WORLD TRADE  
ORGANIZATION  G/TRIMS/W/60 
14 October 2008 
 (08-4897) 
Committee on Trade-Related Investment Measures Original:   English 
  
 
COMMUNICATION FROM THE EUROPEAN COMMUNITIES 
  
 The following communication, dated 13 October 2008, is being circulated at the request of 
the Delegation of the European Communities.   
 
_______________ 
 
 
TRANSITIONAL REVIEW MECHANISM PURSUANT TO PARAGRAPH 18  
OF THE PROTOCOL ON THE ACCESSION OF THE PEOPLE'S  
REPUBLIC OF CHINA
1 ("CHINA") 
 
 1. The EC is transmitting these comments and ques tions in advance of the meeting of the 
Committee on Trade-Related Investment Measures (TRIMs) on 23 October 2008 , 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, 10 October 2005, 25 of October 2006, and 1 November 2007 as well as previous 
questions from the European Communities as  contained in documents G/TRIMS/W/21, 
G/TRIMS/W/31, G/TRIMS/W/36, G/TRIMS/W/41, G/TRIMS/W/50, and G/TRIMS/W/55.   
2. 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 th e review".  In particul ar, 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 
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."   
                                                     
 
1 WT/L/432 G/TRIMS/W/60 
Page 2  
 
  3. At this point in time, the EC's comments and questions are focused on the following priority 
items:   
I. AUTOMOBILE INDUSTRIAL POLICY  
A. J
OINT VENTURE OWNERSHIP LIMITATION  
4. In connection with prior transitional reviews before this Committee, the EC has signalled 
restrictions on foreign investors who have contri buted substantially to the rapid development of 
China's automotive sector.  Foreign joint venture partners are not allowed majority ownership in 
automobile production.  Moreover, a foreign investor  is limited to setting up no more than two such 
Sino-foreign joint ventures for the production of passengers cars, and two for commercial vehicles 
("2+2").  Due to the global nature of the au tomotive industry and the brand strategies of local 
companies, locked in 50/50 per cent ventures with foreign vehicle makers, such restrictions are 
counterproductive to the Chinese authorities' objec tive of promoting international competitiveness. 
5. During previous transitional reviews before th is Committee, the EC has argued that such 
stringent regulations with a view to protecting a pr eliminary stage of development of the industry are 
no longer relevant, given the out standing performance of the already mature Chinese automobile 
industry.  China has responded that it is "legitim ate for the Chinese government to provide guidance 
on development of the industry based on its independent  judgment of the maturity of the industry".  In 
addition, China has claimed that this is " not in any way related to WTO or our accession 
commitment". 
6. The EC fails to understand the economic and legal grounds for applying such investment 
restrictions in the Chinese automobile industry.  We note that the Chinese government is determined 
to guide and shape the development of the automob ile industry.  However, maintaining investment 
restrictions such as the limitations on foreign shar eholding in JVs and the "2+2" regulation do clearly 
hamper the consolidation of this industry, and serve instead as deterrents for competitive, non-
discriminatory investment decisions.  To ensure a le vel playing field, investors (foreign or national) 
should be allowed to hold a percentage of shares in  an automobile-producing venture proportional to 
the business risk they are prepared to take, and irrespective of external restrictions. 
7. 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 
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 really pursuing the consolidation of the automobile industry. 
8. In this context the EC urges China 
• to allow foreign majority investment;  and 
• to eliminate the "2+2" regulation.  
 
 
                                                      
2 G/TRIMS/M/22, paragraph 27 and G/TRIMS/W/51.  G/TRIMS/W/60 
 Page 3 
 
 
  II. STEEL INDUSTRY DEVELOPMENT POLICY 
9. In connection with previous transitional review s before this Committee,  the EC has raised 
questions regarding China's industrial policy for steel.  In particular, the EC has sought clarifications 
on Articles 23, 17 and 18 of the "Steel Industry Development Policy".   
10. Article 23 of the NDRC Steel Industry Developmen t Policy states that "[i]n 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".  The EC has argued that this limita tion was counterproductive and would hinder a sound 
development of the steel industry and investment fl ows in the sector.  China has replied that this 
restriction in foreign ownership was not related to  the mandate of this Committee.  The EC, however, 
understands that China could provide further in formation on the economic and legal basis for 
applying such restrictions, which clearly impose artificial limits to investment decisions in the steel sector.  In addition, the EC urges China to lift th is foreign ownership limits so that investment 
decisions could be based on sound, objective foundations. 
11. 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".  During previous transitional reviews, China has asserted that these requirements applied 
for both domestic and foreign companies.  
12. In this regard, the EC would be grateful if China could respond to the following questions in 
detail: 
(a) Could China confirm that the criteria u sed to define requirements pursuant to 
Article 23 are identical for both foreign an d domestic companies?  If criteria were 
different, could China elaborate on the reasoning for applying different requirements?  
(b) Could China confirm if any additional test s are set for foreign non-steel investors, 
which do not apply to domestic non-steel investors? 
(c) On what basis does China establish that a company, foreign or domestic, has the 
necessary funding, modern technology a nd management capacity, a stable and 
reliable healthy sales network, sufficient water and ore resources, coal, and electric power resources?  What are the criteria used so as to define these requirements?  
(d) On what basis does China intend to establis h whether a non steel  company, domestic 
or foreign, has a high level of public trust ? 
13. The EC notes that Article 17 envisages a ban 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 cannot be made in China or cannot 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".  
14. In light of China's commitments in paragra ph 7.3 of China's Protocol Accession, the EC 
would be grateful if China replied to  the following questions in detail:  G/TRIMS/W/60 
Page 4  
 
   
(a) What measures does China intend taking to encourage the use of national equipment 
and technologies and to localize the manufacturing of the equipments which are largely needed in the future? 
(b) Could China confirm whether it intends to impose a condition on the importation of 
equipments and technologies, namely that they cannot be made in China or cannot 
meet the requirements? 
III. PETROCHEMICAL, CHEMI CAL, ENERGY SECTORS  
A. JV
 OWNERSHIP LIMITATIONS  
15. In previous transitional reviews, the EC has a ddressed the foreign ownership ceiling, in some 
cases of less than 50 per cent, which impedes furthe r growth and investments in sectors such as the 
petrochemical, chemical, energy and environmental sectors.  In particular, the Measures for Operation and Management of Clean Development Mechanis m (CDM) projects, as published in October 2005, 
set out the general rules and specific requirements for the application for, and approval of, CDM 
projects, including a restriction on the threshold for foreign ownership of CDM projects in China to 
49 per cent.  Under this regulation, a company in Ch ina that is wholly or majority-owned by foreign 
investors will not qualify as CDM projects in Chin a.  We should note that the lack of project 
ownership is an additional risk that investors must  consider when investing in a CDM project.  This 
regulation discourages investment and results in fe wer projects being undertaken that would have 
otherwise been beneficial to China's efforts to improve energy efficiency and reduce environmental 
emissions.  
16. We note that China's rapid industrial developm ent and ensuing environmental challenges has 
created a strong need for the types of energy saving technologies used in the context of CDM projects.  
In this regard, a further opening of the CDM ma rket would create more incentives that would allow 
China to meet its environmental and energy saving goa ls in a much shorter period.  In light of this, 
China may wish to consider allowing foreign compani es to have majority ownership in CDM projects.  
The EC would like China to comment on the basis upon which it imposes these restrictions and its 
future plans to eliminate them.   
B. L
OCAL CONTENT REQUIREMENTS  
17. Can China confirm that there are no local content requirements whatsoever, and indicate a 
central government ministry where complaints of concrete cases could be submitted to rectify the 
situation? 
IV. TRIMS INCOMPATIBLE CLAUSES IN CONTRACTUAL ARRANGEMENTS 
18. During previous transitional reviews, the EC h as addressed concerns regarding the procedures 
to amend contracts that contained TRIMs incompatib le clauses.  China has noted that "the investors 
may decide by themselves whether to change the term s" of a contract, and if so was decided, "they 
may file the application to relevant authorities to ch ange their articles of association or contract of 
enterprise accordingly".  In add ition, China has stressed that this application would be "processed 
timely and in a manner consistent with the TRIMs agreement". 
19. In relation to this statement, the EC would like to pose the following questions: 
(a) Could China indicate the number of applications that have been filed in this context?   G/TRIMS/W/60 
 Page 5 
 
 
  (b) How does China ensure that  the "approval for investment by national and sub-
national authorities" is not  conditioned on performance requirements of any kind?  
(c) How does China ensure that  the "approval for investment by national and sub-
national authorities" is not conditioned on local content requirements of any kind?  
(d) In particular can China confirm that na tional and sub-national authorities are not 
bound by performance requirements stipulated in the industrial policies issued by the 
NDRC?   
(e) Overall, how does China monitor the a pplication process so as to ensure its 
compliance with the TRIMs Agreement? 
V. REGULATIONS FOR THE IMPLEMENTATION OF THE LAW OF THE PEOPLE'S 
REPUBLIC OF CHINA ON SINO-FOREIGN EQUITY JOINT VENTURE 
20. In previous transitional reviews, the EC has a ddressed certain particularities of the regulations 
for the implementation of the Law of the PRC on Sino -foreign equity JVs, and in particular, regarding 
provisions pursuant to Article 41, which stipulate th at "[t]he 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 comp etitive on the international market".  In response to 
EC's concerns regarding compatibility of these re quirements with China's Accession Protocol, China 
has stressed that Article 41 aims at ensuring that  technology is "appropriate and advanced", though it 
is not a performance requirement as such.  
21. However, we would like to highlight that Artic le 43 requires that "[t]he technology transfer 
agreements concluded by a joint venture sha ll be submitted to the examination and approval 
authorities for approval".  In addition, the remai nder of Article 43 imposes several requirements on 
those technology transfer agreements.   
(a) Provided that the provisions of Article 41 are not performance requirements, as 
asserted by China, how does China explain the provisions for the authorities' approval 
set forth in Article 43?  
(b) Could China indicate whether the provisions of Articles 41 and 43 are related to both 
domestic and foreign enterprises?  
VI. NEW ANTI-MONOPOLY LAW 
22. The EC welcomes the adoption of the Anti-Mono poly Law.  The EC hopes that this law and 
its various components (i.e. the national security clau se) will be applied in a fair, transparent and non-
discriminatory manner in order to benefit the Chin ese economy and Chinese consumers.  In addition, 
the EC would like to remind Chinese authorities about  the importance of consulting all stakeholders 
during the preparations of implementing measures.   
23. In this context, the EC would lik e to pose the following questions:  
(a) Could China elaborate on the allocation of  task/competencies between the various 
AML authorities (AMC + AMEAs)? 
(b) When does China anticipate that its AM EA's will be fully operational?  G/TRIMS/W/60 
Page 6  
 
  (c) Will the the AMEAs delegate enforcement powers to their regional branches and how 
will coordination be ensured? 
(d) Could China provide an overview over the adoption of implementing rules and a time 
frame for adopting these implementing rules? 
 
__________