WORLD TRADE  
ORGANIZATION  G/MA/W/79 
20 September 2006 
 (06-4474) 
Committee on Market Access Original:   English 
  
 
CHINA'S TRANSITIONAL REVIEW MECHANISM  
 
Communication from the European Communities
 
  
 The following communication, dated 19 September 2006, is being circulated at the request of 
the Delegation of the European Communities.  
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 The EC is transmitting comments and questions in advance of the meeting of the Market 
Access Committee of 4 October 2006, in order for th e Chinese authorities to reply to and complete 
any outstanding information.   Once the information to be provided by China in accordance with paragraph 8 and 
paragraph IV.3 (a) of Annex 1A of  its Protocol of accession has been received, the EC might come 
back with additional questions. 
 
Chinese exports restrictions 
 
 
 The EC refers to its 2005 communication in which it had recalled China's commitments  
 
• to eliminate, upon accession, export restrictions unless they could be justified under WTO rules 
(§ 165 of the Working Party Report) and 
• to notify any possible export restrictions to the WTO. 
  Justification requested for the existing export r estrictions by the EC since the TRM exercise 
of 2002 has not been provided  by the Chinese authorities nor was it transmitted to the WTO. 
 
 The EC thus remains very concerned about the WTO compliance of a number of the export 
restrictions maintained by China.  China is th erefore urged to comply with its accession related 
commitments and to bring its export regime of ra w materials into conformity with WTO rules.  
  The EC attaches particular importance to and refers to earlier bilateral exchanges on coke, 
rare earths and non-ferrous metals. It urges China 
 
• to notify in line with Part I-Section 8 (b) of  the Protocol of accession the quantities associated 
with the export restrictions imposed on the products listed in the Chinese document of 17 October 2003 (and on any other product that  may not be included in this list) and  
 
• to transmit to the WTO the justification for theses export restrictions; or 
 
• when no such justification exists, correctly notify to the WTO when and how it intends to bring its 
coke export regime in line with WTO rules and also to transmit all necessary information when 
this will be case for rare earths. G/MA/W/79 
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   The EC asks China to communica te a timeframe for the aboliti on of the export licence system 
on coke.   The EC urges China to present a comprehensive table on the export taxes and VAT reimbursement schemes and other export restricti ons, in particular on non- ferrous metals and on 
chemical industry raw materials such as fluorsp ar and phosphorous. Attempts to obtain such 
information have met with failure and showed so me deficiency current implementing provisions to 
fulfil WTO transparency requirements.   As far as the introduction of new export restri ctions is concerned, the EC urges China to 
comply with the obligation of consulting countries ha ving a substantial interest in trade of products 
concerned.    The EC is also concerned that a number of e xport restrictions maintained by China may affect 
the supply of raw hides and skins for European tanners. 
 
 In this context, the EC would like to urge China  
• to clarify and notify the products subject to export restrictions and taxes; 
• to transmit to the WTO the justification for theses export restrictions. 
 
China Compulsory Certification (CCC) Regulation 
 
 
 The EC would also like stress to the Chin ese authorities its concern about the growing 
difficulties encountered by European exporters owi ng to the China Compulsory Certification (CCC) 
regulation. Several sectors are affected by provisions  that appear to be trade restrictive, impose a 
heavy cost on importers and are not proportionate to the objectives stated by the Chinese legislation. 
The EC urges China to develop and implement a certification system in a way avoid unnecessary 
barriers to trade. 
 
Automobiles  
 
 The EC refers to its serious concerns re garding the New Automobile Policy (hereafter 
“NAP”) already voiced in last year’s transitional review, especially with a view to the wide scope of 
state intervention and the uncertainty about the implementing regulations that will supplement the 
new policy. Based on past experience on how the NAP  was developed, the EC wishes to stress the 
transparency obligations under WTO rules with rega rd to the outstanding implementation regulations 
of the NAP. Publishing drafts of these implementi ng regulations well in advance would allow other 
WTO Members to comment on them. 
 
 The EC would like to draw China’s sp ecial attention to the following issues 
 (i) Administrative measures for the import of automobile components fulfilling the 
characteristics of a whole vehicle .  
 
 The EU believes that China is in breach of its obligations as a WTO member and its 
undertakings on joining the WTO. This issue has now been referred to the WTO Dispute 
Settlement Body and does not need to be review ed in the context of the transitional review 
mechanism. The EU remains open to finding a mutually agreed, WTO-compliant solution. 
   G/MA/W/79 
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  (ii)  Joint venture ownership limitation   
   The NAP imposes restrictions on foreign invest ors, which have contributed substantially to 
the rapid development of China’s automotive sect or. Foreign joint venture partners are still 
not allowed majority ownership in automobile production. Moreover, participation of foreign 
joint venture partners in automobile manuf acturing projects is limited to two for the 
production of passenger cars and two for commer cial vehicles (“2+2”). Due to the global 
nature of the automotive industry and the bran d strategies of local companies locked in 
50/50% ventures with foreign vehicle makers su ch restrictions are counterproductive to the 
NAP’s objective of promoting international competitiveness. 
 
  In this context the EC urges China   - to allow foreign majority investment and  - to eliminate the “2+2” regulation.  
 
 The EC likes to draw China’s attention to the f act that a review of the joint venture ownership 
regulation might well help to facilitate to solve the problem related to the localisation of parts 
production (see (i)). 
 (iii)  Type Approval/ Homologation Standards
 
 
 Vehicles/components produced in China are type-approved according to the China 
Compulsory Certification (CCC) regulation. Since the CCC rules are not internationally recognized these vehicles are marketable on the domestic market only. Moreover, vehicles 
importers have to carry considerable – and so metimes prohibitive – costs as vehicles already 
type approved according to EU Directives that conform to the internationally recognized 
homologation standards of the 1958 UN/ECE Agreement have to be approved again 
according to the CCC rules. The CCC regulation thus effectively constitutes a non-tariff market access barrier. 
  Against this background the EC reco mmends China’s accession to the 1958 UN/ECE 
agreement as soon as possible.  
  Adhesion to the Agreement would allow China both to recognize and to deliver homologation 
results obtained in accordance with the testing methods it prescribes. That would facilitate the 
sales of China-made cars in othe r countries. In addition, China would be able to proactively 
participate in preparing internationally recogni zed homologation standards as they continue to 
evolve. 
 (iv)  The Automotive Industry Development Policy
 
  According to recent press releases, China envisages to modify the "Automotive Industry 
Development Policy" reinforcing the conditions for EU manufacturers to invest in China. 
According to these draft provisions, new invest ors would only be authorised to produce 
Chinese brand vehicles. Amendments to the "A utomotive Industry Development Policy" may 
also concern the production of parts which coul d also be subject to Joint venture ownership 
limitation. This may have a very  negative impact concerning the investment of EU car parts 
manufacturers in china. Finally, the Chinese govern ment may also decided to grant financial 
support to Chinese manufacturers in or der to promote export of vehicles. 
  In this regard, the EC would be grateful if China could: G/MA/W/79 
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   -  Provide information on the latest development on the "Automotive Industry 
Development Policy" regarding these three points in order to dispel legitimate concerns raised by the proposed policy.  
 
Steel Industry Development Policy
 
 
(i)  In article 30 of the NDRC Steel Industry De velopment Policy, last paragraph, referring to 
high energy consuming and high polluting primar y processed products, it is stated: " Limits 
will be imposed  on the exports of high energy c onsuming and high polluting primary 
processed products such as coke , ferroalloys, pig iron, steel scrap , and billets (ingots), and 
export drawbacks on these products w ill be reduced or abolished."  
  In this regard, the EC would be grateful if China could explain in detail:   
-  What is meant by "limits will be im posed"- the consistency with China WTO's 
obligations, in particular with reference to export restrictions; 
-  which “export drawbacks” the Chinese aut horities refer to and which consequences 
they expect from reduction or abolition thereof;  
-  the measures and provisions that have been  or will be taken to implement this policy; 
-  Which ministry/department will do be in charge of the implementation. 
 
(ii)   In article 30 of NDRC Steel Industry Devel opment Policy, first paragraph, it is stated: "The 
state encourages
 enterprises to strengthen interna tional cooperation in mining industry 
resources. The state supports  large scale backbone enterprises and corporations to establish 
iron, chrome, manganese, nickel, waste st eel and coking supply bases overseas through 
investment, joint ventures, partnerships and purchases. The state encour ages for needs in raw 
materials such as ore and coke, to be reso lved by relying on the overseas market."  
  In this regard, the EC would be grateful if China could explain in detail:   
-  the measures it intends to take to encourage
 enterprises to strengthen international 
cooperation in mining industry resources; 
-  the measures it intends to take to "support large scale backbone enterprises and 
corporations” to establish iron, chrome, manganese, nickel, waste steel and coking supply bases overseas through investment, joint ventures, partnerships and purchases; 
-  the implementing provisions it intends to take as well as their possible timing. 
 
(iii)  Article 18 of the NDRC Steel Industry Deve lopment Policy reads:  "Policies for imported 
technologies and equipments: use of national e quipment and technologies is encouraged, and 
import is to be reduced
. The equipments and technologies  that must be imported because they 
can not be made in China or can not meet th e requirements must be advanced and practical . 
The manufacturing of the equipments which are la rgely needed in the future will be localised. 
Use of outdated and second hand steel production equipments eliminated either at home or 
overseas is prohibited."  
  In this regard, the EC would be grateful if China could explain in detail:   
-  the measures it intends to take to reduce imports; 
-  he definition of  "advanced and practical" in this context; 
-  the criteria that will have to be met to  fulfil such definition of "advanced and 
practical"; 
-  the implementing measures as well as their timing. 
  G/MA/W/79 
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  (iv)  Article 23 of the NDRC Steel Industry Development Policy states that "In principle, when 
investing in the Chinese steel industry, foreign investors will not hold a controlling stake." This limitation is questionable in view of  WTO commitments, counterproductive and will 
hinder the development and the investments. The EC requests that this artificial limit be lifted and that investments can take place on the basis of sound and objective factors. 
 Petrochemical, chemical, energy and environment sectors
 
 
(i)  JV ownership limitations and local content requirements  
 
The Chinese Authorities maintain a foreign invest ment ceiling in some cases of a less than 
50% ownership position for the foreign partner that impedes further growth and investments in those sectors. In addition, local content re quirements are in place for the construction of 
new plants. In this context the EC urges China to:  
 - allow foreign majority investment so as to encourage the continued and increased 
investment and technology transfer in the sector, and  
 - eliminate local content requirements wh ich would allow industry to catch up with 
international standards and competition.    
  (ii)  Retail and wholesales fuels market opening
 
 
There are many restrictions on foreign en terprises that want to access China's growing 
wholesale/retail fuel sector and local enterprises benefit from unfair competitive advantages. The EC urges China to:     
 - Lift the majority ownership condition in the draft Wholesale Regulation, which 
requires foreign firms to possess at least 30 retail sites prior to receiving access to the wholesale fuel market. This condition can not be met by foreign firms. 
 - Modify the new franchise requirements, which require an existing turnover of 1m 
tons per annum before allowing fuel dealer ship a condition that can only be met by 
PRC National Oil Companies. 
 - Change the Price Control Regulation for refined oil products which leads to 
disparities in pricing, negative margins and inability to secure reliable supply. 
 
Pharmaceuticals
 
 Despite the EC repeated requests to address the problems, this sector continues to be 
characterised by a variety of unnecessary, burdensome or costly registrations, licensing, certification 
and reimbursement procedures are creating trade barriers: 
For example:   
  1.  Imported active pharmaceutical ingred ients face stricter testing requirements 
compared to local manufactured products as for example the very extensive "Port Drug 
Inspection" as well as the case-by-case quality standard evaluation.  
 2.  It typically takes 6 to 12 months to obtain clinical trial approval in China, while 
clinical trial approvals can usually be obtain ed within 3 months in other major markets.  
 
3.  The price of the originator (??) medicine is tied to the cost-basis of its generic 
version plus a small premium. This approach is  contrary to international practices where the 
price of generics is linked to the originator medicine. G/MA/W/79 
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  4.  As regards to the National Reimbursement Drug List (NRDL) problems arise due to 
the fact that  the lists are not  annually updated and as a result the most innovative products are not included.  5.  The approval and licensing procedures for the establishment of  foreign invested 
commercial enterprises are unclear.  
   On all these issues the EC reiterates its serious  concerns as some of these measures appear to 
run counter to  China’s WTO commitments, in particular national treatment.  
 In this regard, the EC would be grateful if China could: 
 
-   Ensure imported and locally manufac tured products are treated equally. 
-  Shorten clinical trial appli cation approval time to 3 months.  
-  De-link the pricing of innovative drugs (of the originator) from generics.  
-  Update reimbursement lists on an annual basis with newly registered drugs. 
-  Provide written and clear guidance to assist local authorities, namely drug regulatory and 
commercial bureaus, in amending business licenses for pharmaceutical companies and set up 
a uniform system of approval of the establishment of Foreign Invested Commercial Enterprises in all locations throughout China.  
 
Cosmetics
 
 
 Despite the many requests by the EC, the approval procedures for imported non-special use 
cosmetics still differ from that of domestic non- special use cosmetics. For imported products, a 
multiple approval procedure is still compulsory, l eading to extensive workload, misallocation of 
personnel and financial resources and delays  in product introduction to the market. 
  This  measure is likely to invalidate some of China’s WTO commitments (national treatment 
obligation).  
 In this regard, the EC requests that China u nifies the notification system currently in force for 
imported non-special use and domestic non-special use cosmetics.  
Wood & Wood products
 
  The Notice of the General Office of the State Council on transferring Opinions on Speeding 
up the Conservation and Substitution of Timbers of Such Departments as National Development and 
Reform Commission - Guobanfa No. 58 in (2005), is unclear on whether wood which has been legally 
harvested and which originates from sustainable forests can be used in  the Chinese building, 
construction and interior decoration sector.   
 In this regard, the EC would be grateful if China could: 
 -  describe in detail the measures and regulations  it has adopted or intends to adopt and the 
implementing provisions thereof,  in order to implement the policy guidelines set up in Guobanfa 58. 
-  Ensure that such regulations will not discrim inate between domestic a nd foreign suppliers of 
wood which has been legally harvested and which originates from sustainable forests. 
-   Ensure that full consultation of stakeholders , including foreign suppliers of sustainable wood 
products, will be carried out well in advance of the process of dr afting the necessary 
implementing regulations. 
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