WORLD TRADE  
ORGANIZATION  G/C/W/560 
6 November 2006 
 (06-5345) 
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 3 November 2006, 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 20 
November 2006 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 Members dur ing 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. Transparency 
1. In China’s Protocol of Accession and 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.   
2. In Section 2(C) of its Protocol of Accession, China specifically committed to establish or 
designate an official journal dedicated to the pub lication of all trade-related measures, including, inter 
alia, “all laws, regulations and other measures pertaining to or affecting trade in goods . . . .”  The 
term “laws, regulations and othe r measures” is defined 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.”   
3. During past transitional reviews, China has 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 G/C/W/560 
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  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 being made by central, provincial and local 
government entities in fulfilling the Stat e Council’s directive to send measures 
pertaining to or affecting trade in goods to MOFCOM for publication in the 
MOFCOM Gazette.  As part of that up date, please identify the government entities 
that regularly send their goods measur es to MOFCOM for publication in the 
MOFCOM Gazette.  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 p ast year in implementing the commitment 
that it made in Section 2(C) of its Protocol of Accession to provide a reasonable period for public comment on new or modifi ed measures before implementing them, 
except in certain specified instances.   
2. Trading Rights 
4. In connection with the transitional review be fore the Committee on Market Access held on 
4 October 2006, the United States noted that China,  in its Protocol of Accession, had committed to 
eliminate its system of examination and approval of trading rights, i.e., the right to import goods (into 
China) and the right to export goods (from Chin a), and make full trading rights automatically 
available for all Chinese enterprises,  Chinese-foreign joint ventures, w holly foreign-owned enterprises 
and foreign individuals, including  sole proprietorships, within three years of its accession, or by 
December 11, 2004, the same dead line for China to eliminate most  restrictions in the area of 
distribution services.  The only exceptions applied to  products listed in Annexes 2A and 2B, such as 
grains, cotton and tobacco, for which China reserved th e right to engage in state trading.  In April 
2004, the National People’s Congress issued the revised Foreign Trade Law .  Except with regard to 
products reserved for state trading, this law – cons istent with China’s WTO obligations – provided for 
trading rights to be automatically available thr ough a registration process for all domestic and foreign 
entities and individuals, effective July 1, 2004.   Despite the revised Foreign Trade Law , other 
Chinese measures reserve the right to import publications, including books, newspapers and magazines, audiovisual products and electronic pub lications, to certain state-owned enterprises.  
These measures include the Administrative Regulations on Publishing , issued by the State Council in 
December 2001, the Catalogue for the Guidance of Foreign Investment Industries , issued by the 
National Development and Reform Commission (“NDRC”) and MOFCOM in November 2004, the 
Decisions of the State Council Regarding Entrance of Non-Public Capitals into Cultural Industries , 
issued by the State Council in April 2005, the Several Opinions on Canvassing Foreign Investment 
into the Cultural Sector , issued by the Ministry of Culture, the State Administration of Radio Film 
and Television, the General Administration of  Press and Publications (“GAPP”), NDRC, and 
MOFCOM in July 2005, and the Procedures for the Examination and Approval of Establishment of 
Publication Importation Entities , issued by GAPP in December 200 5.  Other relevant measures 
include the Administrative Regulations on Audio and Video Products , issued by the State Council in 
December 2001, and the Administrative Regulations on Electronic Publications , issued by GAPP in 
December 1997.  The United States had asked China to clarify certain matters relating to China’s 
justification for the measures in question, but Chin a did not do so at the Market Access Committee’s 
transitional review.  The United States therefore asks that China respond to the following questions 
during the upcoming transitional review before the Council for Trade in Goods:  
(a) When China responded to questions on this issue from the United States at the 
November 2005 meeting of the Counc il for Trade in Goods, it explained − with  G/C/W/560 
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  regard to the importation of books, newspaper and magazines − that the Chinese 
government had the right to restrict the importation or exportation of products to 
protect public morals, public interest and na tional security.  China cited Article XX of 
GATT 1994.  Please explain the relevance of GATT Article XX to China’s Protocol 
of Accession.  In addition, please explain why China’s import restriction is “necessary” within the meaning of Article XX. 
(b) Does China contend that it has the right to restrict the importation of audiovisual 
products and electronic publications on the same basis as it rest ricts the importation 
of books, newspapers and magazines?  Please explain. 
3. Export Quotas 
5. In connection with the trans itional review before the Market Access Committee held on 4 
October 2006, the United States noted that, since China’s accession to the WTO, the United States 
and other Members had expressed concern about China’s export restrictions on coke, a key steel input.  The United States further noted that China is the world’s largest producer of coke, with total production exceeding 208 million MT in 2005, a 14  percent increase over 2004.  For 2006, China 
announced an export quota of 14.3 million MT, similar to the level to which Ch ina eventually raised 
the quota in 2004 and 2005, despite the fact that WTO rules establish a general prohibition against 
export restrictions, with only limited exceptions.  The United States had asked China if it had any 
plans to eliminate its coke export quota system, but China did not respond at the Market Access 
Committee’s transitional review.  In subsequent bilateral discussions fo cused on China’s steel 
industry, China stated that it had no plans to eliminate its coke export quota system.  The United States continues to urge China to eliminate its coke export quota system without further delay. 
6. Does China have any plans to eliminate the e xport quota that it maintains on fluorspar?  If 
not, why not? 
4. Export Duties 
7. On 27 October 2006, the Customs Tariff Commiss ion of China’s State Council announced a 5 
percent duty on exports of coke.  It also announ ced export duties on certain other steel-making raw 
materials and semi-finished steel products, including 10 percent export duties on 30 types of primary 
steel products, including pig iron and billet, and 15 percent export duties on certain non-ferrous 
alloying metals.  China does not appear to apply export duties to finished steel products. 
(a) Please explain China’s trade policy objectives for the imposition of export duties on 
these steel-making raw materials and semi-finished steel products. 
(b) Please justify these export duties under WTO rules,  including paragraph 11.3 of Part I 
of China’s Protocol of Accession and Annex 6 thereto. 
8. In its 27 October 2006 announcement, the Customs Tariff Commission also announced a 10 
percent duty on exports of fluorspar.   
(a) Please explain China’s trade policy objectives for the imposition of the export duty on 
fluorspar. 
(b) Please justify this export duty under WTO rul es, including paragraph 11.3 of Part I of 
China’s Protocol of Accession and Annex 6 thereto. G/C/W/560 
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  5. Value-Added Tax Rebates for Steel Exports 
9. On 15 September 2006, China’s Ministry of Finance, NDRC, MOFCOM, General 
Administration of Customs and State Administra tion of Taxation (“SAT”) announced reductions in 
the value-added tax (“VAT”) rebates applicable to exports of certain finished steel products, but not 
others.   
(a) Please explain China’s trade policy objectives for these reductions in VAT export 
rebates. 
(b) Does China provide VAT export rebates fo r steel-making raw materials and semi-
finished steel products?  Please explain. 
(c) Please explain how these VAT export rebate changes for finished steel products relate 
to the changes in the export duties on st eel-making raw materials and semi-finished 
steel products announced by the Customs Tariff Commission on 27 October 2006. 
6. Value-Added Tax Rebates for Domestic Equipment Purchases 
10. On 24 July 2006, SAT and NDRC jointly issued the Trial Measures for the Administration of 
Tax Rebate on Domestically Manufactured Equipment in Foreign-Invested Projects .   This measure 
provides for VAT rebates in connection with pur chases of domestically manufactured equipment by 
foreign-invested enterprises engaged in transporta tion or residential project construction or the 
exploration and development of offshore petroleum.  Domestically manufactured equipment refers to 
equipment produced in China that is classified as a fixed asset, as well as to accessories and parts 
listed in the equipment procurement contract.  No  VAT rebate is available in connection with 
purchases of imported equipment under this measure. 
(a) Please explain the reasons for the differential treatment. 
(b) Please explain how the difference in the treatment of imported versus domestic 
products under this measure is consis tent with Article III of GATT 1994.  
7. Investment  
11. In connection with the transitional review be fore the TRIMs Committee held on 25 October 
2006, the United States noted that, in June 2006, China publicly issued the State Council Opinions on 
the Revitalization of the Industria l Machinery Manufacturing Industries  (the State Council  Opinions ).  
The State Council  Opinions identify 16 types of equipment manufacturing as the focus of the new 
initiative, including, inter alia , large equipment for clean and efficient power generation, critical 
semiconductor manufacturing equipment, civilian airc raft and aircraft engines, pollution control 
equipment, textiles machinery and large excavat ors.  Policy supports for the initiative include 
preferential import duties of parts and material  needed for R&D (vs. finished machinery), 
encouragement for procuring domestically manufactur ed new major technical equipment, a dedicated 
fund to facilitate capital market financing for domest ic firms, and strict review of imports.  The State 
Council  Opinions  discuss new controls on foreign investment in these sectors, including new approval 
requirements when foreign entities seek majority ow nership or control and the strengthening of the 
management of equipment and machinery imports, as well as a number of other initiatives designed to 
promote, develop and expand the market share of dom estic companies in these sectors in China.  At 
the TRIMs Committee’s transitional review, China an swered some of the United States’ questions 
about the State Council Opinions  but left others unanswered.  The United States therefore asks that 
China respond to the following questions during th e upcoming transitional review before the Council 
for Trade in Goods:   G/C/W/560 
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(a) Please describe the legal effect of the State Council  Opinions .   
(b) Please describe the extent to which China has begun to implement the State Council  
Opinions .  What is the status of any proposed implementing regulations? 
12. In connection with the transitional review be fore the TRIMs Committee held on 25 October 
2006, the United States referenced new regulations  on mergers and acquisitions (M&A regulations) 
that were jointly issued in August 2006 by MOFCOM, the State-owned Assets Supervision and 
Administration Commission, SAT, the State Admi nistration of Industry and Commerce, the China 
Securities Regulatory Commission and the State Administration of Foreign Exchange.  The 
regulations strengthen MOFCOM’s s upervisory role over foreign investment, in part by requiring 
MOFCOM’s approval of M&A transactions that it be lieves impact state economic security or involve 
famous Chinese brands.  The regulations also pla ce MOFCOM in the role of determining if the 
domestic acquisition target has been appropriately  valued.  At the TRIMs Committee’s transitional 
review, China answered some of the United States’ questions about the M&A regulations but left 
others unanswered.  The United States therefore asks that China respond to the following questions 
during the upcoming transitional review before the Council for Trade in Goods:  
(a) When does China plan on issuing implemen ting rules for the M&A regulations?  Will 
an opportunity be provided for public comment on a draft of these implementing rules? 
(b) Article 12 of the M&A regulations calls  for MOFCOM’s approval of any deal 
involving a “major industry”, having “imp act on the state economic security” or 
concerning “famous trademarks or traditional Chinese brands”.  This language is very 
broad and appears to require MOFCOM approval on most foreign investment 
transactions.  Please explain what the quo ted terms mean.  Does China intend to 
define these terms in the implementing rules? 
(c) Article 14 of the M&A regulations requires that MOFCOM approve the valuation of 
any merger or acquisition.  What qualifi cations and experience will be required of 
those who determine the appropriate valuati on?  On what basis will they determine 
the value? 
(d) Article 30 of the M&A regulations requires an “acquisition consultant” be hired to 
complete a stock swap-based deal.  Article 31 sets forth general guidelines as to who will be able to qualify as such a c onsultant.  These guidelines include the 
requirements that the acquisition cons ultant have a “good reputation”, no 
“significant” criminal record and the “capabilit y to conduct” the investigation.  Please 
explain what the quoted terms mean.  Does China intend to define these terms or 
otherwise provide more specificity regarding the necessary qualifications for an acquisition consultant in the implementing rules? 
(e) Chapter 5 of the M&A regulations re quires MOFCOM approval for any M&A 
transaction that meets specific criteria or i nvolves “very large market share” or “other 
important factors” that affect competition.  Please explain what the quoted terms mean.  Does China intend to define the quoted terms in the implementing rules?  
What are the other applicable criteria?    
(f) Some provisions in Chapter 5 of the M&A regulations address competition policy 
concerns.  Will these provisions remain in  place after China issues its Anti-Monopoly 
Law?  Please explain. G/C/W/560 
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  13. In connection with the transitional review befo re the Subsidies Committee held on 26 October 
2006, the United States had noted a report in the International Herald Tribune  on 16 May 2006 that 
the Wuhan city government will spend between $1.5 billion and $3.0 billion to build a semiconductor 
plant that will make 12-inch wafers.  Accordi ng to the report, the Semiconductor Manufacturing 
International Corp (“SMIC”) will design, build and manage the plant.  The United States sought 
specific information about this project but China di d not provide it at the transitional review before 
the subsidies Committee.  The United States therefore asks that  China respond to the following 
questions during the upcoming transitional revi ew before the Council for Trade in Goods:  
(a) What is the specific ownership and investme nt role of the Wuhan government in this 
project? 
(b) What are the specific terms and conditions of SMIC’s participation in this project? 
8. State-Owned Enterprises 
14. In connection with the transitional review befo re the Subsidies Committee held on 26 October 
2006, the United States had asked several questions related to state-owned enterprises (“SOEs”), but 
China did not respond to them.  The United States therefore asks that China respond to the questions 
below on SOEs during the upcoming transitional re view before the Council for Trade in Goods. 
15. Does China plan to implement a formal privati zation programme in the future where it sells 
majority ownership in large SOEs to private entit ies?  If so, when does it expect to begin this 
programme? 
16. 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 rega rd to SOEs.  What measures has China issued, or does China plan 
to issue, to implement th ese changes?  Please explain. 
17. What plans does China have to further improve corporate governance and increase 
accountability in large SOEs? 
18. 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. 
19. The United States understands that SOEs in China have been exempt from paying any 
dividends to the state since at least 1994.  This exemption apparently rema ins in place even though a 
number of large SOEs in China are highly profitable,  contributing to more than 6 percent of GDP in 
2004 according to some estimates.  Given the cl ear link established between the exemption of 
dividend payments and conti nued overinvestment by SOEs, as well as the documented link between 
dividend pay-outs and good corporate governance, please explain what steps, if any, are being taken 
by China to change this policy.   
20. According to a World Bank report, northeast Chin a 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.  G/C/W/560 
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  (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 owne rship of SOEs in the region? 
(b) Considering that the private sector has been an important engine of growth in China, 
please explain what measures the government is taking to encourage the growth of 
the private sector in China’s northeast region as part of its revitalization plans. 
9. Border Trade 
21. In connection with transitional reviews in past  years, the United States has expressed concern 
about imports from border areas that continue to be nefit from preferential treatment in the form of 
reduced import duties and/or VAT pursuant to m easures such as Bulletin No. 27 and Bulletin No. 39, 
issued by the General Administration of Customs on 1 May 2003 and 11 June 2003, respectively.  In 
explaining its concerns, the United States has refe renced China’s WTO commitments, as set forth in 
Part XIV of Annex 5A to China’s Protocol of Ac cession (where China stated that it would eliminate 
preferential import duties for border trade) and pa ragraph 2(A) of China’s Protocol of Accession 
(where China extended its obliga tions under the WTO Agreement and the commitments that it made 
in its Protocol of Accession to border trade regions  as part of its commitment to apply uniformly its 
trade regime).  Has China eliminated preferentia l border area treatment for any products during the 
past year?   Does China have any plans to review its preferential treatment of imports from border areas? 
__________