WORLD TRADE
ORGANIZATIONG/MA/W/51
13 October 2003
(03-5425)
Committee on Market Access Original:  English
TRANSITIONAL REVIEW MECHANISM PURSUANT TO PARAGRAPH 18 OF THE
PROTOCOL ON THE ACCESSION OF THE PEOPLE'S REPUBLIC OF CHINA
Questions from the United States to China concerning Market Access
The following communication, dated 10 October 2003, has been received for the Permanent
Delegation of the United States.
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Trading Rights
1. In its WTO accession agreement, China committed that it would no longer condition eligibility
for trading rights, meaning the righ t to import and the right to export, on export performance, trade
balancing, foreign exchange balancing or prior experience requirements.  China committed that it
would eliminate these requirements immediately upon its accession (11 December 2001).  (Working
Party Report, para. 83(c).)  China further committed to expand the availability of trading rights
pursuant to an agreed schedule covering the first three years of its WTO membership.
First, China committed to make trading rights  available to all wholly Chinese-invested
enterprises (referred to herein as Chinese enterpri ses), subject to certain minimum registered capital
requirements, to be gradually decreased during a three-year transition period (ending
11 December 2004).
Second, China committed that it would make “full rights to trade” available to joint ventures
with minority foreign ownership beginning not later than one year after China's accession (i.e., by
11 December 2002).  (See Working Party Report, para. 83.)
Third, China committed that, within two years after its accession (i.e., by 11 December 2003), it
would make these same full trading rights available to joint ventures with majority foreign ownership.
Finally, China committed to eliminate its system of case-by-case examination and approval of
trading rights and make “full” trading rights available for all wholly Chinese-invested enterprises,Chinese-foreign joint ventures, wholly foreign-owne d enterprises and foreign individuals, including
sole proprietorships, within three years of its accession (i.e., by 11 December 2004).  At that time,
China will be required to grant trading rights au tomatically.  As China expressly confirmed, trading
rights will be granted in a non-discretionary way, and any requirements for obtaining trading rights
will be for customs and fiscal purposes only and will not constitute a barrier to trade.
To date, while China has made progress in impl ementing its trading rights commitments insofar
as they relate to Chinese enterprises, it appears that  China has fallen behind with regard to its trading
rights commitments insofar as they relate to foreign-invested enterprises.  It is the understanding of
the United States that China has continued to limit the availability of trading rights for
foreign-invested enterprises by imposing conditions on  the eligibility of these enterprises, including
requirements related to minimum registered capital, import levels, export levels and prior experience.G/MA/W/51
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Since well before China’s accession, pursuant to China’s Foreign Trade Law , foreign-invested
manufacturing enterprises have had the right to import inputs for production purposes and the right to
export their finished goods, without the need for prior approval.  In January 2001, China expanded the
import rights of some foreign-invested manufacturing enterprises with the issuance of the
Supplementary Provisions (II) to the Provisional Regulations Governing the Establishment ofInvestment-type Companies by Foreign Business Investment .  In July 2001, shortly before its
accession, China granted limited additional export rights to some foreign-invested manufacturing
enterprises with the issuance of the Circular Concerning the Extension of Import and Export Rights
for Foreign-Funded Enterprises .  Both of these measures, however, conditioned trading rights
eligibility on requirements related to minimum registered capital, import levels, export levels and/or
prior experience, among others.
China treatment of foreign-invested trading enterprises is set forth in the January 2003
Provisional Rules for the Establishment of Chinese-Foreign Equity Joint Venture Foreign Trade
Companies , which apparently superseded two earlier measures, the Provisional Rules for the
Establishment of Chinese-Foreign Equity Joint Venture Foreign Trade Companies on a Pilot Basis
(Sept. 1996) and the Regulations on Policies for Pilot Chinese-Foreign Equity Joint Venture Foreign
Trade Companies (Aug. 1997).  The new rules permit the formation of foreign-invested trading
enterprises (with minority foreign ownership imme diately and majority foreign ownership after
11December 2003), which may import and export all goods (except goods reserved for state trading),
but only if certain stringent requirements are met.  For example, the foreign investor must have had an
average annual amount of trade with China of at least $30 million for the preceding three years (or$20 million if the foreign-invested trading enterprise registers in the central or western regions of
China).  Similar requirements apply to the Chinese investor.   In addition, the foreign-invested trading
enterprise must have minimum registered capital  of RMB 50 million and personnel experienced in
conducting international trade.
(a) Do any measures other than those discussed above govern the trading rights of
foreign-invested enterprises?
(b) Can China confirm that the above statements accurately describe the conditions that must be
fulfilled for a foreign-invested enterprise to obtain trading rights?  Please explain how
conditions relating to minimum registered capital, past import and export levels and prior
experience are consistent with the terms of China’s accession agreement.
(c) Please confirm that China will make trading rights available automatically to all enterprises in
China and foreign enterprises and individuals, including sole proprietorships, by
11 December 2004.
(d) Does China intend to circulate for public comment a draft measure establishing its automatic
trading rights system, consistent with paragraph 2(C)2 of the Working Party Report?  When
will the draft measure be circulated?
Value-Added Tax Applied to Semiconductors
2.       Despite its national treatment obligations under Article III of GATT 1994, China applies a
reduced VAT to integrated circuits designed or manufactured in China, while it charges the full
17 percent VAT on imported integrated circuits.  In particular, pursuant to State Council Document 18
and subsequent measures, China provides for partial refunds of the VAT paid on integrated circuitsmanufactured and/or designed in China, but provides no refund of the VAT paid on imported
integrated circuits unless they were designed in China.
(a) Please explain the reasons for the differential treatment.G/MA/W/51
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(b) Please explain how the difference in the treatment of imported versus domestic products
under these measures is consistent with Article III of GATT 1994.
(c) According to media reports, a group of Chinese ministries and agencies is evaluating these
measures in light of China’s WTO obligations.  What is the status of this group’s review ofthese measures?  When does China anticipate making revisions to these measures based on
this group’s recommendations?
Value-Added Tax Applied to Diammonium Phosphate
3. The United States continues to have national treatment concerns regarding the Circular about
VAT Exemption Policy for Certain Farming Materials  (No. 113/2001), jointly issued by the Ministry
of Finance and the State Administration of Ta xation on 20 July 2001, which exempts all phosphate
fertilizers except diammonium phosphate (DAP) from China’s value-added tax (VAT).  DAP, which
is produced in the United States, competes with similar phosphate fertilizers produced in China, such
as monoammonium phosphate (MAP).  This measure discourages use of DAP, for which China
committed to permit access under its TRQ commitments, in favor of products that are not imported.The United States has raised this issue with China on several occasions, both at the WTO and
bilaterally.  However, China so far has not revised the measure in question.
(a) Please explain the reasons for the differential treatment.
(b) Is it China’s position that DAP and MAP do not compete against one another in China?  If so,
please explain the basis for this position.
(c) Please explain how the difference in the trea tment of DAP and similar products like MAP is
consistent with Article III of GATT 1994.
New Automobile Industrial Policy
4. In paragraph 204 of the Working Party Report, China committed to amend its 1994 Industrial
Policy for the Automotive Sector upon accession to make it compatible with WTO rules and
principles.  China also specifically agreed to elim inate export performance, local content and foreign
exchange balancing requirements from its laws, regulations and other measures, and not to enforce theterms of any contracts imposing these requirements.  In addition, China agreed that it would no longer
condition importation or investment approvals on these requirements or on requirements such as
technology transfer and offsets.  Previously, China explained that it had revised the Law on
Chinese-Foreign Equity Joint Ventures, the Law on Chinese-Foreign Contractual Joint Ventures and
the Law on Wholly Foreign-Owned Enterprises to eliminate and cease the enforcement of localcontent requirements, among other requirements, and that these revisions superseded conflicting
provisions in the 1994 Industrial Policy for the Automotive Sector.  China also indicated that it was
conducting in-depth research and study with a view to issuing a new automobile industrial policy and
that it would issue new  Guidelines for Current Development of Automobile Industry .
(a) Please describe the status of that effort.
(b) We understand that an existing draft of the new automobile industrial policy discourages the
importation of auto parts.  Please explain how China plans to implement this aspect of the
new policy, and explain how it would be consistent with China’s market access commitments.
(c) We understand that an existing draft of the new automobile industrial policy seeks to restrict
imports of CKDs.  Please explain how China plans to implement this aspect of the new
policy, and explain how it would be consistent with China’s market access commitments.G/MA/W/51
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(d) We understand that an existing draft of the new automobile industrial policy includes
provisions on automobile dealerships that woul d require separate distribution networks for
imported and domestic automobiles.  Please explain how these provisions would be consistent
with China’s national treatment obligations.
(e) Does China intend to circulate a draft of the new automobile industrial policy for public
comment before it is finalized, consistent with paragraph 2(C)2 of the Working Party Report?
Tariff-Rate Quotas on Fertilizers
5.         In the Goods Schedule accompanying the protocol of Accession, China committed to allocate
specified portions of the fertilizer TRQ for importation through entities other than state tradingenterprises.  For 2003, please provide information on the total quantity of each fertilizer TRQ (i.e.,
diammonium phosphate (DAP), urea and NPK) th at was allocated for importation through state
trading enterprises, and the total quantity of each  fertilizer TRQ  allocated for importation through
entities other than state trading enterprises.
6. In the TRQ headnotes on fertilizer and wool tops (found in Part III, Section A, of China’s
Goods Schedule), paragraph 6B, China committed that applications for reallocation of uncontracted-
for TRQ shall be accepted from 1-15 September, that specific conditions for applying for reallocated
TRQ will be published in the official journal one month in advance of the application period, and that
new allocations will be assigned by 1 October.  Please describe in detail how China is implementingits commitments regarding reallocation of 2003 TRQ.
7. At a 3-4 July, 2003 symposium in Beijing, the Chinese phosphate fertilizer industry
reportedly expressed its expectation that the Chinese government would “continue to balance overall
volume” of fertilizer imports and suggested that the Chinese government should control DAP imports,in particular, at the level of 3 million tons in 2003.  (China committed to an in-quota volume of 5.95
million tons in 2003.)  Please confirm that China has fully allocated DAP TRQs for 2003 and has not
sought to control the level of DAP imports through administrative means.
Industrial Quotas
8. There is inadequate information on how China has allocated 2003 quotas for autos and other
products listed in Table Two of Annex Three to China’s Protocol of Accession.  In addition, there
have been complaints that applicants for auto quota have received only a small portion of the quantity
applied for.  For each of the products listed in Table Two of Annex Three to the Protocol of
Accession, please provide the following information for the 2003 quotas:
(a) Total quantity of quotas applied for;
(b) The number of requests for quotas denied;(c) Total quantity of quotas allocated to end-users;(d) Minimum size of individual quota allocation;(e) Fill rates for the quotas;
(f) Total quantity of quotas allocated to entities that had not previously been allocated quotas;
and
(g) Total quantity of quotas allocated to enterprises with foreign ownership.G/MA/W/51
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Consumption Tax Applied to Imported Goods
9.         The United States continues to have national treatment concerns regarding the Provisional
Regulations on Consumption Tax , which have been in effect since 1993 and have not been amended
since China acceded to the WTO.  Under those regulations, which apply to a range of consumerproducts, including spirits and alcoholic beverages, cosmetics and skin and hair care preparations,
jewelry, fireworks, rubber, motorcycles and automobiles, China uses a different tax base to compute
consumption taxes for imported products and domestic products.  This difference in treatment results
in consumption taxes for imported products that are substantially higher than those for domestic
products.  Thus, for domestic products, the tax base for domestic products is the sales amount
(apparently the ex-factory price).  This amount is multiplied by the consumption tax rate to derive the
consumption tax due.  In contrast, for imported products, Article 9 sets the tax base as the “compositeassessable value,” which is defined as (dutiable value + customs duty), divided by  (1 – consumption
tax rate).  The resulting amount is then multiplied by the consumption tax rate to derive the
consumption tax due.  The United States has raised this issue with China on prior occasions, but
China so far has not revised the regulations in question.
(a)       Please explain why the tax base used to compute the consumption tax owed on imported
goods is different from, and higher than, the tax base used to compute the consumption tax
owed on domestic goods.
(b) Does China continue to maintain that the computations for domestic products and imported
products are equivalent?  If so, please explain how these computations can be equivalent
when the resulting consumption taxes for imported products are substantially higher than
those for domestic products (even after accounting for the difference due to the inclusion of
customs duties in the tax base for imported products).
(c) Please explain how the difference in the treatment of imported versus domestic products
under these regulations is consistent with GATT Article III.
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