WORLD TRADE  
ORGANIZATION  G/TRIMS/W/47 
26 September 2006 
 (06-4570) 
Committee on Trade-Related Investment Measures 
 Original:   English 
 
 
  
COMMUNICATION FROM THE UNITED STATES 
  
 The following communication, dated 22 September 2006, is being circulated at the request of 
the Delegation of the United States.  
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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") 
 
Questions From the United States to China
  
Concerning Trade-Related Investment Measures  
 
 I. AUTOMOBILE INDUSTRIAL POLICY 
1. In connection with last year's transitional re view before this Committee, the United States 
addressed Article 47 of China's automobile indust rial policy, published on 1 June 2004, and entitled 
"Development Policy of the Automobile Industry" , which states that a new automobile production 
plant requires a minimum investment of RMB 2 b illion, of which owned cap ital should not be less 
than RMB 800 million.  According to this article, the new plant should also include an R&D facility, 
investment in which should not be less than RM B 500 million.  Article 47 additionally requires the 
establishment of an R&D facility in connection w ith new automobile engine manufacturing.  The 
United States explained that, in its WTO accession ag reement, China committed not to condition the 
right of investment on the conduct of research  and development.  The United States cited 
paragraph 7.3 of China's Protocol of Accessi on ("China shall, upon accession, comply with the 
TRIMs Agreement, without recourse to the provi sions of Article 5 of the TRIMs Agreement ... 
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 importation, the right 
of importation or investment by national and sub-na tional authorities, is not conditioned on:  whether 
competing domestic suppliers of such products exis t; 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 .") and paragraph 203 of the accomp anying Working Party Report ("The 
allocation, permission or rights for investment will not be conditional upon performance requirements 
set by national or sub-national authorities or subj ect to secondary conditions covering, for example, 
the conduct of research , the provision of offsets or other forms of industrial compensation including 
specified types or volumes of business opportunities, the use of local inputs or the transfer of technology.")   G/TRIMS/W/47 
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  2. The United States asked China to explain whet her Article 47 was consistent with China's 
commitments in paragraph 7.3 of  China's Protocol of Accession and paragraph 203 of China's 
Working Party Report not to condition the right of  investment by mandating the conduct of research 
and development in China.  In response, the repr esentative from China did not address that question.  
Instead, the representative from China stated only that "setting up an R&D facility itself did not 
constitute a mandatory requirement on transfer of  technology ... [and] [t]hus ... was not against 
[China's] WTO commitments."   
(a) Please explain how Article 47 complies with China's commitments in paragraph 7.3 
of China's Protocol of Accession and para graph 203 of China's Working Party Report 
not to condition the right of investment by mandating the conduct of research and 
development in China − an issue explicitly separate from the issue of technology 
transfer, according to paragraph 7.3 of Ch ina's Protocol of Accession and paragraph 
203 of China's Working Party Report. 
3. In connection with China's Trade Policy Revi ew, held on 19 and 21 April 2006, the United 
States submitted written questions addressing the fact that new investment projects in the automotive 
sector require, inter alia , a technology transfer agreement.  Th e United States then asked China to 
explain, taking into account the commitments that China made in paragraph 7.3 of Part I of its 
Protocol of Accession and paragr aph 203 of the accompanying Working Party Report not to condition 
investment on the transfer of technology, how it ju stifies this condition.  To date, China has not 
responded to this question.  The United States anticipates that China will submit its Trade Policy 
Review response prior to this Committee's 17 October 2006 meeting, when China's Transitional 
Review Mechanism is on the agenda.  The United States may then ask follow-up questions in 
connection with China's upcoming transitional review .  In the event that China does not submit its 
Trade Policy Review response prior to this Comm ittee's 17 October 2006 meeting, the United States 
would ask that China provide its response durin g the portion of that meeting devoted to the 
Transitional Review Mechanism. 
II. STEEL POLICY 
4. In connection with last year's transitional re view before this Committee, the United States 
addressed Article 23 of China's steel industrial pol icy, released by the National Development and 
Reform Commission on 8 July 2005, which mandates certain requirements as conditions for investments.  These include requi rements for certain production levels in the previous year, self-
financing of 40 per cent or above, modern technology and management, strong supply and 
distribution networks, transportation, and water, mi neral and power resources.  Furthermore, these 
requirements appear to apply only to domestic enterprises seeking to operate in cross-regional 
domestic steel operations, while foreign enterprises must meet these requirements for any investment 
in China.  In addition, domestic enterprises only n eed to meet a 5 million ton previous year quantity 
threshold for investments in common steel and a 0.5 million ton previous year quantity threshold for 
investments in special high-alloy steel.  The co rresponding thresholds for foreign enterprises are 
10 million tons and 1 million tons.  Article 23 also do es not allow foreign enterprises to invest in new 
business sites, but limits participation to reform  or relocation of existing enterprises and to non-
controlling stakes.  The United States asked Chin a to explain why there is a need for such 
discrepancies in the treatment of foreign enterp rises and domestic enterprises.  However, China did 
not respond to this question.  Please provide the requested explanation during the portion of this 
Committee's 17 October 2006 meeting devoted to the Transitional Review Mechanism. 
5. In connection with last year's transitional re view before this Committee, the United States 
also noted that the steel industrial policy places other restrictions on foreign investment, such as by 
requiring that foreign investors possess proprietary technology/intellectual property in the processing 
of steel.  Given that foreign investors are not allo wed to have a controlling share in steel and iron  G/TRIMS/W/47 
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  enterprises, this requirement would seem to constitute a de facto technology transfer requirement.  
The United States then asked China to explain how  these restrictions are consistent with the 
commitments made by China in paragraph 7.3 of its Protocol of Accession and paragraph 203 of its 
Working Party Report.  However, China did not  respond to this question.  Please provide the 
requested explanation during the portion of this Committee's 17 October 2006 m eeting devoted to the 
Transitional Review Mechanism. 
III. STATE COUNCIL OPINIONS 
6. Over the past year, the United States and U.S.  industry have become concerned about new 
restrictions on investment being proposed and impl emented by China.  Often, these restrictions are 
accompanied by other problematic industrial poli cies, such as the increased use of subsidies, 
preferences for using domestic rather than impor ted goods, or the development of China-specific 
standards. 
7. In June 2006, China publicly issued the State Council Opinions on the Revitalization of the 
Industrial 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 aircraft and aircra ft engines, pollution control equipment, textiles 
machinery and large excavators.  Policy supports fo r the initiative include preferential import duties of 
parts and material needed for R&D (vs. fini shed machinery), encouragement for procuring 
domestically manufactured new major technical eq uipment, a dedicated fund to facilitate capital 
market financing for domestic firms, and strict review of imports.  The State Council  Opinions  discuss 
new controls on foreign investment in these sect ors, including new approval requirements when 
foreign entities seek majority ownership or contro l and the strengthening of the management of 
equipment and machinery imports, as well as a num ber of other initiatives designed to promote, 
develop and expand the market share of domes tic companies in these sectors in China.   
8. In the United States' experience, sustained economic growth and de velopment of globally 
competitive companies is best achieved by relyi ng on market mechanisms and resisting domestic 
pressures to raise barriers to trade and to protect domestic companies against foreign competition.  
Government intervention often stymies development.  In addition, particularly at a time of large and 
rising trade and economic imbalances , introducing new investment restrictions intended to protect the 
development of strategic industries or specific se ctors inevitably leads to further bilateral trade 
frictions and can give rise to WTO concerns. 
(a) Please describe the legal effect of the State Council  Opinions .   
(b) Please clarify the full scope and intent of the State Council  Opinions .  What kinds of 
specific policies are being planned to s upport the development of the selected 
industries?   
(c) Does China have plans to expand the policies set forth in the State Council  Opinions 
to include other sectors in the future?  The United States notes that press reports 
indicate that the financial services, energy and petrochemicals sectors, among others, are under consideration.  Please explain. 
(d) Please describe the extent to which China has begun to implement the State Council  
Opinions .  What is the status of any proposed implementing regulations? G/TRIMS/W/47 
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  IV. M&A REGULATIONS 
9. In August 2006, new regulations on mergers and acquisitions (M&A regulations) were jointly 
issued by the Ministry of Commerce (MOFCOM), the State-owned Assets Supervision and Administration Commission (SASAC), the State Administration of Taxation (SAT), the State Administration of Industry and Commerce (SAIC), the China Securities Regulatory Commission 
(CSRC) and the State Administration of Foreign Ex change (SAFE).  No opportunity was provided for 
public comment on a draft of these regulations.  Inst ead, the regulations were issued in final form, 
effective one month later.  The regulations st rengthen MOFCOM's superv isory role over foreign 
investment, in part by requiring MOFCOM's appr oval of M&A transactions that it believes impact 
state economic security or involve famous Chinese brands.  The regulations also place MOFCOM in 
the role of determining if the domestic acquis ition target has been appropriately valued.   
(a) Please explain why China chose not to circulate a draft of the M&A regulations for 
public comment. 
(b) 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? 
(c) Article 12 of the M&A regulations calls  for MOFCOM's approval of any deal 
involving a "major industry", having "impact 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? 
(d) 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? 
(e) 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 consultant have a "good reputation", no "significant" 
criminal record and the "capability to conduc t" the investigation.  Does China intend 
to define these terms or otherwise provide more specificity regarding the necessary 
qualifications for an acquisition consultant in the implementing rules? 
(f) Chapter 5 of the M&A regulations re quires MOFCOM approval for any M&A 
transaction that meets specific criteria or involves "very larg e market share" or "other 
important factors" that affect competition.  Does China intend to define the quoted terms in the implementing rules?  What are the other applicable criteria?    
(g) Some provisions in Chapter 5 of the M&A regulations address competition policy 
concerns, such as market share.  Will th ese provisions remain in place after China 
issues its Anti-Monopoly Law?  Please explain. 
10. Does China have any plans to draft a new law on mergers and acquisitions?  If so, does China 
intend to circulate a draft of that law for public comment?  Please explain.  G/TRIMS/W/47 
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  V. FOREIGN INVESTMENT CATALOGUE 
11. In November 2004, the National Developmen t and Reform Commission (NDRC) and the 
Ministry of Commerce issued a revised Catalogue for the Guidance of Foreign Investment Industries .  
This catalogue became effective in January 2005.  Does China have any curren t plans to revise this 
catalogue?  Please explain. 
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