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World Trade Organization: Observations on China's Rule of Law	 
Reforms (06-JUN-02, GAO-02-812T).				 
                                                                 
This testimony describes China's development of rule of law	 
practices related to the commitments China made to the World	 
Trade Organization (WTO), which it joined in 11, 2001. When China
joined the WTO, it agreed that its legal measures would be	 
consistent with its WTO obligations. GAO found 60 commitments	 
that specifically obligate China to enact, repeal, or modify	 
trade-related laws or regulations. In addition, China has made a 
substantial number of other WTO commitments related to the rule  
of law in transparency, judicial review, uniform enforcement of  
laws, and nondiscriminatory treatment. Chinese government	 
officials described how their efforts for reform go beyond	 
China's WTO commitments and include broad reforms of laws and	 
regulations at the national and provincial levels, as well as	 
reforms of judicial and administrative procedures. However,	 
Chinese officials acknowledged the challenges they face in	 
completing the necessary reforms and identified the need for	 
outside training assistance. According to GAO's survey, U.S.	 
businesses in China consider rule of law-related WTO commitments 
to be important, especially the consistent application of laws,  
regulations, and practices in China, and enforcement of 	 
intellectual property rights. However, a majority of businesses  
answering the survey anticipated that these rule of law 	 
commitments would be difficult for the Chinese to implement, and 
they identified some concerns over specific implementation	 
issues. 							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-812T					        
    ACCNO:   A03533						        
  TITLE:     World Trade Organization: Observations on China's Rule of
Law Reforms							 
     DATE:   06/06/2002 
  SUBJECT:   International trade				 
	     Monitoring 					 
	     International agreements				 
	     Foreign governments				 
	     International organizations			 
	     China						 

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GAO-02-812T
     
Testimony Before the Congressional Executive Commission on China

United States General Accounting Office

GAO For Release on Delivery Expected at 2: 30 p. m., EDT Thursday June 6,
2002

WORLD TRADE ORGANIZATION

Observations on China?s Rule of Law Reforms

Statement of Susan S. Westin, Managing Director, International Affairs and
Trade

GAO- 02- 812T

Page 1 GAO- 02- 812T China's Rule of Law Reform

Mr. Chairman and Members of the Commission: I am glad to have the
opportunity today to discuss aspects of China?s development of rule of law 1
practices that are related to the commitments China made to the World Trade
Organization (WTO), which it joined on December 11, 2001. My observations
address three areas: (1) How elements in China?s WTO accession agreement 2
seek to improve the rule of law; (2) What Chinese officials told us about
their reform efforts; and (3) What the U. S. business community has told us
about the importance of these efforts and their views on rule of law
implementation in China to date.

My statement today is based on our ongoing work; therefore, my observations
are preliminary in nature. As you know, both the Senate Finance and House
Ways and Means committees have asked GAO to conduct a 4- year body of work
relating to China?s implementation of its WTO commitments. This includes
analyzing China?s final WTO commitments, performing annual business surveys,
evaluating China?s implementation of its commitments, and assessing
executive branch monitoring and enforcement activities. Our work to date has
included two trips to China; one trip to Geneva, Switzerland; numerous
meetings with U. S. and Chinese government officials; and an assessment of
preliminary results from a mail survey and structured interviews of U. S.
companies doing business in China. We are finishing our analysis and
verifying our work, and we plan to report the final results of our work in
various products by mid- October.

Many elements in China?s WTO accession agreement seek to improve the rule of
law. When China joined the WTO, China agreed to ensure that its legal
measures would be consistent with its WTO obligations. In our

1 Definitions of ?rule of law? are varied. For purposes of this testimony,
we generally use it to describe a society in which law, for the most part,
guides people and the government in the conduct of their affairs and
constitutes the supreme legal authority, in contrast to the authority of an
individual ruler or a political party.

2 China?s WTO commitments are documented in its (1) Protocol on the
Accession of the People?s Republic of China, which contains the terms of
membership that China negotiated and affirms China?s adherence to the WTO
agreements; (2) the Report of the Working Party on the Accession of China,
which contains additional commitments as well as provides a narrative on the
results of China?s negotiations; and (3) annexes containing market access
commitments, which primarily cover individual tariff lines for goods and
schedules for various service sectors. Summary

Page 2 GAO- 02- 812T China's Rule of Law Reform

analysis of China?s WTO commitments, we found at least 60 commitments that
specifically obligate China to enact, repeal, or modify trade- related laws
or regulations. In addition, China has made a substantial number of other
WTO commitments related to the rule of law areas of transparency, judicial
review, uniform enforcement of laws, and nondiscriminatory treatment.

Chinese government officials have emphasized their commitment to make WTO-
related reforms that will strengthen the rule of law. They described how
their efforts for reform go beyond China?s WTO commitments and include broad
reforms of laws and regulations at the national and provincial levels, as
well as reforms of judicial and administrative procedures. However, Chinese
officials acknowledged the challenges they face in completing the necessary
reforms, including the capacity of the government to carry out new functions
in a timely manner. In addition, despite an extensive training program about
WTO- related reforms throughout the country, officials identified the need
for outside assistance, because they lacked the expertise and capacity to
meet all their training needs themselves.

According to the preliminary results of our survey, U. S. businesses in
China consider rule of law- related WTO commitments to be important to them,
especially the consistent application of laws, regulations, and practices in
China, and enforcement of intellectual property rights. However, a majority
of businesses answering our survey anticipated that these rule of law
commitments would be difficult for the Chinese to implement, and they
identified some concerns over specific implementation issues. U. S.
businesses told us in interviews that they expected WTO reforms, including
those related to the rule of law, to be part of a long- term process.
Nevertheless, they believe the Chinese leadership is dedicated to living up
to their WTO commitments.

Rule of law reform must take place within China?s legal and political
system, and any assessment of rule of law development should be judged in
the context of Chinese institutions. China?s current legal system is
relatively new and is based, to a great extent, on the civil law codes of
Germany as adopted by Japan, and, to some extent on the legal institutions
of the former Soviet Union and China?s traditional legal system. Two
important characteristics of Chinese legal development since 1949 have been
the subordination of law to Communist Party policy and the lack of
independence of the courts. Another characteristic is the large number of
legal measures used to implement a law, including administrative Background

Page 3 GAO- 02- 812T China's Rule of Law Reform

regulations, rules, circulars, guidance, Supreme People?s Court
interpretations, and similar local government 3 legal measures. China?s
central government laws, regulations, and other measures generally apply
throughout China. Although local governments enact laws and regulations,
these must be consistent with central government measures. In 1996, a number
of China?s top leaders emphasized the principle of administering the country
in accordance with law. Several years later, China amended its constitution
to incorporate this principle.

A substantial number of the many commitments that China has made to the WTO
can be characterized as related to developing rule of law practices. In a
broad sense, China?s WTO commitments suggest that in its commercial
relations China is on the way to becoming a more rules- based society,
contingent on the faithful implementation of its WTO accession agreement.
This agreement is highly detailed and complicated, running to over 800 pages
including annexes and schedules. It is the most comprehensive accession
package for any WTO member. As part of this package, China agreed to ensure
that its legal measures would be consistent with its WTO obligations. About
10 percent of the more than 600 4 commitments that we identified in China?s
accession package specifically obligate China to enact, repeal, or modify
trade- related laws and regulations. These commitments cover such trade
policy areas as agricultural tariff- rate quotas, export and import
regulation, technical barriers to trade, intellectual property rights, and
nondiscrimination. In addition, by becoming a WTO member, China has agreed
to abide by the underlying WTO agreements, such as the General Agreement on
Tariffs and Trade, the General Agreement on Trade in Services, the Agreement
on Trade- Related Aspects of Intellectual Property Rights and the
Understanding on the Rules and Procedures Governing the Settlement of
Disputes.

China also has made a substantial number of important, specific commitments
in the rule of law- related areas of transparency, judicial review, uniform
enforcement of legal measures, and nondiscrimination in its commercial
policy. In the area of transparency, China has agreed to

3 Local governments include provinces, autonomous regions, municipalities
directly under the central government, other municipalities, special
economic areas, and counties. 4 This number excludes market access
commitments contained in China?s tariff and services schedules. Many
Elements in

China?s WTO Accession Agreement Seek to Improve the Rule of Law

Page 4 GAO- 02- 812T China's Rule of Law Reform

designate an official journal for publishing trade- related laws and
regulations and to provide a reasonable period for public comment before
implementing them. China has also agreed to designate an enquiry point where
individuals, business enterprises, and WTO members can request information
relating to these published laws and regulations. Transparency requirements
and commitments to report information to the WTO together represent about a
quarter of the commitments we identified in China?s accession package. In
the area of judicial review, China has agreed to establish or designate
tribunals to promptly review trade- related actions of administrative
agencies. These tribunals are required to be impartial and independent of
the administrative agencies taking these actions. In the area of uniform
enforcement, China has agreed that all trade- related laws and regulations
shall be applied uniformly throughout China and that China will establish a
mechanism by which individuals and enterprises can bring complaints to
China?s national authorities about cases of nonuniform application of the
trade regime. Finally, in the area of nondiscrimination, China agreed that
it would provide the same treatment to foreign enterprises and individuals
in China as is provided to Chinese enterprises. China also agreed to
eliminate dual pricing practices as well as differences in treatment
provided to goods produced for sale in China and those produced for export.
(See the appendix for examples of rule of law- related commitments included
in China?s WTO accession agreement.)

Chinese government officials have stated their commitment to make WTOrelated
reforms that would strengthen the rule of law. Furthermore, China?s plans
for reform go beyond conforming its laws and regulations to China?s WTO
commitments and include a broad legal review, as well as reforms of judicial
and administrative procedures. Chinese officials with whom we spoke
discussed the numerous challenges they face in these areas and said that
these reforms will take time to implement. They also stated their need for
outside assistance to help them with their reform efforts.

First, Chinese government officials are in the midst of a comprehensive,
nationwide review of laws, regulations, and practices at both the central
and provincial levels. This review is to lead to repeals, changes, or new
laws. According to one report, Chinese officials have identified more than
170 national laws and regulations and more than 2,500 ministry regulations
as being WTO related. Chinese Officials Cite

Early Reform Efforts But Recognize Challenges to Implementation

Early Reform Efforts in Three Areas

Page 5 GAO- 02- 812T China's Rule of Law Reform

Officials whom we interviewed from the Ministry of Foreign Trade and
Economic Cooperation (MOFTEC) contend that generally China has done a good
job of implementing its WTO obligations to date. MOFTEC officials said that
complete implementation will take time and that part of their role is to
teach other ministries how to achieve reform according to WTO commitments.
They noted the importance of their efforts to coordinate WTO- related
reforms with other ministries because Chinese laws tend not to be very
detailed and, as a result, it is difficult to incorporate the language of
specific WTO commitments into Chinese laws. Officials said that,
consequently, Chinese laws will sometimes use general, open- ended phrases
that refer to WTO commitments, such as the services annexes, while the
detail is set forth in the implementing regulations .

Provincial authorities are still reviewing their laws and regulations to see
if they are consistent with national laws. Provincial- level officials told
us that in some cases they were still waiting for the national government to
finish its legislative and regulatory processes. This process will guide
their own review of laws and regulations at their level. Prior to their
enforcement, provincial- level laws, regulations, and other regulatory
measures that implement the central government?s legal measures are
submitted to the central government for review. Chinese officials told us
that they have found many provincial regulations that did not conform to
national laws and regulations. MOFTEC officials estimated that it would take
a year or two to complete this entire reform process, while some provincial
officials estimated 2- 3 years.

Second, China is undertaking reform of its judicial processes to ensure that
they are compatible with its WTO commitments. The Supreme People?s Court
informed us that since China?s accession it has been revising hundreds of
judicial interpretations about laws that do not conform to WTO rules. It has
also instructed the judiciary throughout the country to follow the revised
interpretations and to undertake similar work at their respective levels.
Officials told us that the court is also involved in reforms related to the
WTO areas of judicial independence and uniform application of legal
measures. For example, with regard to judicial independence, in February of
this year the court issued new regulations to improve the adjudication of
civil and commercial cases involving foreign parties. Under these
regulations, mid- level and high- level courts, in contrast to the basic-
level courts, will directly adjudicate cases involving, among other
subjects, international trade, commercial contracts, letters of credit, and
enforcement of international arbitration awards and foreign judgments.
Furthermore, China recently amended its Judges Law to

Page 6 GAO- 02- 812T China's Rule of Law Reform

require that new judges pass a qualifying exam before being appointed to a
judicial position.

Third, China is reforming its administrative procedures and incorporating
the rule of law into decision- making. About one third of the commitments we
identified in China?s WTO accession agreement relate to guidance about how a
particular commitment should be carried out. Officials told us that they are
attempting to reduce the number of layers necessary to approve commercial
activities and to make these processes more transparent. These actions can
help implement rule of law practices at the day- to- day level. These
reforms are also still underway at the central and provincial levels. For
example, State Economic and Trade Commission (SETC) officials told us that
they have identified 122 administrative procedures that must be changed to
conform to WTO rules but that 40 percent of these must still be changed. In
Shanghai, officials said that they have eliminated 40 percent of government
approvals under their jurisdiction and that they are working to make the
remaining 60 percent more efficient.

Some Chinese officials with whom we spoke acknowledged challenges in
completing all these reforms in a timely manner. These challenges include
insufficient resources, limited knowledge of WTO requirements, and concerns
about the effects on the economy of carrying out particular WTO commitments.
For example, Chinese officials said that the effects of the changes needed
to conform their tariff- rate quota administration process to WTO
requirements were so difficult that they were unable to allocate the quota
and issue certificates in time to meet the deadlines set forth in China?s
WTO commitments. A number of Chinese officials also indicated that it has
been very difficult to fulfill a WTO transparency commitment that requires
China to translate all its trade laws, regulations, and other measures into
an official WTO language- English, French, or Spanish. This difficulty is
due in part to the abundance of the materials to be translated and the
highly technical quality of many legal measures.

Many Chinese officials we interviewed emphasized the importance of the steps
they had taken at both the national and subnational levels to increase the
training of government officials about WTO rules. For example, the State
Economic and Trade Commission and the General Administration of Customs said
they have been holding training sessions for over a year at the national,
provincial, and municipal levels on general WTO rules and China?s WTO
obligations. In addition, the National Judges Chinese Officials

Acknowledge Challenges Chinese Officials Identified the Need for More
Technical Assistance

Page 7 GAO- 02- 812T China's Rule of Law Reform

College plans to train 1,000 judges from local courts across the country and
send others for training abroad. Furthermore, governments in Shanghai,
Guangzhou, and Shenzhen have established WTO affairs consultation centers
that organize training and international exchange programs for midlevel
Chinese officials on implementing WTO reforms.

Despite these efforts, Chinese officials acknowledged that their
understanding of WTO rules remains limited and that more training is needed.
According to several Chinese government officials we interviewed, China
continues to lack the expertise and the capacity to provide all the training
necessary to implement WTO rules and, therefore, it has asked for technical
assistance both multilaterally and bilaterally from outside China. As a
result, the WTO secretariat, the European Union, the United States, and
other WTO member countries have either given or plan to give training
assistance to China in numerous areas, including rule of law- related
programs. For its part, the U. S. government has provided limited training
on a range of WTO- related topics, including standards, services,
antidumping requirements, and intellectual property rights. The U. S.
private sector also has provided technical assistance. In our interviews of
U. S. businesses in China, almost one third of respondents said that they
had given some assistance to China that related to implementation of China?s
WTO commitments.

Preliminary data from our written survey indicate that China?s WTO
commitments related to rule of law reforms are some of the most important
for U. S. businesses with a presence in China. 5 For example, more than 90
percent of businesses that have responded to date indicated that the
following reform commitments were important or somewhat important to their
companies:

 consistent application of laws, regulations, and practices (within and
among national, provincial & local levels);

 transparency of laws, regulations, and practices;

 enforcement of contracts and judgments/ settlement of disputes; and

 enforcement of intellectual property rights. 5 We have surveyed more than
500 U. S. companies with a presence in China and have received more than 175
usable responses as of the date of this testimony. Rule of Law- Related

Reforms Are Important for U. S. Business, but Difficulties Anticipated

Page 8 GAO- 02- 812T China's Rule of Law Reform

When asked to identify the three commitments that were most important to
their companies, two WTO rule of law- related areas received the greatest
number of responses in our written survey - consistent application of laws,
regulations, and practices; and enforcement of intellectual property rights.
We will include a more complete analysis of these and other issues
considered in our business survey in a report to be released this fall.

A majority of businesses answering our survey expected these rule of law
commitments to be difficult for China to implement relative to its other WTO
commitments. Businesses cited a number of reasons for this relative
difficulty, including (1) the cultural ?sea change? required to increase
transparency; (2) a reluctance to crack down on intellectual property right
violations stemming from a fear of destabilizing the labor force; and (3)
the challenge of implementing laws, rules, and regulations consistently
among provinces and within and among ministries.

Similarly, in our interviews, company officials noted the magnitude of WTO-
related reforms, including those that would strengthen the rule of law. 6
They said that successful implementation would require long- term effort.
Commensurate with the expected difficulty in carrying out reforms, we heard
numerous specific individual complaints from U. S. companies, including
concerns about

 vague laws and regulations that create uncertainty for foreign businesses;

 lack of transparency, which denied foreign companies the ability to
comment on particular draft laws or regulations or to respond to
administrative decisions;

 conflicting and inconsistent interpretations of existing laws and
regulations from Chinese officials;

 unfair treatment by, and conflicts of interest, of Chinese regulators; and

 uneven or ineffective enforcement of court judgments. Nevertheless, U. S.
businesses in China believe that the Chinese leadership is strongly
committed to reform and that the leadership has communicated this commitment
publicly. Several private sector officials noted a more open, receptive, and
helpful attitude on the part of the government officials with whom they had
contact. Other private sector officials noted

6 We interviewed representatives from more than 50 companies in China as
well as representatives from U. S. industry associations.

Page 9 GAO- 02- 812T China's Rule of Law Reform

more specific positive actions. For example, officials noted improvements in
intellectual property right protections including crackdowns against
counterfeiters in Shanghai, and a case where a U. S. company won a judgment
against a counterfeiter in a Chinese court that included an order to cease
the operations of the copycat company.

First, it is very clear that China has shown considerable determination in
enacting the numerous laws, regulations, and other measures to ensure that
its legal system and institutions, on paper, are WTO compatible.
Nevertheless, the real test of China?s movement toward a more rule of
lawbased commercial system is how China actually implements its laws and
regulations in fulfilling its WTO commitments. At this point, it is still
too early for us to make any definitive judgments about China?s actual
implementation. Second, as you know, it has been the hope of U. S.
government officials and others that China?s accession to the WTO would
constitute a significant step forward in China?s development toward becoming
a more rule of law- oriented society. It is worth noting that China?s reform
efforts, which have been ongoing for more than 20 years, have included
substantial legal developments that could be described as rule of law
related. These include the enactment of numerous laws, regulations, and
other measures that apply to many aspects of Chinese society beyond the WTO,
the recent proliferation of law schools and legal training, and the
recognition of the need for judicial reform. It is still too early to know
where this process will lead, but there is hope that the many rules- based
commitments that China made to become a WTO member will influence legal
developments in other areas.

Mr. Chairman, this completes my prepared statement. I would be happy to
respond to any questions you or other Members of the Commission may have at
this time.

For future contacts regarding this testimony, please call Susan Westin at
(202) 512- 4128. Adam Cowles, Richard Seldin, Michelle Sager, Matthew Helm,
Simin Ho, Rona Mendelsohn also made key contributions to this testimony.
Concluding

Observations Contacts and Acknowledgments

Page 10 GAO- 02- 812T China's Rule of Law Reform

Transparency

 Trade Framework: China shall make available to WTO members, upon request,
all laws, regulations and other measures pertaining to or affecting trade in
goods, services, TRIPS or the control of foreign exchange, before such
measures are implemented or enforced. (Protocol paragraph 2. C. 1)

 Services: China would publish in the official journal, by appropriate
classification and by service where relevant, a list of all organizations
that were responsible for authorizing, approving or regulating services
activities whether through grant of license or other approval, including
organizations delegated such authority from the national authorities.
(Working Party report paragraph 332)

Judicial Review

 Trade Framework: China shall establish or designate, and maintain
tribunals, contact points and procedures for the prompt review of all
administrative actions relating to implementation of laws, regulations,
judicial decisions and administrative rulings of general application
referred to in Article X: 1 of the GATT 1994, Article VI of the GATS and
relevant TRIPS provisions. (Protocol paragraph 2. D. 1)

 Intellectual Property Rights: Appropriate cases, including those involving
repeat offenders and willful piracy and counterfeiting, would be referred to
relevant authorities for prosecution under the criminal law provisions.
(Working Party report paragraph 299)

Uniform Enforcement

 Trade Framework: China shall apply and administer in a uniform, impartial
and reasonable manner all central government laws, regulations and other
measures and local regulations, rules and other measures issued or applied
at the sub- national level. The laws, regulations and other measures covered
are those that pertain to or affect (1) trade in goods, (2) services, (3)
trade- related aspects of intellectual property rights (TRIPS), and (4) the
control of foreign exchange. (Protocol paragraph 2. A. 2)

 Trade Framework: China would strengthen the uniform enforcement of taxes,
tariffs and non- tariff measures on trade between its special economic areas
and the other parts of China?s customs territory. (Working Party report
paragraph 225)

Nondiscrimination

 Import Regulation: China would adopt and apply tariff reductions and
exemptions so as to ensure MFN treatment for imported goods. (Working Party
report paragraph 111)

 Import/ Export Regulation: Except as otherwise provided for in this
Protocol, foreign individuals and enterprises and foreign- funded
enterprises shall be accorded treatment no less favorable than that accorded
to other individuals and enterprises in respect of the distribution of
import and export licenses and quotas. (Protocol paragraph 8.2)

Source: Protocol on the Accession of the People?s Republic of China and
Report of the Working Party on the Accession of China, World Trade
Organization.

Appendix I: Examples of Rule of Law- Related Commitments Included in China?s
World Trade Organization Accession Agreement

(320128)
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