WORLD TRADE  
ORGANIZATION  G/TRIMS/W/50 
12 October 2006 
 (06-4934) 
Committee on Trade-Related Investment Measures Original:   English 
  
 
COMMUNICATION FROM THE EUROPEAN COMMUNITIES 
  
 The following communication, dated 11 October 2006, is being circulated at the request of 
the Delegation of the European Communities. 
 
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TRANSITIONAL REVIEW MECHANISM PURSUANT TO PARAGRAPH 18  
OF THE PROTOCOL ON THE ACCESSION OF THE PEOPLE'S  
REPUBLIC OF CHINA ("CHINA") 
 
 1. The EC is transmitting the comments and questions  set below in advance of the meeting of 
the Committee on Trade-Related Investment Measur es (TRIMs) on 25 October, in order for the 
Chinese authorities to reply and to complete any information that ma y be incomplete.  The questions 
build upon the previous meetings of the Comm ittee on TRIMs on 14 October 2002, 3 October 2003, 
25 October 2004 and 10 October 2005.  
2. Once the information to be provided by Ch ina in accordance with paragraph 8 and 
paragraph IV.3(a) of Annex 1A of its accession pr otocol has been received, the EC may submit 
additional questions, including questions pertaining to issues that have been raised in previous EC 
communications.   
3. At this point in time, the EC's comments and questions are focused on the following priority 
items:   
• Clauses contained in contractual arrangemen ts that are incompatible with China's 
obligations under its Accession Protocol and the Regulations for the Implementation 
of the Law of the People's Republic of Chin a on Sino-Foreign Equity Joint Venture.   
• New Automobile Policy.   
• Steel Industry Development Industry.   
• Petrochemical, chemical, energy and environment sectors.   
 
4. In connection with its accession to the WTO, Ch ina has committed itself to comply fully with 
the TRIMs Agreement by abolishing legislati on and other measures c onstituting illegal TRIMs upon 
joining the WTO and through "providing relevant in formation, including information contained in 
Annex 1A, to each subsidiary body in advance of the review".  More specifically, Paragraph 7.3 of the 
Accession Protocol for China reads:   
"China shall, upon accession, comply with the TRIMs Agreement, without recourse to 
the provisions of Article 5 of the TRIMs Agreement.  China shall eliminate and cease 
to enforce trade and foreign exchange balan cing requirements, local content and 
export or performance requirements made effective through laws, regulations or G/TRIMS/W/50 
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  other measures.  Moreover, China will not enforce provisions of contracts imposing 
such requirements.  Without prejudice to th e relevant provisions of this Protocol, 
China shall ensure that the distribution of  import licences, quotas, tariff-rate quotas, 
or any other means of approval for im portation, the right of importation or 
investment by national and sub-national aut horities, is not conditioned on:  whether 
competing domestic suppliers of such products  exist;  or performance requirements of 
any kind, such as local content, offsets, the transfer of technology, export performance or the conduct of research and development in China."   
TRIMs incompatible clauses in  contractual arrangements
 
 
5. During the last TRM, China stated that "wit hout the consensus reached through consultation 
between the consenting parties on any terms of an existing contract, the contract itself or some of its articles could not be altered or invalidated by  a Chinese court or any other administrative body 
through a mandatory order."
1  In this context, the EC would be grateful if China could clarify how it is 
implementing its commitment to "not enforce pr ovisions of contracts imposing the requirements" 
listed in  paragraph 7.3 of the protocol of accession?   
6. On earlier occasions China has also  informed Members about the fact that the contracts and 
articles of association of a foreign invested ente rprise become effective only after they have been 
approved by the competent authority. In this c ontext how does China ensure that the "approval for 
investment by national and sub-national authorities" is not conditioned on performance requirements 
of any kind?  In particular can China confirm th at national and sub-national authorities are not bound 
by performance requirements stipulated in the industrial policies issued by the NDRC?   
Regulations for the Implementation of the Law of the People's Republic of China on Sino-Foreign 
Equity Joint Venture  
 
7. Article 41 of those regulations stipulates that:  "The technology to be introduced to the joint 
venture shall be appropriate and advanced and enab le the venture's products to display conspicuous 
social economic results domestically or to be competitive on the international market."  
8. Could China explain how this requirement relat es to the Accession Protocol requirements that 
"China shall eliminate and cease to enforce trade an d foreign exchange balancing requirements, local 
content and export or performance requirements made  effective through laws , regulations or other 
measures. (…) China shall ensure that any (…) mean s of approval for (…) investment by national and 
sub-national authorities, is not conditioned on (… ) performance requirements of any kind"?   
9. The EC further notes that Article 43 of the said Regulations requires that:  "The technology 
transfer agreements concluded by a joint venture shall be submitted to the examination and approval 
authorities for approval."  The remainder of Ar ticle 43 imposes several requirements on those 
technology transfer agreements.   
10. Could China explain how these requirements compare to similar transactions between domestic 
parties and whether it considers that the said require ments result in equally favourable treatment for 
imported goods as compared to like domestic products?   
                                                      
1 G/TRIMS/M/22, para. 22.  G/TRIMS/W/50 
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  New Automobile Policy  
 
11. The EC refers to its concerns regarding the New Automobile Policy (hereafter "NAP") 
already voiced in last year's transitional review, especially with a view to the wide scope of state intervention and the uncertainty about the implem enting regulations that will supplement the new 
policy.  Given the experience of how the NAP was developed, the EC wishes to stress the 
transparency obligations under WTO rules with rega rd to the outstanding implementation regulations 
of the NAP.  Publishing drafts of these implemen ting regulations well in advance would allow other 
WTO Members to comment on them.   
The EC would like to turn China's specia l attention to the following issues:   
 
(i) Administrative measures for the import of automobile components fulfilling the 
 characteristics of a whole vehicle  
 12. The EU believes that China is in breach of its obligations as a WTO member and its 
undertakings on joining the WTO.  This issue has now been referred to the WTO Dispute Settlement 
Body and does not need to be reviewed in the cont ext of the transitional review mechanism.  The EU 
remains open to finding a mutually agreed, WTO-compliant solution.   
(ii) Joint venture ownership limitation 
 
 13. The NAP imposes restrictions on foreign investors who have contributed substantially to the 
rapid development of China's automotive sector.  Foreign joint venture partners are not allowed 
majority ownership in automobile production.  Mo reover, participation of foreign joint venture 
partners in automobile manufacturing projects is limited to two for the production of passenger cars 
and two for commercial vehicles ("2+2").  Due to th e global nature of the automotive industry and the 
brand strategies of local companies locked in 50/ 50 per cent ventures with foreign vehicle makers 
such restrictions are counterproductive to th e NAP's objective of promoting international 
competitiveness.   
14. During last year's transitional review before th is Committee, China stated that shareholding 
requirement was based upon the fact that China's automotive industry was at a preliminary stage of development and it did not contradict any WTO prin ciple or China's accession commitments.  The EC 
is fully aware of China's automo tive industry evolution, which has significantly developed over the 
last years and has bright prospects – 8-9 per cent e xpected growth level over the next five years.  
Clear signs of overcapacity in the industry support the premise that the sector has reached maturity.  
Consequently, stringent regulations with the view of  protecting a preliminary stage of development of 
the industry are no longer relevant.   
15. With regard to the "2+2" requirements on setting up JVs, China noted that this requirement 
was designed to prevent investors from over-stretch ing their investment, opening multiple production 
sites and competing viciously with one another.  From an economic point of view, this reasoning does 
not stand since investment decisions should be made according to business risk, and therefore, without arbitrary investment restrictions.  A successf ul consolidation of the industry is not fostered, 
but, on the contrary, clearly hampered by the limitations on foreign shareholding in JVs and the "2+2" regulation.   
16. China has confirmed the existence of an ex emption to the "2+2" requirement for those 
"investors which, in association with their Chinese jo int-equity partners, acquire or merge with other 
auto production companies in China".
2  The EC welcomes this exemption and China's argument that 
                                                      
2 G/TRIMS/M/22, para. 27. G/TRIMS/W/50 
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  this is a step forward and a support attitude toward further consolidation of its automobile industry.  
However, the EC considers this exemption does not suffice since it does not apply to all foreign 
investors.  Therefore, the EC en courages China to completely elimin ate this requirement in all cases 
with a view to truly pursuing the consolidation of the automobile industry.  
17. In this context the EC urges China 
• to allow foreign majority investment;  and 
• to eliminate the "2+2" regulation.  
 (iii) Amendments to the Automotive Industry Development Policy
 
 18. According to recent press releases, China envisages to modify the "Automotive Industry 
Development Policy" reinforcing the conditions for EU  manufacturers to invest in China.  According 
to these draft provisions, new investors would only be authorized to produce Chinese brand vehicles.  
Amendments to the "Automotive Industry Developm ent Policy" may also concern the production of 
parts which could also be subject to Joint ventur e ownership limitation.  This may have a very 
negative impact concerning the investment of EU car parts manufacturers in china.  Finally, the 
Chinese government may also decide to grant fina ncial support to Chinese manufacturers in order to 
promote export of vehicles.   
 19. In this regard, the EC would be grateful if China could:     - Provide information on the latest development on the "Automotive Industry 
Development Policy" regarding these three points in order to dispel legitimate 
concerns raised by the proposed policy.  
 
Steel Industry Development Policy
 
 
20. In connection with last year's transitional review before this Committee, the EC raised 
questions regarding China's industrial policy for steel.  In particular, the EC sought clarifications on 
Articles 23, 17 and 18 of the new "Steel Industry Development Policy".  However, China did not 
respond to the related questions a nd invited Members to refer to China's statement made under the 
TRM at the Committee on Import Licensing Procedures of 16 September 2005.  Yet, this statement did not relate to the abovementi oned questions but only to new me asures adopted by China on its 
import licensing regime.  Therefore, the EC seeks again clarifications on the following issues:  
 21. Article 23 of the NDRC Steel Industry Development Policy states that "In principle, when investing in the Chinese steel industry, foreign investors will not hold a controlling stake".  In particular, it is established that "A minimum owned capital of at least 40 per cent of the total capital 
needed".  This limitation is counterproductive and will hinder the development and the investments. 
The EC requests that this artificial limit be lifted and that investments can take place on the basis of 
sound and objective factors.   22. In addition, Article 23 sets out that "enterprises must demonstrate they have the necessary funding, modern technology and management capacity , as well as demonstrate they have necessary, 
stable, and reliable healthy sales network, sufficien t water and ore resources, coal, and electric power 
resources".  As for foreign non-steel investors, the same Article states that "overseas non steel 
enterprises wishing to invest in the steel sector  must demonstrate a high level of public trust". 
Article 23 appears thus to discriminate between domestic and foreign companies in that higher production volume thresholds are being set for foreign investors as compared to domestic common  G/TRIMS/W/50 
 Page 5 
 
 
  steel enterprises.  In addition to that, additional t ests are set for foreign non-steel investors, which do 
not appear to apply to domestic non-steel investors.   
23. Paragraph 7.3 of China's  Protocol of Accession stipulates that " China  shall ensure that (…)  
approval for importation, the right of importa tion or investment by national and sub-national 
authorities, is not conditioned on:  (… )  performance requirements of any  kind, such as local content, 
offsets, the transfer of technology, export perform ance or the conduct of research and development in 
China."   By contrast, Article 23 of the new Steel Policy appears to make foreign investment 
conditional upon ownership of independent technology/inte llectual property rights.  
24. In that context, the EC would be gr ateful if China could explain in detail: 
 - By what criteria and on what basis does China intend to establish whether a company 
 has the necessary funding, modern technology and management capacity, a stable, 
 and reliable healthy sales network, su fficient water and ore resources, coal, and 
 electric power resources ? 
 
- By what criteria and on what basis does China intend to establish whether a non steel 
  company has a high level of public trust ? 
- Would China please clarify whether the requirements of Article 23 will also apply to
 Chinese companies which do not engage in inter-regional investment nor in  establishing combined steel enterprises? 
- Would China please explain why different standards are being set for domestic and 
  foreign companies, like those regarding: 
 (a) minimum production thresholds, or 
 (b) additional tests for non-steel companies. - Would China please explain how her decision to make foreign investment in the steel 
 sector conditional upon ownership of inde pendent technology can be justified under 
 her accession protocol and the report of the working party? 
25. The EC notes that Article 17 envisages a ba n on outdated techniques and equipments.  For 
this purpose, a list of outdated production capacity , techniques and products has been or will be 
established.  In addition, Article 18 of the NDRC Steel Industry Development Policy reads:  "Policies 
for imported technologies and equipments:  u se of national equipment and technologies is 
encouraged, and import is to be reduced.  The e quipments and technologies that must be imported 
because they can not be made in China or can no t meet the requirements must be advanced and 
practical.  The manufacturing of the equipments wh ich are largely needed in the future will be 
localized.  Use of outdated and second hand steel pro duction equipments eliminated either at home or 
overseas is prohibited."   26. In this regard, the EC would be grat eful if China could explain in detail:  
 
 - on what basis the list of outdated production capacity, techniques and products 
(Article 17 of the Steel Industry Developmen t Policy) has been or will be established;  
  - the definition of "outdated equipments";    G/TRIMS/W/50 
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   - the measures it intends to take to encourage use of national equipment and 
technologies and to localize the manufacturing of the equipments which are largely needed in the future; 
  - whether China intends to impose a cond ition on the importation of equipments and 
technologies, namely that they cannot be made in China or cannot meet the 
requirements;  
  - the definition of "advanced and practical  equipments" in this  context and whether 
  China intends to impose such a cond ition on the importation of such products; 
 
 -  the implementing measures as well as their timing. 
 
Petrochemical, chemical, energy and environment sectors 
 
 
(i) JV ownership limitations and local content requirements  
 27. The Chinese Authorities maintain a foreign investment ceiling in so me cases of a less than 50 
per cent ownership position for the fo reign partner that impedes further growth and investments in 
those sectors.  In addition, local content requirement s are in place for the construction of new plants.  
In particular, these local content requirements could reach a 70 per cent for new projects in the 
renewable energy sectors, requirements that might be  extended to other sectors- i.e. the chemical 
industry.  In light of these measures and the fact th at they are in clear inconsistency with the TRIMs 
Agreement and China's commitment in paragraph 7. 3 of China's Protocol Accession, the EC seeks 
some clarifications in the abovementioned measures.     
28. In that regard, the EU would be grateful  if China could clarify the following issues: 
  - On which basis does China impo se shareholding restrictions?  
  - Could China explain in a systematic way what local content requirements currently 
  exist in the renewable energy and in the chemical sector?  
 
 - Does China plan to extend these local c ontent requirements and, if so, in which 
sectors? 
  
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