WORLD TRADE  
ORGANIZATION  G/TRIMS/W/69 
5 October 2009 
 (09-4758) 
Committee on Trade-Related Investment Measures Original:   English 
  
 
COMMUNICATION FROM THE EUROPEAN COMMUNITIES 
  
 The following communication, dated 2 October 2009, 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
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 16 October 2009 , 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 Octobe r 2006, 1 November 2007, and 23 October 2008 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, 
G/TRIMS/W/55, and G/TRIMS/W/60.   
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 TR IMs Agreement.  China shall eliminate and 
cease to enforce trade and foreign exchange balancing 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 the 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 produc ts exist;  or performance requirements 
of any kind, such as local content, o ffsets, the transfer of technology, export 
performance or the conduct of research and development in China."   
                                                     
 
1 WT/L/432.   G/TRIMS/W/69 
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  3. At this point in time, the EC's comments and questions are focused on the following priority 
items:   
I. LOCAL CONTENT REQUIREMENTS 
4. China has in previous transitional revi ews argued that it has honoured its accession 
commitments as concerns the elimination of local co ntent requirements, and that its trade policies and 
measures are uniformly implemented.  In addi tion, China has referred to a number review 
mechanisms that citizens and enterpri ses have at their disposal should problems in this respect appear.  
The EC has taken note of these explanations, but remains concerned of reports from industry that 
local content requirements continue to be applied in China across several se ctors, especially at the 
local level.   
 
(a) Could China indicate what measures it forese es in order to rectify this situation of 
authorities imposing local content requiremen ts which allegedly are not in line with 
national legislation?   
(b) Could China provide an assessment of how often the various review mechanisms that 
are available for industry have resulted in locally applied local content requirements 
to be rectified?   
II. STEEL INDUSTRY DEVELOPMENT POLICY 
5. In connection with previous transitional reviews 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 Industr y Development Policy".  While China has given 
answers to some of our questions, we feel that certain matters require further clarification.   
 6. Article 23 of the NDRC Steel Industry Developm ent 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 limit so that investment 
decisions could be based on sound, objective foundations.   
 7. 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, and that  its delegation has not been informed by its 
competent authority of any additional requirements or tests applicable only to foreign investors.  However, the EC has received frequent reports from industry indicating that requirements are not 
applied in a similar fashion to domestic and foreign companies.   
8. In this regard, the EC would be grateful if  China could respond to the following questions in 
detail:   
(a) 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  G/TRIMS/W/69 
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  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? 
(b) Could China confirm that the criteria u sed to define requirements pursuant to 
Article 23 are in all cases identical for both foreign and domestic companies?  If criteria were different, could China elabor ate on the reasoning for applying different 
requirements?  
(c) Could China verify whether any additional tests are set for foreign non-steel 
investors, which do not apply to domestic non-steel investors? 
(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 ? 
9. 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 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".  In the 2008 transitional review China noted that  Article 18 is "a reflection of 
the general guidance nature of the industrial po licy and is not directly applicable itself".   
 
10. In light of China's commitm ents in paragraph 7.3 of Chin a's Protocol Accession, the EC 
would be grateful if China replied to  the following questions in detail:  
 
(a) Could China explain what are the practical  consequences of the "general guidance" 
contained in the requirements of Article 18? 
(b) What measures does China intend to take in  order to further encourage the use of 
national equipment and technologies and to localize the manufacturing of the equipments which are largely needed in the future? 
(c) 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. TRIMS INCOMPATIBLE CLAUSES IN CONTRACTUAL ARRANGEMENTS 
11. During previous transitional reviews, the EC has 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". 
12. In relation to this statement, the EC woul d like to pose the following questions, which it does 
not consider China has previously answered in  a comprehensive and fully satisfactory manner: G/TRIMS/W/69 
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  (a) What mechanisms does China in tend to use in order to en sure that the "approval for 
investment by national and sub-nati onal authorities" is not conditioned on 
performance requirements of any kind?  
(b) 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?  
(c) 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?   
(d) Overall, how does China monitor the a pplication process so as to ensure its 
compliance with the TRIMs Agreement? 
IV. JOINT VENTURE OWNERSHIP LIMITATIONS  
13. In connection with prior transitional reviews before this Committee, the EC has signalled its 
concerns over the continued use of restrictions on foreign investors in several sectors of the Chinese 
economy.  Foreign joint venture partners  are not allowed majority ownership inter alia  in the 
automobile, petrochemical, chemical, energy and envi ronmental sectors.  We have elaborated on our 
specific concerns in these sectors in our previous submissions mentioned in paragraph 1, and China 
has noted that it has similar views to those of th e EC as concerns opening these sectors for foreign 
investment, but that it would need "a bit more time" to do so. 
14. During previous transitional reviews before this Committee, the EC has argued that such 
stringent regulations with a view to protecting a pr eliminary stage of development in those sectors are 
no longer relevant, given the outstanding performance  of the already mature Chinese industry.  China 
has responded that it has "the legitimate right to i ndependently judge on the level of maturity of 
specific industries and to decide on the speed of in vestment liberalization".  In addition, China has 
claimed that it does not think there is a ques tion of consistency with WTO obligations.   
(a) What progress has China achieved in opening these sectors for foreign investment 
since the last transitional review in 2008? 
(b) Could China elaborate on the timeframes it foresees for further investment 
liberalization in these sectors, notably in li ght of Minister Chen  Deming's September 
speech at the Xiamen fair that recalls China' s plan to gradually reduce the restrictions 
of the equity caps for foreign investment.  
V. REGULATIONS FOR THE IMPLEMENTATION OF THE LAW OF THE PEOPLE'S 
REPUBLIC OF CHINA ON SINO-FOREIGN EQUITY JOINT VENTURE 
15. In previous transitional reviews, the EC has addressed 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.  
16. However, we would like to highlight that Ar ticle 43 requires that "[t]he technology transfer 
agreements concluded by a joint venture sha ll be submitted to the examination and approval  G/TRIMS/W/69 
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  authorities for approval".  In addition, the remai nder of Article 43 imposes several requirements on 
those technology transfer agreements.  We note th at China has in previous transitional reviews 
stressed that Article 43 contains no compulsory requirement for foreign investors to include a 
technology transfer agreement in the contract, and that inclusion of such agreements are at the 
discretion of the foreign investors and their Chinese partners.  However, our concern remains that in 
many instances Chinese authorities continue to consider technology transfer agreements a de facto  
requirement in joint venture contracts.   
(a) Could China indicate whether the provisions of Articles 41 and 43 are related to both 
domestic and foreign enterprises?  
(b) What measures does China intend to take in order to ensure that technology transfer 
agreements are not imposed on foreign i nvestors engaging in joint ventures, as 
provided by Article 43, and remain exclusively on a voluntary basis? 
 
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