WORLD TRADE
ORGANIZATIONG/L/664
4 December 2003
(03-6436)
Council for Trade in Goods
REPORT OF THE COUNCIL FOR TRADE IN GOODS
ON CHINA'S TRANSITIONAL REVIEW
1. The Council for Trade in Goods, at its meeting on 26 November 2003, carried out the
Transitional Review of China pursuant to paragraph 18 of the Protocol on the Accession of the
People's Republic of China (WT/L/432).
2. Japan and the United States submitted questions and comments in writing to China on the
CTG-specific information requirements contained in Annex 1A of the Protocol.  These questions and
comments were circulated in documents G/C/W/471 and Corr.1 and G/C/W/473 respectively. The
European Communities circulated their comments and questions after the meeting in documentG/C/W/476.  The information provided by China to  the Council for the review was circulated in
document G/C/W/474.
3. The review proceeded in two stages.  First, the Council for Trade in Goods took note of the
reviews that had been carried out in the CTG su bsidiary bodies.  Second, the Council reviewed the
information provided by China concerning specific parts of Annex 1A of the Protocol.  The
statements made at the meeting of 26 November 2003 are reflected in the minutes of the meeting in
document G/C/M/71.  The relevant paragraphs which reflect the discussion under agenda item III are
annexed.G/L/664
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ANNEX
III. TRANSITIONAL REVIEW UNDER P ARAGRAPH 18 OF THE PROTOCOL OF
ACCESSION OF THE PEOPLE'S REPUBLIC OF CHINA
3.1 In accordance with paragraph 18 of the Protocol of the Accession of the People's Republic of
China in document WT/L/432, the Chairman said that the CTG would report to the General Council
on the Transitional Review.  As last year, he suggest ed that the Council proceed in two stages.  First,
the CTG subsidiary bodies were required to transmit their reports to the Council for Trade in Goods.
This they had done and, as a first step in today's review process, he wanted to give Members an
opportunity to make general comments on those report s, and would then propose that the Council take
note of the Reviews that had been carried out in the CTG subsidiary bodies.  Then the Council would
move on to its own report.  Turning to the report s of the subsidiary bodies, the Chairman reminded
Members that the following CTG subsidiary bodies had carried out the Review:  Committee on
Market Access (document G/MA/150);  Committee on Agriculture (G/AG/18);  Committee on
Customs Valuation (G/VAL/56);  Committee on Sanitary and Phytosanitary Measures (G/SPS/29);Committee on Technical Barriers to Trade (G/TBT/W/236);  Committee on Import Licensing
(G/LIC/11);  Committee on Rules of Origin (G/RO/56);  Committee on Anti-Dumping (G/ADP/12);
Committee on Subsidies and Countervailing Measures (G/SCM/111);  Committee on Safeguards
(G/SG/66);  and Committee on Trade-Related Investment Measures (G/L/648).
3.2 The representative of the United States noted that three of the questions that they had
submitted for the transitional review sought clarifications about matters that were addressed before the
Committee on Market Access and the Subsidies Committee.
3.3 The representative of the European Communities said that the EC attached great importance
to the TRM exercise, and considered that it was of utmost importance to ensure a proper and
meaningful functioning of this mechanism over the years to come.  Taking into account the
experience of last year and to make the 2003 exercise more meaningful, the EC had decided this year
to:  (i) as last year, transmit the questions well in advance of each meeting (typically six weeks);  (ii)
focus on a limited number of priorities;  and (iii) raise only issues discussed already a number of times
in the WTO committees or in bilateral meetings and therefore well-known to the Chinese side.  The
objective of the EC was to have in each subs idiary body under the Council for Trade in Goods a
meaningful discussion and detailed replies from the Chinese side to this limited number of questions.
The assessment made by the EC about this year’s TRM exercise in the subsidiary bodies under the
Council for Trade in Goods was mixed:  while the Chinese side provided useful clarifications on
several matters of concerns, the EC impression was that it did not obtain satisfactory replies from the
Chinese side to a number of questions raised notably in the Import Licensing, Market Access, TBTand SPS Committees.  The EC would come back to these issues in the relevant Committees and
bilaterally with China in the coming months.
3.4 The Council took note of the reports and of the statements made.
3.5 The Chairman said that China was required to  provide information to the CTG in accordance
with paragraph 18.1 of the Protocol of Accession.  The relevant information requirements were listed
in Annex 1A.  China had submitted information as required under Annex 1A of the Protocol of
Accession in document G/C/W/474.  He also drew attention to the documents by Japan contained in
G/C/W/471 and Corrigendum 1, and by the United St ates contained in document G/C/W/473.  The
European Communities also subsequently circulated its submission in document G/C/W/476.
3.6 The representative of China addressed the Council on the implementation of China’s
commitments with regard to trade in goods within  the framework of paragraph 18 of China’s ProtocolG/L/664
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of Accession and also responded to Members’ quest ions and concerns.  Prior to the meeting, as
required by Annex 1A to the Protocol of China’s Accession, China had submitted information
regarding the repeal or modification of laws and regulations by the principle of non-discrimination,
policies affecting trade in goods and policy of government procurement, etc.  A delegation composed
of senior officials from relevant governmental authorities including the Ministry of Commerce, theState Development and Reform Commission had been formed to attend this review.  Responding to
questions raised by Members, the representative said the following:
1.  On Transparency3.7 In line with China’s reform and opening up process, and to implement the commitments upon
its accession, China was now, according to its arrangement of legislative plan, revising relevant lawsand regulations mentioned by some Members in their questions.  Amendments to these laws and
regulations would be open for public comment pursuant to provisions of the Legislation Law  and
Regulations on the Drafting Procedure of Administrative Regulation .  In addition, China would also
notify those laws and regulations to the WTO.  Above all, China would fully fulfil its commitments
on transparency made upon its accession to WTO.
2.  On Export Restrictions3.8 Fluorspar was a kind of non-regenerative resource under the protection of the Chinese
Government.  The mining of fluorspar had a significantly negative impact on the environment.  Chinahad been attaching great importance to the exploitation, processing and consumption of exhaustible
resources.  From the 1970s, China had begun to impose export quotas on fluorspar while restricting
the domestic mining and production of fluorspar.  Pursuant to China's Foreign Trade Law , the
Regulations on the Administration of Import and Export of Goods  and China's commitments upon
accession, China still imposed export quota administration on fluorspar.  Due to the depleting offluorspar resources and its shrinking production, the domestic consumption and export of fluorspar
had, in turn, gradually decreased.  China's export quota administrative measure on fluorspar was
consistent with the "general exceptions" provided in Article XX of GATT 1994 – " nothing in this
Agreement shall be construed to prevent the adoption or enforcement by any contracting party of
measures: including those relating to the conservation of exhaustible natural resources if such
measures are made effective in conjunction with restrictions on domestic production or
consumption;" .  Furthermore, according to the WTO rules, the general abolition of quantitative
restrictions set forth by the Article XI did not preclude the various exemptions as contained in
Articles XII to XXI of GATT 1994.  During recent ye ars, domestic and foreign prices of fluorspar had
risen to various degrees.  This rise in price was determined by the rules of market rather than the
export quotas by the Chinese Government.
3.  On Value-Added Tax Policies
3.9 China currently applied 17 per cent VAT on both domestic and imported goods, which was
fair and non-discriminatory in terms of the value of goods.  The current VAT rebate policy was
consistent with the national treatment rule under Article III of GATT 1994.  In China, customsimposed duties and VAT for the importation of copper scraps, copper ore concentrates and raw
copper by copper-smelting enterprises reaching a certain production scale.  After paying the duty and
tax, a company could apply for the drawback of 30 per cent VAT on presentation of duty-paid proofs.
The refunded tax should be applied to the technological innovations of the enterprise.  VAT rebate
policy on copper materials applied to all enterprises reaching certain production scale, and was notconditioned on ownership of the enterprise or local content.  Copper-smelting enterprises had to pay
VAT while importing copper materials.  The amount of VAT should be the total sum of dutiable
value and tariff multiplied by VAT rate for copper materials.  According to relevant policy and
provisions, the government would refund 30 per cent of the paid VAT to the enterprise.   This policyG/L/664
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only applied to imported copper scraps, copper ore concentrates and raw copper and did not apply to
other products.  China did not implement any similar policy on other products or adopt any other
preferential policies on copper-processing enterprises.
4.  On Border Trade:3.10 The WTO did not provide for the specific definition, forms and territorial scope of border
trade, and only set forth a fundamental provision that "the provisions of this Agreement shall not be
construed to prevent advantages accorded by any contracting party to adjacent countries in order to
facilitate frontier traffic".  Therefore, special preferential treatments for border trade were allowed by
the WTO, and advantages and conveniences accorded by a contracting party to adjacent countries
were not inconsistent with the basic principle of the WTO, i.e. MFN.  China had committed in itsaccession protocol to apply WTO Agreements and the protocol across the whole customs territory
including border trade areas, and would develop and implement laws, regulations and other measures
in relation to trade in goods in a uniform, impartial and rational manner.  Border trade policies had
been uniformly implemented and enforced in the provinces and regions in border areas of China as an
important part of China's foreign trade policies.  According to Bulletin No. 27 and No. 39 issued by
the State General Customs Administration on 1 May 2003 and 11 June 2003 respectively, China had
removed boric acid and 19 other products from the list of products subject to border trade import
duties policy.
5.  Government Procurement:3.11 Since became a Member, China had been actively laying the ground work for the full
implementation of the commitments relating to go vernment procurement contained in its accession
protocol, and these efforts had yielded remarkable results in many ways.  China’s first Government
Procurement Law  was published in 2001 and was followed by the enactment of a series of
supplementary rules.  The implementing regulation to the Law was also being drafted.  Since the
Government Procurement Law  took force, purchase activity falling under the provisions of the State
Council had to follow government procurement procedures, which had to be made transparent.
According to the existing regulations of Ministry of Finance, procurement from foreign suppliers had
to go under international public tendering.  Information relating to the bidding and winner had to be
made public via the media designated by the Ministry of Finance.  Up till now, no complaints from
foreign suppliers had been filed to the Ministry.
3.12 In addition, opinions had been solicited extensively concerning the  Administrative Measures
on Tendering and Bidding for Goods and Services under Government Procurement,  which was due to
be promulgated in December 2003.  Administrative Measures on Information Publication of
Government Procurement  and Measures on Complaints by the Suppliers  would be promulgated
together with the Administrative Measures on Tendering and Bidding for Goods and Services under
Government Procurement.  Administrative Measures on Software Procurement by the Government ,
Administrative Measures on Expert Recruitment for Government Procurement  and Examination
Measures on Institutions of Government Collective Procurement  were to be promulgated at the end of
2003.  Comments on these measures had also been solicited.  The Ministry of Finance had made theaccession to the GPA one of its research subjects in 2003.  The establishment and composition of the
panel of experts would be further decided based upon the results from the preliminary study, while the
timetable for the launch of negotiations would be set in the same manner.
6.  On Customs Valuation:3.13 With regard to the questions posed by Members concerning customs valuation, China had
provided responses in the context of TRM held by the Committee of Customs Valuation on
6 October 2003.  If Members had further questions to China’s responses during TRM, they could raiseG/L/664
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these questions under the appropriate agenda item in the meeting of the Committee with the mandate,
to which China would provide answers according to due procedures.
7.  On trading right s:
3.14 According to China’s commitments upon acces sion, China would progressively liberalize the
availability and scope of the right to trade so that within three years after accession all domestic
enterprises and foreign enterprises and individuals, including sole proprietorships of other WTO
Members, would have the right to export and import all goods (with the exception of products listed
in Annex 2A of the Protocol reserved for importa tion and exportation by state trading enterprises)
throughout the custom territory of China.  She stressed the point that the trading rights in this context
only referred to the right of importation and exportation, not including the right of distribution inChina.  The liberalization of distribution rights would be executed in accordance with the Schedule of
Specific Commitments on Services and governing regulations in China.
3.15 Given the above-mentioned commitments and relevant laws and regulations governing
foreign-invested enterprises, the enterprises in China with foreign investment had the right to import
equipment, technology, raw material and other goods for self-use, and export their products.  While
for the importation and domestic distribution of the goods other than the above listed, the enterprises
should apply for the expansion of its business scope of distribution in accordance with China’s
timetable regarding distribution in the Schedule of Specific Commitments on Services and other
relevant regulations in China.  Furthermore, the Chinese Government also allowed foreign-investedenterprises to engage in import and export, domestic purchase and distribution in China through the
establishment of specific trading company, holding company, logistics company, distribution
enterprises, procurement centre, etc.  At present, the Foreign Trade Law of China  was being revised.
The current draft of the  Foreign Trade Law  did not contain the requirements on minimum registered
capital, import or export performance and history experience.
Implementation of WTO obligations by other Members:3.16 With reference to the Article 18 of the Accession Protocol, "China can also raise issues
relating to any reservations under Section 17 or to any other specific commitments made by other
Members in this protocol, which have a relevant mandate."  Under Paragraph 241 of the Report of the
Working Party on the Accession of China which specifies the commitments undertaken by the textileclothing import restraining Members of the WTO, the United States was obliged to increase the
growth rates of quotas in force on the date of China’s accession to the WTO by the respective growth
factors provided for in the Agreement on Textiles and Clothing (ATC), including the 25 per cent
growth factor applicable to Stage 2 of the ATC implementation.  However, the United States had
failed to fully implement its obligations by not applying the full 25 per cent growth factor to China.Since the issue remained unresolved after several rounds of bilateral consultations between China and
the United States, China requested the Textile Monitoring Body to review this matter.  The TMB
recommended, after thorough and careful review conducted in January 2003, that the United States
apply the 25 per cent growth factor in full to China and make the necessary adjustments to its
methodology accordingly (see G/T/TMB/R/95).  So far the United States had not yet made suchadjustments in compliance with TMB’s recommendation.  Such a failure on the US side had adversely
affected the market access available to China and upset the balance of rights and obligations between
China and the United States under the ATC.  The textile and clothing sector continued to play a
significant role in China’s economic and social development in terms of both job creation and poverty
alleviation.  China hoped that the United States woul d immediately take actions to remedy the above-
mentioned problem and fully implement its commitments under the WTO.
3.17 The representative of the United States thanked the Chinese delegation for their responses.
The first question dealt with trading rights, the right to import and export goods in China.  This was aG/L/664
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key area in the China accession negotiations, along with the commitments on distribution services.
For foreign invested enterprises, China committed to a phased-in liberalisation of trading rights.  By
11 December 2002, joint ventures with minority foreign ownership should have had full trading rights
without conditions.  By 11 December 2003, joint ventures with foreign majority ownership should
have had those same rights.  The Working Party report in paragraph 83 required China to eliminateexport performance requirements, trade balancing requirements and prior experience requirements.  In
that same paragraph the only minimum registered capital requirements allowed were those for
Chinese enterprises, that is wholly Chinese-invest ed enterprises.  In the measures that China had
issued to date, dealing with trading rights for fore ign invested enterprises, it had imposed stringent
requirements and conditions on eligibility.  There were minimum registered capital requirements,
import level and export level requirements, and there were prior experience requirements.  These
measures had acted to greatly restrict the number of foreign enterprises or foreign invested enterprisesthat were eligible to gain trading rights.  He was in terested in China's response to or explanation as to
how it justified those measures in light of paragraph 83 of the Working Party report.
3.18 This phased-in liberalisation essentially concludes on 11 December 2004, when full trading
rights are to be available to all enterprises in China and all foreign enterprises and individuals.  Heunderstood from the Chinese delegation's response that China is now working on amendments to the
foreign trade law that would effect that commitment due 11 December 2004.  He welcomed the
delegate's statement that those amendments would not contain any of these conditions on minimum
registered capital, import and export levels, or prior experience.  The United States, however, sought
for China to reconsider its position and to immediately make changes to those existing measures sothat the joint ventures with minority or majority foreign ownership would have the trading rights to
which they should be entitled at this point.
3.19 The next area that the US had addressed in its questions was value-added tax policies.  It
asked one question specifically dealing with the value-added tax policy on integrated circuits.  In thepast, before the Market Access Committee, China had sought to justify its discriminatory value-added
tax policy in this area by citing GATT Article III, paragraph 8(b).  In its question the US cited two
examples of a GATT and WTO panel report that made clear that discriminatory VAT policies ran
afoul of Article III, that was whether they were effected through a simple reduction of the VAT that
had to be paid or, as China did, where it was effected through a rebate of the VAT that had already
been paid.  In either event those types of policies were considered discriminatory under Article 3 and
he was interested in China's views on those reports.  With regard to the questions on the VAT policieson copper scrap, the United States was just seeking clarifications as to how these policies worked:
first, he was trying to understand if the entity that paid the VAT in the first place was always the
entity that received the VAT rebate subsequently;  the second clarification was whether or not the
rebate was only available upon exportation.
3.20 The next area dealt with the export restrictions on fluorspar.  The Chinese delegate had
addressed the question on export quotas on fluorspar and China's explanation was that while export
quotas were generally prohibited, Article XX allowed an exception in this case, because China
maintained comparable restrictions on domestic consumption.  Although the Chinese delegate did not
cite the specific measures that China used to effect the domestic restrictions, in the past China hadreferred to compensatory taxes and other charges.  However these charges applied equally to domestic
sales and to exports, so those would not seem to qualify for the required comparable restrictions on
domestic consumption.  As Japan had pointed out in its questions on this issue, what had been seen
was domestic consumption increasing in recent years while exports had been decreasing.  The second
issue the US had raised under export restrictions on fluorspar, which he did not hear the Chinesedelegate address, dealt with export licence fees.  Article VIII of the GATT only allowed fees that were
limited to the costs of services rendered.  He believed the Chinese delegate had said that the price of
fluorspar, both domestically and on export, was determined by market forces.  However, the export
licence fees that China maintains on fluorspar were assessed on a per unit basis and it more thanG/L/664
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doubled the cost of fluorspar.  He was interested in what justification the Chinese delegation could
cite for maintaining those export licensing fees in the light of GATT Article VIII.
3.21 With regard to border trade, he appreciated the Chinese delegate's response but had not heard
whether or not she had provided a list of the products that still received preferential border tradetreatment.  He would like at least a citation of a measure where he could clarify that matter.
3.22 Lastly, on government procurement, he noted his delegation's interest in China beginning the
negotiations for GPA membership as soon as possible.
3.23 In response to China's comments regarding textiles, the US representative said that it was true
that the ATC required an increase in China's quota growth rates because China had joined the WTOduring the second stage of the ATC implementation period.  Where he disagreed with China was on
the methodology that should be used in determining that quota growth increase.  The US position was
that because China had joined the WTO only 21 days before the end of stage 2, the fundamental
principle that a Member did not begin acquiring the benefits of the WTO Agreements until it was
actually a Member of the WTO allowed the US to pro-rate the increase in the quota growth rate forthat period of stage 2 of the ATC when the US was calculating what those increases should be.  His
delegation had explained in further detail to the TMB the reasons behind the US use of this
methodology.  The document that was cited by the Chinese delegation with the findings of the TMB
explained in greater detail why it was that the US had adopted this methodology.
3.24 The representative of Japan referred to the document G/C/W/471 and requested that the
Chinese delegation supply additional information and data for the questions addressed in the above
communication from Japan, because the statement made by the Chinese delegation failed to respond
to all questions.  In addition, the representative of Japan noted that the Chinese delegation had
mentioned that for fluorspar domestic consumption actually decreased along with exports.  Thiscontradicted his delegation's understanding of trends in domestic consumption.  He believed that there
must be some discrepancy between the data on which he had based his comments and those on which
the Chinese delegation had based their statement.  The representative of Japan stated that he would
appreciate it if China could further explain or furnish more data on this question.  On government
procurement, he expressed our appreciation of the explanation given, and looked forward to getting
more updated information whenever new developments occurred.
3.25 The representative of the European Communities concentrated on three concerns:  first, the
trading rights issue (right to import and export for foreign invested companies):  the Chinese
statement on this issue at the Import Licensing Co mmittee did not clarify whether the shortcomings in
the current Chinese legislation highlighted by the EC in both the Import Licensing and the Market
Access Committees would be corrected and whether, in line with China’s commitments, all majority-owned foreign joint-ventures would be able to obtain trading rights from 11 December 2003, without
any condition and for all goods related to their activity.  This notably supposed the abolition of the
distinction currently made by the Chinese side but  not foreseen under China’s Protocol of accession,
between so-called "trading JVs" and "manufacturing" JVs, the elimination of conditions on prior
experience and capital requirement and the unclear requirement for existing JVs to request in somecases a "change of [their] scope of business".
3.26 Second, the establishment of a dual distribution network for domestically produced and
imported automobiles:  while the question from the EC on this issue was unfortunately left
unanswered by the Chinese side at the Market Access Committee of 20 October 2003, the Chineseside officially confirmed its intention to set up separate distribution network a few days later in a
bilateral meeting.  The EC was told that the objec tive of China was to establish such system in the
coming months.  As was done then and on a number of occasions in the past (notably during last year
TRM in this Council), the EC would like to strongly  reiterate its deep concerns with regards to thisG/L/664
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planned measure and to its WTO compatibility.  The EC would be grateful if China could explain
whether it intended to reconsider this measure and, if not, what was the state of play of the legislative
process for its adoption and when China intended to notify it for comments.  In this respect, given the
potentially very disruptive impact such a measure would have on the activity of foreign automotive
firms in China, the EC would like to urge China to make available the text of the planned measure assoon as possible.
3.27 Finally, as a follow-up to the question asked last year, the EC raised the question of China’s
accession to the Government Procurement Agreement (GPA).  In the Working Party for WTO
accession China had stated that it would initiate negotiations for membership in the GPA as soon as
possible.  Now that two years had elapsed since China’s accession to the WTO, the EC would be
grateful if China could indicate when it intended to start negotiation in order to join the GPA.  The ECwould also like to stress that, until its accession to the GPA, China should, in line with its
commitments ensure that all government entities  conduct their procurement in a transparent manner
and that all foreign suppliers be provided with equal opportunity to participate in that procurement
pursuant to the MFN principle.
3.28 The representative of Canada commended China for its efforts during this second year of
membership in the WTO.  Canada acknowledged the sustained commitment that China had
demonstrated to the ongoing process of evolution and reform of its international trade regime.
Continued progress was resulting in increased trade between China and other WTO Members
including Canada, as well as in economic growth within China.  Canada recognised progress in areasof particular interest, notably with regard to clarification of frontier/border trade issues and towards
implementation of its commitments under the Information Technology Agreement.  Products on the
ITA list were an important and growing part of our bilateral trade and would play a significant part in
the development of China's economy.
3.29 Another noteworthy area was on some SPS issues where ongoing cooperation between
Canadian and Chinese authorities was bringing satisfactory solutions that would benefit Canada's
exporters of food products.  While Canada acknowledged progress made to date, there continued to be
areas of concern.  For example, Canada shared the views expressed by some Members regarding a
perceived lack of transparency in China's approach to TRQ and quota allocation for certain products,
particularly agricultural commodities.  Canada was a significant producer of canola and was taking
advantage of the new export opportunities for this commodity.  However, China's approach toregulating genetically-modified organisms (GMOs) was evolving and Canada was eager to ensure that
its growing trade in canola was not negatively affected.  Canada continued to monitor closely China's
compliance with its WTO obligations in these, and other areas.  Canada was prepared to work
constructively with China to ensure that commitments China had given to all WTO Members were
sustained and achieved.
3.30 The representative of China thanked the speakers for their interventions and, concerning the
questions and comments made, invited her colleagues to provide further responses.  Regarding trading
rights, as pointed out by the China HOD in the context of China's protocol of accession, trading rights
only referred to import and export, not distribution.  In this regard, foreign invested enterprises withmajority or minority ownership should follow the relevant provisions of the regulations with regard to
foreign invested enterprises.  These enterprises could import goods, services and technologies for their
own use, and if those enterprises imported goods and services to be distributed within Chinese
territory they needed firstly to file the applicat ion for changing their business scope and after doing
that they could undertake distribution business in China.  With regard to the capital requirements oftrading companies set up by foreign investment, one was referring to foreign trade companies only.
Regarding the question raised by the US about ho lding companies, their functions were much more
than trading, and China imposed capital requirements on those companies.  With regard to logistics
companies set up by foreign investment, these co mpanies were actually involved in distribution,G/L/664
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purchasing and a series of other activities.  So with this expanded business scope China had to impose
capital requirements for these companies.  China was now revising its foreign trade law.  According
to the draft of the foreign trade law China would further specify the trading rights and their
availability to foreign invested companies.
3.31 Regarding export restrictions which directly concerned fluorspar, in order to protect those
non-generative resources China was now imposing a quota restriction system on the export of
fluorspar.  This was in line with the general exceptions as enshrined in Article XX of the GATT 1994.
The US had raised a concern that China might have collected an export licence fee which ran at
80-150 per cent of the production cost of fluorspar.  She pointed out that with regard to the export
licence, only 20 RMB was collected for the cost of the licence itself.  No other fees were charged.
Secondly, fluorspar was a scarce resource with great market demand.  Production was falling in recentyears in China, where the costs of exploitation and transportation were constantly rising, which
resulted in a surge of demand and shortage in supply.  It was this gap between the supply and the
demand which was the cause of the rise in price and was not the result of quota restrictions imposed
by the Chinese Government.  With regard to the question raised by Japan on the increase of domestic
consumption of fluorspar, she considered that in  recent years the production of fluorspar had been
constantly decreasing.  Exports, together with domestic consumption, had also been decreasing
significantly.
3.32 With regard to border trade, he considered the border trade policy of China was in line with
the MFN principle of GATT 1994.  The list of preferential treatment for border trade was publishedby the Ministry of Finance with approval by the State Council and the executive agency was the
general customs administration in China.  The list was published in several batches and up until now
there had been no complete and uniform document containing all products subject to preferential
treatment for border trade.
3.33 With regard to the automobile distribution network in China, a new automobile development
policy was in the process of being drafted.  During the drafting process China had extensively
solicited the opinions from various parties, including US and EU manufacturers.  The final solution of
this problem would have to wait until the final text of this new policy was ready and published.  With
regard to the questions raised by some Members on the VAT regime, he began with an explanation of
the VAT rebate system in China for integrated circuits.  The VAT tax, as reflected in the prices of
integrated circuits, was the same for all products a nd was not treated differently with regard to the
ownership of these manufactures.  With regard to the cases raised by the US on the panel rulings on
some related cases, he said the following:  with rega rd to the wine tax cases raised by the US, the tax
policy actually covered a two-layer tax regime for wine distribution.  According to the law the lower
rate applied to wines produced below a certain production scale, and imports of wines were subject to
a higher rate in general.  The Canadian Government  claimed that this violated the national treatment
rule.  Because these measures were different from state to state in the US, this was also challenged by
the Canadian Government.  The US was held to lose in this case.  He thought there are essential
differences between the US tax policy on wines and China's VAT rebate policy on integrated circuits.
If lower tax rates applied to domestic products they would benefit from a relatively low price, and a
higher tax rate on imported goods would pose a kind of discrimination.  This type of difference in taxrates for domestic and imported goods was inconsistent with the national treatment principle.  A
policy concerning this case was not comparable to the VAT rebate policy on integrated circuits in
China.
3.34 With regard to the question concerning the Indonesian automobile case, the interpretation of
the WTO DSB on the subsidies paid to the producers was that if the subsidies were derived from
indirect taxes, first of all they should be imposed on a non-discriminatory basis, and at the same time
the subsidies must be paid to producers directly, which was stated in Article III.8(b) of the GATT.
This should not be a financial benefit indirectly accruable to producers, such as those paid toG/L/664
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consumers of the products manufactured by domestic producers.  Therefore his delegation was of the
view that the current VAT drawback system for inte grated circuits was in full conformity with the
above interpretations and with Article III.8(b) of GATT 1994.
3.35 With regard to the VAT regime on copper scrap, he stressed the point that after payment of
duties, enterprises could apply for a drawback of VAT on presentation of duty paid proofs.  This
policy only applied to exporters of finished products and semi-finished products.  This tax rebate
system was equally applied to all enterprises reaching a certain production level regardless of the
ownership of the enterprise.
3.36 The representative of Japan said that concerning fluorspar his delegation requested China at a
later stage to submit to Japan the sources of the data for the domestic consumption of fluorspar so that
the statistics upon which the Chinese information was based could be verified.
3.37 The representative of the United States said on the fluorspar issue, the US would be interested
in understanding more about the import licence fees.  US companies were paying fees that doubled
the cost of fluorspar, but the Chinese delegation ha d said that the fee was only 20 RMB.  He did not
understand this discrepancy at this point.  These fees  had been in place for several years so he would
appreciate a clarification at some point on that issue.  With regard to trading rights, he was not
addressing specifically logistics companies and holding companies which carried out a range of
duties.  China's commitments were to allow foreign invested enterprises to have full trading rights
without conditions, without capital requirements, without import and export level requirements, andwithout prior experience requirements.  On the VA T issue with regard to integrated circuits he
disagreed on what the WTO precedent was.  With regard to border trade, he understood that the list of
products had been issued in several batches and at some point he would be interested in finding out
what those various measures were.
3.38 The representative of China thought that the responses contained in her statement and
information exchanged in the discussion should be sufficient to address the major concerns of
Members.  Also, multilateral and bilateral channels which were supplementary to each other could be
utilised to accommodate the concerns of Members.  The implementation of China's commitments
made in the WTO accession was an integral part of China's opening up and economic reform policy.
China had been faithfully fulfilling its commitments towards other WTO Members on a friendly and
mutually beneficial basis.  China as a developing country was facing enormous difficulties inimplementing its commitments.  It was therefore her sincere hope that WTO Members would adopt a
long-term approach and a pragmatic attitude towards China's implementation process.
3.39 The Chairman thanked the delegation of China for the answers that it had provided and also
those delegations that had raised questions and made comments.  Regarding the form of the CTG
report, he suggested that the Council proceed in the manner it did last year.  This would mean that a
brief factual report would be prepared with references to the relevant documents and attached to it the
portion of the minutes of this meeting which related to the Transitional Review.  The CTG report,
together with the reports of the subsidiary bodies, would then be transmitted to the General Council.
3.40 It was so agreed.
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