic 
resources to prepare for the responses.  He said that his delegation had never received written 
questions from Chinese Taipei.  He then proceeded to provide oral responses to the questions raised 
by Members.  First of all, he reiterated that Ch ina had fully abided by its TRIMs commitments and 
obligations upon its accession, and that it had a bolished the requirements on foreign exchange 
balance, trade balance, local content and export perfo rmance.  However, with regard to all the existing 
commercial contracts on joint venture operation and technology transfer, since they had been signed 
by the relevant parties in consideration of thei r own business interests, the parties involved should  G/L/708 
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 negotiate about the amendment of those contracts themselves on the basis of fairness, justice and 
equality.  The contracts should not be regarded as i nvalid automatically or be annulled through or by 
government actions or interference.  Regarding the Industrial Guideline Catalogue for Foreign 
Investment , he said that as all Members knew, the catal ogue currently in effect had been publicized 
and implemented after am endment in March 2002.  With the ra pid development of China’s national 
economy and society since then, and in order to m eet the needs of further opening up, China would 
amend its Industrial Guideline Catalo gue for Foreign Investment from time to time as appropriate.  
At present, the competent authorities were working on the amendment, and the new version would be 
issued and implemented soon after its approval by  the State Council.  The aim of establishing and 
implementing the Industrial Guideline Cata logue for Foreign Investment  was to further the guidance 
on foreign investment and to direct it to closely follow up the rapid development of China’s national 
economy and society.  Consistent with The Regulation on Foreign Investment guidance , foreign 
investment projects that endangered the national secur ity or imperil social and public interests should 
be prohibited.  Upon its accession to the WTO, China had made no promise to open up the ten 
presently prohibited types of projects to foreign investment.  Among those, in the fields of 
"agriculture, forestry and fishery", there were thr ee types of projects prohibited to foreign investment, 
with "production and development of genetically modified plants seeds" included as one of them.  
However, bio-technology seed development and production was not included among the three. 
21. He then referred to the new Policy on Development of Automobile Industry.   He said that this 
policy stipulated that "...Projects, set up by fore ign or domestic automobile manufacturers within 
export processing zones (EPZ) on the production of auto mobiles and engines oriented for export, will 
not be restricted by the provisions of this Policy, but should be submitted to the State Council for 
examination and approval."  Hi s delegation believed that the practice of establishing export 
processing zones and applying different administrativ e methods to the enterprises within the zones 
was the common practice adopted by most Members a nd it should not be regarded as requirements on 
export performance.  He added that, according to Interim Measures on Custom Administration on the 
Export Processing Zones , the automobile manufacturers inside the zones would not be included in the 
public registry for domestic manufacturers and prod ucts.  Automobiles and engines produced in the 
zone were intended for export only.  As for goods transported out of the zones, they were subject to 
the same customs procedures applicable to im ported goods, as well as to the tariff on finished 
products. For goods under import licensing, a valid import licence needed to be submitted to the 
customs.  All the articles in the Policy on Development of Automobile Industry applied to enterprises 
that invested in the automobile industry in China.  Article 3  - or "paragraph 3 of the new policy" as a 
Member had put it in its written question - generally outlined China’ s goals, strategy and direction in 
automobile industry development, without touching u pon any detailed  measures or restrictions on the 
volume.  Annex 2 of the Policy stipulated that, wh en setting up an automobile enterprise project, the 
enterprises involved should put rele vant documents on record.  Article  4 of Annex 2 set out that the 
contract on foreign technology transfer should be  put on record.  The reason why China required 
"foreign technology transfer and contract on techni cal cooperation" was to prevent illegal assembling, 
to protect intellectual property and to ease up the procedures for product testing and accreditation, but 
not to force foreign parties to transfer their technol ogies.  Therefore, this practice did not constitute a 
restriction on investment, nor a violation of the Prot ocol of Accession or the Working Party's Report. 
He went on to say that Article 47 of the Policy required the newly-established enterprises to set up 
their own Research and Development institutions.  Th e reason for this requirement was to equip the 
enterprises with basic technical ability  in order to ensure that the ne wly-established enterprises be able 
to conduct technical reconstruction and research and development on their own products, and that 
they could meet the increasing technical and lega l requirements on safety, environmental protection 
and energy saving, as well as customer demand in China.  This article did not stipulate specific and mandatory requirements on product R&D performance.  Finally, he said that in China the customs 
were responsible for the regulations on supervis ion of EPZ.  Reference could be made to the Interim 
Measures on Custom Administrati on on the Export Processing Zones  for details.  The investment G/L/708 
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 projects on automobiles and engines within the EPZ were operated in accordance with the stipulations 
in this Policy.  
22. The representative of the United States
 said that his delegation appreciated China's responses, 
but wanted to seek further clarification on some of  them.  He had understood the Chinese delegate to 
say that, with regard to Article 47 of the New Automobile Policy, the provision dealing with R&D 
was not mandatory.  He asked China if his unders tanding was correct.  Regarding the Catalogue for 
foreign investment, he had understood from China' s responses that biotechnology seed development 
and production was not included in the prohibited cate gory.  He also wanted to clarify that this 
interpretation was correct.  Lastly, he said that his authorities in the capital would review the 
responses and the information on Annex 1A that ha d been received from China at the meeting and 
that, if necessary, his delegation would raise an y follow-up comments or questions in the Council for 
Trade in Goods. 
23. The representative of the European Communities  thanked the Chinese delegation for having 
provided some answers to the questions that his delegation had put in its  document submitted on 
13 September 2004.  He wanted to ask for clarificat ion on two points, which he would take back to 
Brussels for further discussions, including with th e automobile industry and experts.  The first 
question related to the issue of enforcement of c ontracts.  He had understood from China's response 
that such contracts which might contain TRIMs- incompatible clauses should be the subject of 
renegotiation or amendment among the parties to the contracts rather than to any government 
intervention.  Leaving aside that argument, he asked  if China could clarify what exactly was meant by 
the following sentence from the Protocol of Accession: "...Moreover, China will not enforce 
provisions of contracts imposing such requirements... ".  He asked China whet her that sentence could 
be read to mean that, for instance, if a foreign i nvestor refused to meet the requirement by a domestic 
party to use local components and he was taken to court, the Chinese authorities would ensure that the 
relevant provisions of such a contract were not "enforced" in accordance with the Accession Protocol.  The second question related to paragraph 13 in docu ment G/TRIMS/W/36.  He asked China to what 
extent actual export performance was a condition or re quirement in order to be granted the relevant 
approval to invest in the EPZs.  He acknowledged th at China had provided useful information about 
the EPZs, however he would be grateful if China could provide a very specific answer to his question.   
24. The representative of Chinese Taipei
 thanked the delegation of China for its remarks and said 
that he understood that China had not fully respon ded to the questions posed by his delegation given 
that these had come too late.  He looked forwar d to their responses at an appropriate time. 
25. The representative of China  said that his delegation required a lot of time and resources to 
prepare its responses under the TRM.  He thanked Members' appreciation for China's efforts and 
contribution in this regard.  He added that under the TRM process, once this item of the agenda was 
completed at the present meeting, the questions orally  made or raised should be put to China in some 
other appropriate situation.  Once the TRM was co mpleted in the Committee it was over.  He was 
happy to answer some of the follow-up questions raised by Members; in some other cases he would 
need to take the questions back home for furthe r discussion in order to provide the appropriate 
responses.  Regarding the question on the EPZs, he advised the delegate of the European 
Communities to refer to the Interim Measures on Custom Administration on the Export Processing 
Zones .  He added that once back in the capital, hi s delegation would get more information from the 
customs and would get back to the European Communi ty with the responses, in some other situation. 
On the question regarding biotechnology seed de velopment and production,  his delegation could 
confirm that there were only three types of projects in the fields of agriculture, forestry and fishery 
that were prohibited to foreign investment, and that production and the development of genetically 
modified plant seeds was one of them.  As far as he knew, biotechnolog y seed development and 
production was not included among the three.  Re ferring to Article 47 of the Chinese auto parts  G/L/708 
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 industry policy, he said that this provision did not stipulate specific or mandatory requirements on 
product  research and development performance. 
26. The Chairman  commended the delegation of China for its  efforts in preparing for the review 
and in replying to the questions that had been subm itted.  He also thanked all other delegations for 
their active participation in the exercise.  The Committee took note of the statements made.   
27. The Committee approved  ad referendum  the Report of the Chairman to the Council for Trade 
in Goods1, and agreed  that the Report, to which would be attach ed as an annex the re levant sections of 
the Minutes of the present meeting, be subm itted to the Council for Trade in Goods.  
 
 
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1 A draft Report of the Chairman was distributed to  Members at the meeting for their consideration.