WORLD TRADE  
ORGANIZATION  G/C/W/587 
5 November 2007 
 
 (07-4795) 
Council for Trade in Goods Original:   English 
  
 
TRANSITIONAL REVIEW MECHANISM PURSUANT TO PARAGRAPH 18  
OF THE PROTOCOL ON THE ACCESSION OF THE  
PEOPLE'S REPUBLIC OF CHINA ("CHINA")  
 
Questions From the UNITED STATES to CHINA
 
 
  The following communication, dated 2 November 2007, is being circulated at the request of the delegation of the United States. 
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 The United States wishes to pose the following  questions to China in  connection with the 
23 November 2007 meeting of the Council for Trade in Goods for the purposes of the transitional review mandated by China’s Protocol of Accession.  Several of these questions relate to matters that 
were raised by the United States and other Member s during the transitional reviews held before the 
committees that report to the Council for Trade in Goods, but China did not respond to them.  The 
United States notes that it may submit additiona l questions, depending on the outcomes of other 
upcoming transitional reviews before committees th at report to the Council for Trade in Goods. 
 
1. Export Restrictions 
1.1 The United States remains concerned a bout China’s export quotas (and related export 
licensing requirements) on numerous raw materials.   For example, China maintains export quotas on 
(i) antimony, (ii) coke, (iii) fluorspar, (iv) indi um, (v) magnesium carbonate, (vi) molybdenum, (vii) 
rare earths, (viii) silicon, (ix) talc, (x) tin, (xi) tungst en and (xii) zinc, despite the fact that China is the 
world's leading producer of each of these raw mate rials (except for molybdenum, for which China is 
the world’s second leading producer), and despite the fact that China maintains no comparable 
restrictions on domestic sales of these raw materials.  China’s export quotas on these raw materials 
significantly disadvantage U.S. and other foreign pro ducers, which use these raw materials to make a 
wide range of downstream products, such as steel , chemicals, ceramics,  semiconductor chips, 
refrigerants, medical imagery, aircraft, refined petroleum products, fiber optic cables and catalytic 
converters, among numerous others.  The export quotas create disadvantages for foreign producers by 
artificially increasing China’s export prices for these raw materials, which also drives up the world 
prices.  At the same time, the export quotas artificially lower China’s domestic prices for these raw 
materials due to domestic oversupply, enabling China’s domestic downstream producers to produce 
lower-priced products from these raw materials and thereby creating significant advantages for China’s domestic downstream producers when comp eting against foreign downstream producers both 
in the China market and in export markets.   
 
(a) For each of the 12 raw materials identifie d above, please separately explain how China 
justifies its use of the export quotas under Artic le XI of the General Agreement on Tariffs and 
Trade 1994 and identify any measures rele vant to China’s justification. 
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  (b) Please separately describe Chin a’s plans for eliminating the export quotas on each of the 
12 raw materials identified above.  If China does not have any such plans, please explain why 
it does not. 
 (c)  The United States understands that China has not notified to the WTO any of the export 
quotas on the 12 raw materials identified above, despite China’s commit ment in paragraph 
8.1(b) of Part I of China’s Protocol of Accession to notify all export quotas “listed separately by HS tariff line and with the quantities associated  with the restriction... and the justification 
for maintaining the restriction or its scheduled date of termination.”  Is the United States’ 
understanding correct?  If so, please indicate when China will submit the required 
notifications. 
 
1.2 For many of the raw materials on which Ch ina maintains export quotas, China also imposes 
export duties.  For example, China imposes expor t duties of 15 percent on coke, 15 percent on 
fluorspar, 15 percent on indium, 5 percent on magnesium carbonate, 15 percent on molybdenum, 
15 percent on rare earths and 15 percent on silicon.  Ho wever, in Section 11.3 of Part I of its Protocol 
of Accession, China committed not to impose export duties on any goods not appearing on the list of goods subject to export duty in Annex 6 of its Protocol of Accession.  Coke, fluorspar, indium, 
magnesium carbonate, molybdenum, rare  earths and silicon do not appear  on the Annex 6 list.  Please 
explain how China justifies its imposition of e xport duties on these raw materials in light of the 
commitment that China made in Section 11.3 of Part I of its Protocol of Accession. 
 
2. VAT on Agricultural Goods 
2.1 The United States understands that many agricultural products are exempted from China's 
13 per cent value-added tax (VAT) normally app licable to agricultural products when sold 
domestically.  For example, it appears that domes tic sales of agricultural commodities produced and 
sold by farmers in China, such as wheat, cotton and corn, are exempted from the VAT.  In addition, it 
appears that domestic sales of agricultural inputs produced in Ch ina, such as seed, pesticide, 
herbicide, agricultural machinery and certain fertili zers, are exempted from th e VAT.  However, when 
imports of these same products are sold in China, it appears that they are assessed the VAT at the rate 
of 13 per cent. 
(a) In connection with this year’s transitional review before the Committee on Agriculture, China 
confirmed that domestic sales of agricultural commodities produced and sold by farmers in 
China, such as wheat, cotton and corn, are ex empted from the VAT.  However, China did not 
address the United States’ further questions about the discriminatory treatment of imports of these same products when sold in China.  Chin a instead focused on re bates of the VAT when 
the domestically produced agricultural commoditi es were later exported.  The United States 
notes that it is not asking about rebates of the VAT upon export, but rather only about the 
VAT treatment of two types of sales taking place in China, i.e., domestic sales of agricultural commodities produced in China versus domestic sales of imports of these same products.  
With that distinction in mind, can China confirm that imports of agricultural commodities such as wheat, cotton an d corn when sold in China are assessed the VAT at 13 per cent?  If 
so, can China identify the applicab le measures?  Can China also explain how it justifies these 
VAT exemptions under its WTO obligations, incl uding Article III of the General Agreement 
on Tariffs and Trade 1994 (GATT 1994) and Artic le 3 of the Agreement on Subsidies and 
Countervailing Measures (SCM Agreement)? 
   (b) Can China confirm that domestic sales of agri cultural inputs produced in China, such as seed, 
pesticide, herbicide, agricultural machinery and certain fertilizers, are exempted from the 
VAT, while imports of these same products wh en sold in China are assessed the VAT at 
13 per cent?  If so, please identify the applicab le measures.  Please also explain how China  G/C/W/587 
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  justifies these VAT exemptions under its WTO obligations, including Article III of the GATT 
1994 and Article 3 of the SCM Agreement.  The United States notes, as above, that it is not asking about rebates of the VAT upon export, but rather only about the VAT treatment of two 
types of sales taking place in China, i.e., domestic sales of agricultural inputs produced in China versus domestic sales of imports of these same products. 
 3. Textiles 
3.1 The United States has identified a number of programs under which China appears to provide 
export-contingent subsidies to Chinese textile sector  companies.  For example, according to Xiang 
Zheng Fa (2007) No. 1, the Ningbo Xiangshan County Foreign Trade and Economic Cooperation 
Bureau offered a new subsidy, effective beginning 1 Ja nuary 2007.  A stated goal of this program is to 
“accelerate exports”, and it specifies various awar ds, which are contingent upon export.  Textile 
companies receive “additional awards” of RMB 0.02  for each US dollar above the previous year’s 
actual exports for “non-quota” textile sector goods exported to “quota areas” (e.g., the United States 
and the European Union).  In ad dition, certain textile sector comp anies that export to “quota areas” 
are eligible for an “award” of up to RMB 20,000 for a portion of the cost to purchase export quota 
rights.  (a) Please describe the specific benefits that are available to textile and apparel companies under 
this program.  Are these benefits contingent upon export performance? 
 
(b) Please describe what steps the central govern ment is taking to prevent and discourage 
provincial and sub-regional government s from establishing WTO-prohibited subsidy 
programs targeting the textile and apparel industry.  
3.2 Information available to the United States indicates that the Management Measures for the 
Xiamen City Key Exporting Enterprises Support Fund , issued by the Xiamen City Trade Development 
Bureau and the Xiamen City Financial Administra tion Bureau on 5 July 2006, provides grants to 
exporting enterprises where the level of benefits is determined by the enterprise’s level of exports.  
This measure stipulates that “Xiamen Exporting Backbone  Companies” are eligible for grants of up to 
RMB 600,000 depending on certain criteria, including:  (1) the level of exports, (2) export growth, 
(3) ranking among the city’s top exporters, (4) the enterprise’s export plan for 2006-2010, and 
(5) Xiamen export content.  Enterprises from 18 listed sectors, including the textiles and apparel 
sectors, are given preferential treatment under this measu re.  One of the stated goals of this measure is 
to encourage enterprises to expand exports of key products defined in the relevant 11th Five-Year 
Plans.   The measure also provides a one-time award of RMB 500,000 to enterprises with exported 
products of at least $100,000,000 per year and MO FCOM assessment as a “Famous Export Brand.”  
Enterprises that export at lower levels receive le sser awards.  Other provisions in this measure 
addressing “Xiamen Famous Export Brands” provide  grants of up to RMB 500,000 to eligible 
enterprises exporting over $3,000,000.  Finally, one ot her provision states that enterprises with “big 
export development potential” are eligib le for support of RMB 1,000,000.   
 (a) Please describe the specific benefits that are available to textile and apparel enterprises under 
this measure.  Are these benefits contingent upon export performance? 
 
(b) Please describe the relationship between centr al government policies and programs, such as 
those contained in relevant Five-Year Plans, and the export-contingent  benefits that sub-
national governments pr ovide to enterprises. 
 
(c)  What is the funding source for the bene fits available under the measure described above? 
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  (d) Please describe the relationship, if any, betw een the Xiamen City Key Exporting Enterprises 
Support Fund and the Textile Support F und the Chinese representative described in 
G/SCM/119 No. 14? 
 
4. Technology – Software and Integrated Circuits 
4.1 In 2000, the State Council issued the  Notice of the State Council on Issuing Relevant Policies 
on Encouraging the Development of Software and IC Industry  (Guo Fa (2000) No. 18), which sets out 
a plan to encourage and promote China’s software and integrated circuit (IC) industries. Information 
available to the United States indicates that Chin a has introduced a number of programs in order to 
implement the policies set forth in the  Notice of the State Council on Issuing Relevant Policies on 
Encouraging the Development of Software and IC Industry .   
 4.2 The United States understands that purs uant to the policies set forth in the  Notice of the State 
Council on Issuing Relevant Policies on Encouraging  the Development of Software and IC Industry , 
the Outline of Software Industry Revitalization Movement (2002-2005)  (Guo Fa 2002 No. 47) was 
issued on 24 July 2002.  It is also the United States’ understanding that the Outline of Software 
Industry Revitalization Movement  details goals for export growth targets through the implementation 
of policies, including the establishment of several software export bases.   The Outline of Software 
Industry Revitalization Movement  further seeks the establishment of a number of funds, including the 
Electronic Information Industry Development Fund,  the 863 Fund, the State Science and Technology 
Fund, the Industry Technology Research and Devel opment Fund, and the Scientific Medium and 
Large-Sized Creation Fund.  In June 2006, an official from China’s Ministry of Commerce 
(MOFCOM) stated that China would establish 15 software export bases pursuant to the 11
th Five-Year 
Program (2006-2010).  (See  “China to Establis h 15 Software Export Bases in 2006-2010,” Asia 
Pulse, 22 June 2006.)  On 1 December 2006, MOFC OM designated the cities of Guangzhou, Nanjing, 
Hangzhou, Chengdu and Jinan as “National Softwa re Export Bases.”  (See “Report on Chinese 
Subsidies for Period Ending December 8, 2006,” available at 
www.mofcom.gov.cn/aarticle/difang/yunnan/200611/ 20061103649443.html.) Th e MOFCOM official 
indicated that MOFCOM will provide more support to the  national software export bases in the form 
of interest rebates, R&D funding, personnel trai ning, export credit loans and credit insurance.   
(a) What specific incentives are offered to soft ware manufacturers/exporters under the Outline of 
Software Industry Revitalization Movement a nd the various funds and programs identified 
above?     
 (b) Are any of the offered incentiv es contingent upon export performance? 
 4.3 In a notice issued on 1 August 2007, and poste d on the website of the National Development 
and Reform Commission (“NDRC”), the NDRC, the Mi nistry of Information Industry, the General 
Customs Administration and the State Administration of Taxation released its list of 94 semiconductor manufacturers, chip packaging and testing enterpri ses and silicon material producers 
that have been designated as “state-encourag ed” integrated circuit enterprises.  (See 
www.ndrc.gov.cn/zcfbtz/2007tongzhi/t 20070814_153464.htm.)  It is the United States’ understanding 
that this designation was based on the certification ru les from state-encouraged IC enterprises issued 
in 2005.  According to the 1 August 2007 notice, the 2005 rules were issued to implement the  Notice 
of the State Council on Issuing Relevant Polic ies on Encouraging the Development of Software 
Industry and IC Industry  (Guo Fa (2000) No.18) policies to encourage the software and IC industries. 
 (a) What specific incentives are offe red to the “state-encouraged” inte grated circuit enterprises?   
 
(b) Are any of the offered incentiv es contingent upon export performance?  G/C/W/587 
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  5. Banking and Financial Sector  
5.1 In the Working Party Report accompanying China’s Protocol of Accession 
(WT/ACC/CHN/49, para. 172), China’s representative “pointed out that China’s objective was that 
state-owned enterprises, including banks, should be run on a commercial basis and be responsible for 
their own profits and losses”.  China’s representative also stated that “[t]he state-owned banks had 
been commercialized…”.  In connection with past transitional reviews before this Committee, the 
United States has sought information about the Chin ese government’s efforts to move the “Big Four” 
state-owned commercial banks (the Industrial and Commercial Bank of China, the China Construction 
Bank, the Bank of China and the Agricultural Bank of China) toward running on a more commercial 
basis.  The United States has commented that the Chinese government’s attempts to improve 
corporate governance, loan classification standa rds and prudential rules and regulations were 
well-intentioned and welcome, but it also appear ed that more fundamental reforms and stronger 
enforcement were still needed, particularly on the institutional side.  For example, the United States 
notes that Article 34 of the Commercial Bank Law states that commercial banks shall conduct their 
lending business in accordance with national and soci al-development needs and under the guidance of 
the industrial policies of the State.  Please explain how  Article 34 is consistent with the objective of 
the Big Four banks operating on a commercial basis.    5.2 The United States understands that eligibility fo r long-term loans for fixed-assets and project 
financing from the Industrial and Commercial Bank of China, the China Construction Bank and the 
Bank of China must be consistent with state industr ial policies.  Is that correct?  If so, please explain 
how these banks are able to issue lo ans in a market-oriented manner if they are required to take into 
account state industrial policies.   
6. State-Owned Enterprises 
6.1 China revised its Company Law, effective 1 January 2006.  Please describe the changes that 
were made with regard to permissible levels of  foreign investment, business registration requirements 
and shareholder protection with regard to state-ow ned enterprises (SOEs).  What measures has China 
issued, or does China plan to issue, to implement these changes?  Please explain. 
 6.2 What plans does China have to furthe r improve corporate governance and increase 
accountability in large SOEs? 
 
6.3 Does China plan to implement a formal priv atization program in the future where it sells 
majority ownership in large SOEs to private entit ies?  If so, when does it expect to begin this 
program?  
6.4 How will the new Bankruptcy Law affect SOEs ?  Will SOEs be allowed to go bankrupt if 
they are insolvent?  What criteria will be used to determine if a company can go bankrupt, and who 
will make the decision to allow bankruptcy of an SO E?  Please also describe the rights and obligations 
of creditor-banks with regard to SO Es that have declared bankruptcy. 
 6.5 The United States understands that SOEs in China have been exempt from paying any 
dividends to the state since at least 1994, even t hough a number of large SOEs in China are highly 
profitable, contributing to more than 6 percent of GDP in 2004 according to some estimates.   
 (a)  Does this exemption remain in place, or has it been modified?  Please explain.  
 
(b) Given the clear link established between the exemption of dividend payments and continued 
overinvestment by SOEs, as well as the docum ented link between dividend pay-outs and good 
corporate governance, what steps, if any, are be ing taken by China to change this policy?   G/C/W/587 
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  6.6 The United States is familiar with the Rules on Accounting Practices of Financial Asset 
Management Companies , issued by the Ministry of Finance (MOF) on 30 June 2000, and the Rules on 
the Disposition of Assets by Financial Asset Management Companies , issued by MOF on 
8 November 2000).  Please explain how it is determ ined which companies with non-performing loans 
(NPLs) are eligible for debt-to-equity conversions.  Are there different rules for SOEs and private 
companies? 
 
6.7 The United States understands that the government is using debt-for-equity swaps to keep certain SOEs out of bankruptcy and specifically cho se 580 SOEs and converted their debt claims into 
asset management company-held equity stakes.  Is this understanding correct?  If not, please explain.   
 
6.8 The United States also understands that the SOEs  that participated in a debt-for-equity swap 
will be required to repurchase their asset management company-held equity stakes within ten years.  
Please describe the terms and conditions under which th ese equity stakes will be repurchased.        
    7. Northeast Revitalization Program 
7.1 According to a World Bank report, northeast Ch ina has significant potential for growth but its 
growth has consistently been lower than that of Ch ina’s southeastern provinces.  This report notes that 
the northeast region would benefit from less government intervention and more emphasis on 
developing the private sector.  Instead, the SOE sect or, with government financ ial support, crowds out 
private sector development and hinders growth.  Moreover, a 21 August 2007 report in the China 
Daily notes that a “blueprint fo r the Northeast revitalization prog ram… was formally released at a 
press conference held by the State Council Information Office yesterday.”  (See “Northeast’s Revival Tied to Private Investment,” China Daily, 21 August 2007 .)  In an effort to attract private investment, 
the blueprint notes that private capital will be gran ted “the same tax exemptions, land use and loan 
policies as the State firms being restructured.”   
 
(a) Please explain the extent to which government  plans for the revitalization of northeast China 
include maintaining ownership of SOEs in the region.  What is the policy justification for 
maintaining ownership of SOEs in the region? 
 (b) What specific types of incentives, e.g., tax exemptions, land use and loan policies, are 
provided to SOEs and private firms investing in  the northeast, as provided for in the blueprint 
for the revitalization plan? 
 
8. Disclosures 
8.1 During past transitional reviews before th e Anti-Dumping Committee, the United States has 
reported on complaints from interested parties in Chinese anti-dumping proceedings about a lack of 
transparency with respect to the factual info rmation before China’s Ministry of Commerce 
(MOFCOM) and a lack of adequate explanation by MO FCOM of its interpretation of those facts.  For 
example, respondents have complained that the di sclosures of anti-dumping margin calculations in 
preliminary and final determinati ons have not contained sufficient information needed to replicate 
certain calculations and identify the specific adjustme nts that were made.  In connection with this 
year’s transitional review before the Anti-Dump ing Committee, the United States asked China to 
describe the specific steps that MOFCOM had taken since last year's transitional review meeting 
before the Anti-Dumping Committee to ensure that disclosures provide greater transparency.  In 
response, China asserted that its disclosures were consistent with the Anti-Dumping Agreement.  
Does China’s response mean that MOFCOM has not  taken any specific steps since last year's 
transitional review meeting before the Anti-Dumpi ng Committee to ensure that its disclosures provide 
greater transparency?  If that is the case, does MO FCOM have any future plans for improvements?  
Please explain.  G/C/W/587 
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  9. Transparency 
9.1  In China’s Protocol of Accession a nd accompanying Working Party Report, Members 
recognized the overriding importance of transparen cy through a host of provisions.  Since China’s 
accession, China has made notable improvements in the transparency of its trade regime, particularly 
through the many notifications that it has made  to the WTO’s councils and committees as well as 
through its use of numerous official journals, othe r publications and the Internet to publicize new or 
modified trade-related laws, regulations and other m easures.  Nevertheless, there remains much to be 
done to further improve transparency in China, as China itself has acknowledged.  Transparency is a 
critically important area, both from a governmental perspective and from a business perspective.   
9.2  In Section 2(C) of Part I of its Protocol of Accession, China specifically committed to 
establish or designate an official journal dedicated  to the publication of all trade-related measures, 
including, inter alia , “all laws, regulations and other measures pertaining to or affecting trade in 
goods...”  The term “laws, regula tions and other measures” is defi ned broadly as “laws, regulations 
and other measures of the central government as well  as local regulations, rules and other measures 
issued or applied at the sub-national level.”   
9.3  During past transitional reviews, China h as stated that its official journal was the China 
Foreign Trade and Economic Cooperation Gazette , now published by the Ministry of Commerce 
(“MOFCOM”) and known as the MOFCOM Gazette.  Until March 2006, however, only trade-related 
measures issued by MOFCOM, either on its own or jointly with other ministries or agencies, were 
published in the MOFCOM Gazette; trade-related m easures issued by other ministries and agencies 
were not published in the MOFCOM Gazette.  In March 2006, China’s State Council issued a notice 
directing all central, provincial and local government  entities to begin sending copies of all of their 
trade-related measures to MOFCOM for i mmediate publication in its Gazette.   
(a)  Please provide an update on the progress be ing made by central, provincial and local 
government entities in fulfilling the State Council’ s directive to send measures pertaining to 
or affecting trade in goods to MOFCOM for pub lication in the MOFCOM Gazette.  As part of 
that update, please identify the government entities that regularly send their goods measures 
to MOFCOM for publication in the MOFCOM G azette.  Please also describe the types of 
goods measures (e.g., laws, regulations, rules, measures, notices, decisions, etc.) regularly being sent to MOFCOM for publication in the MOFCOM Gazette.   
 (b)  With regard to measures pertaining to or affecting trade in goods, please describe any 
progress that China has made during the past year in implementing the commitment that it 
made in Section 2(C) of Part I of its Protoc ol of Accession to provide a reasonable period for 
public comment on new or modified measures before implementing them, except in certain specified instances.   
 
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