WORLD TRADE  
ORGANIZATION  G/TRIMS/W/55 
16 October 2007 
 (07-4451) 
Committee on Trade-Related Investment Measures Original:   English 
  
 
COMMUNICATION FROM THE EUROPEAN COMMUNITIES 
  
 The following communication, dated 15 October 2007, 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 1 November 2007 , 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 and 25 of Octo ber 2006, 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 and G/TRIMS/W/50.   
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. 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 
                                                     
 
1 WT/L/432 G/TRIMS/W/55 
Page 2  
 
  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."   
4. 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  
5. In connection with prior transitional review s before this Committee, the EC 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' objectiv e of promoting international competitiveness.   
6. During last year's transitional review before th is Committee, the EC argued that such stringent 
regulations with a view to protecting a prelimin ary stage of development of the industry were no 
longer relevant, given the outstanding performan ce of the already matu re Chinese automobile 
industry.  China responded that it was "legitimate 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 claimed that this was "not in any way related to WTO or our accession commitment".  
7. The EC fails to understand the economic and legal groundings 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.  
8. 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 cons olidation of the automobile industry.  
9. 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/55 
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  II. STEEL INDUSTRY DEVELOPMENT POLICY 
10. 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 "Steel Industry Development Policy".    
11. 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 argued that this limitati on was counterproductive and would hinder a sound 
development of the steel industry and investment  flows in the sector.  China 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. 
 
12. 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 last year's transitional review , China asserted that these requirements applied for 
both domestic and foreign companies.  
13. 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 ? 
14. 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".  
 
15. 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:  G/TRIMS/W/55 
Page 4  
 
   
(a) Further to China's reply regarding th e definition of "outdated equipment"
3, could 
China indicate where we can consult the catalogues of outdated production capacity techniques and products?  Has this criteria b een clearly defined, i.e. pollution levels, 
energy consumption levels, etc.? 
(b) 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? 
(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? 
(d) Could China clearly define the term "adva nced and practical equipments" in this 
context and indicate whether it intends to impose this condition on the importation of 
such products?  
III. PETROCHEMICAL, CHEMI CAL, ENERGY SECTORS  
A. JV
 OWNERSHIP LIMITATIONS  
16. In relation to last year's transitional revi ew, the EC addressed the foreign ownership ceiling, 
in some cases of a less than 50 per cent, which impedes further growth and investments in sectors such as the petrochemical, chemical, energy and envi ronmental sectors.  In particular, the Measures 
for Operation and Management of Clean Devel opment Mechanism (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 China that is wholly or majority-owned by 
foreign investors will not qualify as CDM projects in Ch ina.  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.   17. We note that China's rapid industrial devel opment 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  
18. The EC notes that the Measures for Oper ation and Management of Clean Development 
Mechanism (CDM) projects do also include local cont ent requirements.  For instance, and with regard 
to the energy sector, the current policies do not enc ourage the participation of foreign invested JVs 
and enterprises as suppliers of equipment in th e power generation and transmission sectors.  
Government agencies and related SOEs are requi red to purchase new and advanced technology 
equipment and services only from domestic companies.  In particular, these local content requirements 
                                                      
3 G/TRIMS/W/25, paragraph 37.  G/TRIMS/W/55 
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  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 industr y.  During last year's transitional review, China 
noted that "it was not aware of any local content requirements in these sectors".  However, the ruling 
operational measures for the management of CDM proj ects are illustrative of the use of local content 
requirements.  
 
19. In light of China's commitmen ts in paragraph 7.3 of China's Protocol Accession, the EC seeks 
some clarifications regarding these measures.    
(a) Could China confirm that government agen cies and related SOEs are required to 
purchase new and advanced technology equipment and services only from domestic 
companies?  
(b) Could China elaborate on the local content requirements currently applied in the 
renewable energy sector and in the chemical sector?   
(c) In addition, could China confirm that fore ign invested joint ventures and enterprises 
that are established and duly registered in China are equally treated as domestic 
enterprises as suppliers of equipment a nd services in the power generation and 
transmission sectors?   
20. In addition, the EC would like to seek clarifi cation regarding the existence of draft legislation 
from the National Development and Reform Commission (NDRC) aiming at increasing the localization of large-scale petrochemical projects.  Several sources indicate that provisions in the draft 
legislation would require project developers to su bmit an equipment procurement list to the Chinese 
authorities and forbid the import of equipment that has already been produced and marketed locally.  
Tax policies would be implemented to limit th e import of equipment that can be produced 
domestically but is not yet commercialized.  The overall objective would be to achieve a 75 per cent 
localization rate by 2010.  
  
21. In this context, the EC would like to pose the following questions: 
  
(a) Could China confirm whether such draft le gislation is indeed under preparation?  
(b) If so, could China inform Members whethe r it has consulted relevant stakeholders 
during the preparations of the draft legislation?   In addition, could China indicate where we 
can find a sample of this draft legislation?  
(c) Could China confirm whether the abovem entioned localization requirements are in 
full compliance with paragraph 7.3 of China's Accession? 
IV. TRIMS INCOMPATIBLE CLAUSES IN CONTRACTUAL ARRANGEMENTS 
22. During the last year's transition review, th e EC addressed concerns regarding the procedures 
to amend contracts that contained TRIMs incompatib le clauses.  China noted that "the investors may 
decide by themselves whether to change the terms" of a contract, and if so was decided, "they may file 
the application to relevant authorities to change thei r articles of association or contract of enterprise 
accordingly".  In addition, China stressed that this  application would be "processed timely and in a 
manner consistent with TRIMs agreement" 
23. 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/55 
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  (b) As regards the application process, could China brief on the steps to follow and the 
role of national and sub-national authorities throughout the process?  
(c) How does China ensure that  the "approval for investment by national and sub-
national authorities" is not  conditioned on performance requirements of any kind?  
(d) 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?  
(e) 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?   
(f) 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 
24. In connection to prior tran sitional reviews, the EC 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 that "[t]he technology to be 
introduced to the joint venture shall be appropriate and advanced and enable the venture's products to 
display conspicuous social economic results domesti cally or to be competitive on the international 
market".  In response to EC's concerns regardi ng compatibility of these requirements with China's 
Accession Protocol, China stressed that Article 41 ai ms at ensuring that technology is "appropriate 
and advanced", though it is not a performance requirement as such.  
25. 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 
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 
26. The EC welcomes the adoption of the Anti-Monopoly Law and looks forward to the 
publication of its implementing rules.  The EC hopes that this law and its various components (i.e. the 
national security clause) will be applied in a fair , transparent and non-discriminatory manner in order 
to benefit the Chinese economy and Chinese consumers.   In addition, the EC would like to remind 
Chinese authorities about the importance of consulti ng all stakeholders during the preparations of 
draft implementing measures.   
27. In this context, the EC would like to pose the following questions:   G/TRIMS/W/55 
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  (a) Could China elaborate on the time frame for adopting these implementing rules?  
(b) What is the role of the newly created "Anti-Monopoly Commission"? What is the 
expected date for this new Comm ission to become operational? 
 
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