China in the WTO – Year 3 

A Research Report 

Prepared for the 

U.S.-China Economic and 

Security Review Commission 

January 21, 2005 

Terence P. Stewart, Esq. 

STEWART AND STEWART

2100 M Street, NW 

Washington, DC 20037 

(202) 785-4185 
TABLE OF CONTENTS

i

Page

I. Review of China’s WTO Compliance in 2004 1

A. Major Compliance Concerns 1

B. USTR’s 2004 Report on China’s WTO Compliance 3

C. Other Reports on China’s WTO Compliance 20

1. American Chamber of Commerce – PRC 20

2. U.S. Chamber of Commerce 22

3. US-China Business Council 26

II. China WTO Issues and U.S. Enforcement 27

A. The Use of China-Specific Safeguards in the United States 27

1. China Accession Provisions 27

a. Product-Specific Safeguards 28

b. Textile Safeguards 29

2. U.S. Application of China-Specific Safeguards 31

a. Product-Specific Safeguards 31

b. Textile Safeguards 37

3. Effectiveness and Possible Modifications to China-Specific 

Safeguards 

 47

a. Product-Specific Safeguards 47

b. Textile Safeguards 49

B. China’s Exchange Rate Policy and the Likelihood of a Successful 

WTO Challenge 

 50

1. China’s Exchange Rate Policy 50

2. Possible Grounds for a WTO Challenge to China’s Exchange Rate 

Policy 

 52

3. Likelihood of a Successful WTO Challenge to China’s Exchange 

Rate Policy 

 55

C. Non-Market Economy Status of China in U.S. Antidumping 

Proceedings and Prospects for Change 

 56

1. NME Country Definition 56

2. NME Methodology 58

3. U.S.-China Working Group on China’s NME Status 59

4. Prospects for Change in China’s NME Status 63

D. Status of U.S. Policy Regarding Application of Countervailing Duty 

Law to China and Other Non-Market Economy Countries 

 67
TABLE OF CONTENTS

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1. Definition of a Non-Market Economy Country 68

2. Background to Current Policy 68

3. Possible Ways to Address Chinese Subsidy Practices 71

a. Statutory amendment 71

b. Change in policy by Commerce 71

c. Action at the WTO 74

E. Intellectual Property Rights 76

1. Problems of Infringement and Enforcement 76

2. U.S. Efforts to Address IPR Problems 79

3. Potential Ways to Reduce Infringement and Improve Enforcement 

of IPR 

 83

F. Areas of China’s WTO Non-Compliance That Should Be 

Considered For Possible WTO Challenges 

 85

G. Cooperation and Competition Between the U.S. and Other Members 

Regarding China Issues 

 89

1. Areas Where the U.S. Can Work Jointly With Other WTO 

Members to Encourage China’s Compliance With its WTO 

Obligations

 89

2. Areas Where the U.S. is Likely to Face Competition With Other 

WTO Members With Respect to Favorable Trade Terms With 

China

 90

III. Transitional Review Mechanism 95

A. Review of the Third Transitional Review Mechanism (TRM) 95

1. Member Participation 96

2. Interaction Between China and Other Members on Procedural 

Issues 

 99

3. U.S. Concerns and China’s Responses 102

a. Agricultural TRQs 102

b. Auto Policy 103

c. Subsidies 105

d. Export Restrictions on Coke 107

e. Services 109

f. Intellectual Property Rights (IPR) 114

B. Assessment of the Effectiveness of the TRM Process 118
China in the WTO – Year 3: A Research Report Prepared for 

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I. Review of China’s WTO Compliance in 2004

 In many respects, China made significant progress in 2004 in meeting the obligations and 

commitments it assumed upon accession to the World Trade Organization (WTO). In a number 

of areas, however, China’s compliance has fallen short of its commitments. The following 

sections review WTO compliance issues identified in the reports issued by the U.S. Trade 

Representative and selected private sector groups. 

A. Major Compliance Concerns

 In 2004, the primary areas of compliance concerns noted by the U.S. and private sector 

interested parties were the following: 

• Intellectual property rights

o While China has undertaken major efforts to revise its laws and regulations 

regarding patents, trademarks, and copyrights to comply with the requirements of 

the TRIPS Agreement, enforcement of intellectual property rights, while improved, 

is far from adequate. All observers state that counterfeiting and piracy in China 

remained rampant in 2004. China’s failure to adequately enforce IPR is a major 

problem for many WTO members and has had enormous economic impact on U.S. 

businesses. 

• Trading and distribution rights

o While China implemented its commitment to full trading rights (right to import and 

export) ahead of schedule in 2004, concerns remain regarding distribution rights in 

China. China issued regulations providing for implementation of distribution rights 

but U.S. businesses are concerned that China has not issued rules clarifying how the 

application and approval process for acquiring distribution rights will work. 

o Regarding sales away from a fixed location (direct selling), China failed to meet its 

commitment to open this market to foreign providers by December 11, 2004. 
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• Services

o In many services sectors, China has met the letter of its liberalization commitments 

but has frustrated market openings with new burdensome licensing and operating 

requirements. 

o Such regulatory burdens as the imposition of high capital requirements, prudential 

rule requirements that exceed international norms, branching restrictions, and 

threshold criteria that are more restrictive of the scope of activities permitted than 

existed before accession, have affected U.S. providers of insurance services, 

express delivery services, telecommunications services, and construction services, 

among others. 

• Agriculture

o While China has become a growing market for U.S. agricultural exports (2003 

exports amounted to $5.4 billion), there were continuing problems with market 

access and transparency. 

o In particular, some notable concerns were: 

 biotechnology regulations regarding risk assessment, labeling and field trials 

 transparency deficiencies in China’s tariff rate quota regime for bulk 

agricultural commodities (such as wheat, corn, cotton and vegetable oils) 

 sanitary and phytosanitary (SPS) regulations that are overly restrictive or not 

based on sound science 

• Industrial policies

o In a number of areas, China has employed policies that effectively limit market 

access, impose conditions on market access, or give preferential treatment. 

o Examples include: 

 discriminatory VAT policies affecting semiconductors (issue was resolved 

bilaterally) and fertilizer 

 failure to provide national treatment with respect to price controls on medicines 

and drug reimbursement 

 preferential import duties and VAT treatment to certain products (particularly 

from Russia) 

 discriminatory application of SPS measures 

 disparate standards testing of foreign products compared to domestic products 

 inadequate transparency regarding proposed technical regulations and 

conformity assessment procedures 
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 development of unique standards for products where international standards 

already exist (affecting such areas as autos, telecommunications equipment, 

wireless local area networks, radio frequency identification tag technology, 

audio video coding, whiskey and other distilled spirits, and fertilizer) 

 inconsistent application of the China Compulsory Certification (CCC) mark 

requirement and failure, so far, to accredit any foreign-invested conformity 

assessment enterprise capable of testing and certifying the CCC mark 

 investment laws and regulations that continue to “encourage” technology 

transfer 

 auto industrial policy that discourages imports of auto parts and encourages use 

of domestic technology 

 government procurement policy that mandates purchases of Chinese-produced 

software to the extent possible 

B. USTR’s 2004 Report on China’s WTO Compliance

On December 11, 2004, the Office of the U.S. Trade Representative (USTR) issued its 

third annual review of China’s compliance with its WTO accession commitments and 

obligations. The USTR conducted its monitoring of China’s compliance efforts and published its 

report, 2004 Report to Congress on China’s WTO Compliance, pursuant to Congress’ statutory 

directive and mandate.1 See U.S.-China Relations Act of 2000, P.L. 106-286, section 421; 22 

U.S.C. § 6951. The USTR’s China Compliance Report examines nine broad categories of 

China’s WTO commitments. In its report, USTR notes both progress achieved since China’s 

accession as well as continuing shortcomings regarding China’s performance of its 

commitments. While USTR’s report is comprehensive, its main focus is on the trade concerns 

that have been raised by U.S. business interests (“stakeholders”), with particular emphasis upon 

continuing shortcomings regarding China’s performance of its commitments, rather than upon 

 

1

 The USTR 2004 report is available at http://www.ustr.gov/assets/Document_Library/Reports_Publications/ 

2004/asset_upload_file281_6986.pdf. 
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the many non-controversial areas where China has satisfactorily complied with WTO 

commitments. As identified and singled out in USTR’s report, the following tables highlight 

China’s compliance deficiencies (as well as some important successes) in the third year of its 

WTO membership (2004) that most affected U.S. stakeholders. 

1. Trading Rights and Distribution Services2

Trading Rights 

• “Trading rights” involves two elements: the right to import goods (into China) and the right to export goods 

(from China). “Trading rights” are critical to the ability of U.S. businesses to operate and expand in China and 

to be able to receive the value of other commitments made by China. 

• China had committed to fully grant trading rights to all entities (both domestic and foreign) by the end of the 

third year after accession (i.e., by December 11, 2004). 

• In the first two years of membership, however, China fell behind in granting phased-in trading rights to 

foreign-invested enterprises. Even up to mid-2004, China limited trading rights by retaining certain conditions 

on trading rights (e.g., minimum registered capital requirements, import levels, export levels, and prior 

experience) that China had committed to eliminate. 

• In January 2004, China drafted a revised Foreign Trade Law that included provisions meeting its trading rights 

commitments. The final revised Foreign Trade Law was issued in April 2004. It provided for the automatic 

grant of trading rights through a registration process. 

• At the JCCT meeting in April 2004, China agreed to implement its trading rights commitments six months 

ahead of schedule, that is, by July 1, 2004. 

• In June 2004, China’s MOFCOM issued final implementing rules and the grant of full trading rights became 

effective on July 1, 2004. 

• USTR reports that U.S. companies have reported few problems regarding the new trading rights registration 

process. 

Distribution Services

• With limited exceptions, China committed to end national treatment and market access restrictions on foreign 

enterprises providing distribution services through a local presence within three years of China’s accession. 

• In the first two years of membership, China fell behind in liberalizing distribution services. China did not 

begin to liberalize until mid-2004, when MOFCOM issued regulations that eliminated national treatment and 

market access restrictions on joint ventures providing wholesaling services, commission agents’ services, 

direct retailing services (other than sales away from a fixed location) and franchising services. China provided 

that these services would be allowed through an approval certificate process. The regulations also provided 

that liberalization would extend to wholly foreign-owned enterprises on December 11, 2004.

• USTR notes the following deficiencies: 

 MOFCOM has delayed issuing implementing regulations, with the result that the procedures for 

securing the necessary approval certificates are not clear and foreign enterprises have so far 

 

2

 See USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at pages 11-21. 
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been prevented from providing wholesaling, commission agents’, and franchising services. 

 MOFCOM has delayed issuing regulations on sales away from a fixed location, or direct selling, 

with the result that foreign enterprises have been prevented from starting up direct selling 

activities. 

Wholesaling Services and Commission Agents’ Services 

• China committed to a gradual phase-in of wholesaling services and commission agents’ services by foreigninvested enterprises regarding goods made by other enterprises in China or imported goods, beginning 

December 2002, with full services allowed to wholly-foreign invested enterprises by December 11, 2004.

• China, however, did not comply with its timetable. In 2003 and into 2004, China continued to restrict theses 

services to joint ventures with minority foreign ownership and continued to impose restrictions such as 

stringent qualification requirements.

• In April 2004, MOFCOM issued regulations that eliminated market access and national treatment restrictions 

on wholly foreign-owned enterprises and reduced capital requirements as of the scheduled phase-in date of 

December 11, 2004. Under the regulations, enterprises must obtain central or provincial-level MOFCOM 

approval before providing these services. 

• USTR notes the following deficiencies: 

 MOFCOM has not yet provided guidance or implementing rules as to how the central or 

provincial-level approval system will work. 

Retailing Services

• China committed to a gradual phase-out of restrictions (such as geographic and quantitative limitations) on 

retailing services by foreign enterprises, with wholly-foreign invested enterprises permitted full retailing 

services by December 11, 2004.

• China, however, did not comply with its phase-in schedule. In 2003 and into 2004, China continued to restrict 

retailing services through burdensome conditions (such as minimum threshold requirements as to volume, 

imports/exports, assets, registered capital, and prior experience). 

• In April 2004, MOFCOM issued regulations that eliminated market access and national treatment restrictions 

on wholly foreign-owned enterprises and reduced capital requirements as of the scheduled phase-in date of 

December 11, 2004. Under the regulations, enterprises must obtain central or provincial-level MOFCOM 

approval before providing retailing services. 

• USTR notes the following deficiencies: 

 As with wholesaling services, MOFCOM has not yet issued guiding rules as to how its approval 

system will operate. 

Sales away from a fixed location 

• China committed to end market access and national treatment restrictions for sales away from a fixed location 

(direct selling) by December 11, 2004. 

• During 2004, MOFCOM drafted three regulations to implement the direct selling commitment, but China did 

not make these draft regulations available for public comment. 

• Based on its knowledge of the draft regulations, USTR notes the following potential problems: 

 National treatment: the draft regulation permits direct selling of domestically-produced goods, 

but restricts selling of imported goods to a fixed location. 
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 Other provisions have requirements that appear to make direct selling commercially unviable. 

2. Import Regulation3

Tariffs 

• In general, USTR found that China complied with its commitment to make the tariff reductions in both 

agricultural and industrial goods that were required as of January 1, 2004. 

Customs and Trade Administration

Customs Valuation

• Upon accession, China assumed the obligations of the WTO Agreement on Customs Valuation and agreed to 

implement these without a transition period. In January 2002, China issued customs valuation regulations. In 

addition, by December 11, 2003, China had committed to value digital products (e.g., floppy disk, cd-rom) 

based on the value of the underlying carrier medium, rather than the imputed value of the content. 

• USTR notes the following deficiencies: 

 China has not uniformly implemented its regulations with the result that U.S. exporters are still 

encountering valuation problems at Chinese ports. These problems include: (1) valuation based 

on reference pricing instead of transaction value; (2) addition of royalties and license fees to the 

dutiable value of imported software; (3) non-uniform valuation by ports of particular digital 

products; and (4) valuation of high-value electronic media to be used to produce multiple copies 

of products (e.g., DVDs) based on the estimated value of the future copies instead of the value of 

the carrier medium itself. 

Rules of Origin

• Upon accession, China became subject to the WTO Agreement on Rules of Origin. 

• USTR has not raised concerns about China’s implementation of its rules of origin obligations, except to note 

that China has not been adequately transparent in drafting and issuing its implementing regulations (e.g., China 

did not circulate draft regulations for comment). 

Import Licensing

• Respecting China’s adherence to the WTO Import Licensing Agreement, USTR reports that it has raised 

various concerns regarding MOFCOM’s automatic and non-automatic licensing regulations in order to 

promote clarity and to ensure no trade-distorting effects. 

Non-tariff Measures 

• China agreed to eliminate numerous nontariff measures (NTMs), including import quotas, licenses and 

tendering requirements covering numerous products. For some products, the NTMs were ended upon 

accession. For other products, China agreed to a transitional phase out of NTMs (e.g., on autos and auto parts, 

crude oil, refined oil, and tires), with all NTMs ended by January 1, 2005. 

 

3

 See USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at pages 21-32. 
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• China agreed to provide detailed procedures for allocating import quotas during the phase-out period, but, 

during the transition period, China’s quota system had many problems. USTR notes that necessary regulations 

were issued late, quotas were allocated late, and lack of transparency prevented knowing if the quotas were 

allocated properly. 

• As of January 1, 2005, China committed to have no import quotas in place. 

Tariff-rate Quotas on Industrial Products

• China agreed to implement a transparent system of TRQs to give access for three industrial products, including 

fertilizer, a major U.S. export. 

• USTR notes the following deficiencies: 

 China was slow to implement its TRQ system in 2002, and there was a lack of transparency. 

 In 2003, China issued the quota allocations on time but discouraged TRQ holders from freely 

using their quotas. U.S. fertilizer exports decreased by 47% in 2003 and by 18% in 2004 (JanSept). 

Other Import Regulation 

Antidumping

• China agreed to conform its regulations and procedures to the WTO Antidumping Agreement. 

• USTR notes the following deficiencies: 

 China’s AD practice has not been adequate with respect to transparency and fair procedures. 

For example, the Chinese authorities have not provided parties with sufficiently detailed 

information or provided adequate disclosure of the facts and calculations on which the AD 

determination is based. 

Countervailing Duties

• China agreed to conform its regulations and procedures to the WTO Agreement on Subsidies and 

Countervailing Measures. 

• USTR finds that China’s regulations and procedural rules generally accord with the Subsidies Agreement, but 

that certain provisions are not implemented. 

• China has not yet initiated any subsidies proceeding. 

Safeguards

• China agreed to conform its regulations and procedures to the WTO Safeguards Agreement. 

• USTR finds that China’s regulations and procedural rules generally accord with the Safeguards Agreement, but 

that certain provisions have not been implemented. 

• China has initiated one safeguards proceeding (steel products). The safeguard measure was terminated in 

December 2003. 
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3. Export Regulation4

• China agreed to maintain export restrictions in accordance with WTO rules, which generally prohibit (with 

exceptions) export restrictions (other than duties, taxes or other charges) (GATT Article XI). 

• USTR notes the following deficiencies: 

 China has continued to impose export restrictions on certain products, most notably blast 

furnace coke and fluorspar. 

 In 2004, export restrictions on coke adversely affected U.S. integrated steel producers and their 

customers. China’s quota, and the illegal sale of export quota certificates, caused a significant 

increase in the export price of coke. 

 Although, in late July 2004, China increased the quota and the export price declined, USTR 

continues to urge China to end export quotas on coke. 

 Regarding fluorspar, China imposes quotas and license fees on fluorspar exports, but does not 

restrict domestic users of fluorspar. 

4. Internal Policies Affecting Trade5

Non-discrimination 

• China agreed to abide by the core GATT 1994 principles of Most-Favored Nation (MFN) (nondiscrimination) 

and national treatment, and to repeal or revise laws inconsistent with those principles. 

• USTR notes the following deficiencies: 

 Although China revised many of its laws that conflicted with MFN and national treatment, 

China has not applied MFN and national treatment in all areas. 

 U.S. pharmaceutical manufacturers have noted national treatment problems regarding price 

controls on medicines and drug reimbursement. 

 China has applied preferential import duties and VAT treatment to certain products 

(particularly from Russia). 

 From accession, China has continued to discriminate in applying SPS measures. 

Taxation

• China agreed that its tax laws would conform to MFN and national treatment principles. 

VAT Policies

• USTR notes the following national treatment deficiencies in China’s VAT system: 

 In 2004, China applied discriminatory VAT rates to imports of semiconductors and fertilizer but 

not to domestically-produced semiconductors and fertilizer. 

 With respect to semiconductors, the U.S. initiated the dispute settlement process in March 2004. 

In July 2004, the issue was resolved when China agreed to eliminate the VAT on semiconductors. 

 

4

 See USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at pages 32-34. 

5

 See USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at pages 34-47. 
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 With respect to fertilizer, China exempts all phosphate fertilizers except DAP (a fertilizer the 

U.S. exports to China) from a 13% VAT. So far, China has not changed this policy. 

 Generally, some U.S. industries complain that Chinese producers can avoid VAT payments 

(through poor collection procedures, special deals or even fraud), while importers must pay the 

VAT. 

Consumption Taxes

• USTR notes the following national treatment deficiencies in China’s consumption taxes: 

 The effective consumption tax rate on imported products (e.g., spirits/alcoholic beverages, 

tobacco, cosmetics and skin/hair care preparations, jewelry, fireworks, rubber, motorcycles and 

automobiles) is substantially higher than the rate applied to domestic products because China 

uses different tax bases to compute consumption taxes for domestic and imported products. 

Subsidies 

• Upon accession, China assumed the obligations of the WTO Subsidies Agreement, including the elimination of 

prohibited subsidies (export subsidies and import substitution subsidies). 

• USTR notes the following deficiencies: 

 Since accession, China has failed to submit to the WTO Subsidies Committee any notifications of 

its subsidy programs (an annual requirement). (However, in November 2004, in the Goods 

Council TRM, China committed to submit its subsidies notification within 2005.) 

Price Controls

• An annex to China’s accession agreement listed products and services subject to price control or government 

guidance pricing. In 2004, China maintained its price controls and guidelines on the listed products and 

services (e.g., pharmaceuticals, natural gas, transportation (including freight transportation), tobacco, and other 

agricultural products). 

Standards, Technical Regulations and Conformity Assessment Procedures 

• China assumed the obligations of the Agreement on Technical Barriers to Trade which sets rules and 

procedures regarding the development, adoption and application of voluntary product standards, mandatory 

technical regulations, and testing/certification procedures. The TBT Agreement is directed to preventing the 

use of technical requirements as unnecessary barriers to trade. 

Restructuring of Regulators

• China has made significant changes to its standards and technical regulations regime. 

• USTR notes the following deficiencies: 

 Despite China’s changes to its standards testing regime, in some sectors, foreign products are 

tested in specially designated laboratories that are separate from those laboratories used to test 

domestic products. This disparate testing can lead to uneven treatment. 

Transparency

• USTR notes the following deficiencies: 

 China’s notifications of proposed technical regulations and conformity assessment procedures 

have been submitted by two agencies (AQSIQ or SAC). TBT measures from other Chinese 
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agencies have not been notified. 

 When TBT measures have been notified, in some cases, the comment periods have been 

unacceptably short, or the comments disregarded. 

Standards and Technical Regulations

• China has made progress in conforming its technical regulations to international standards. 

• USTR notes the following deficiencies: 

 In some sectors, China has been developing unique requirements even where there are wellestablished international standards (e.g., autos, telecommunications equipment, wireless local 

area networks, radio frequency identification tag technology, audio video coding, whiskey and 

other distilled spirits, and fertilizer). 

 These unique standards will create significant barriers to market entry and make the cost of 

compliance high for foreign companies. 

 One example was China’s issuance in May 2003 of two mandatory standards for encryption 

over Wireless Local Area Networks (WLANs) (which incorporated the WLAN 

Authentication and Privacy Infrastructure (WAPI) encryption technique), applicable to 

domestic and imported equipment containing WLAN (also known as Wi-Fi) technologies. In 

April 2004, the US and China resolved the WAPI issue when China said it would suspend 

indefinitely its proposed implementation of WAPI as a mandatory standard. 

 Another example is continuing pressure from within the Chinese government to select 

China’s 3G telecommunications standard. 

Conformity Assessment Procedures

• China has established one safety mark (“China Compulsory Certification” or “CCC” mark), issued to both 

Chinese and foreign products. 

• USTR notes the following deficiencies: 

 In 2004, U.S. companies continued to complain that the CCC mark regulations lack clarity. 

 China is applying the CCC mark requirements inconsistently, i.e., many domestic products that 

require the CCC mark are still being sold without the mark. 

 In addition, in some sectors, U.S. companies complained in 2004 about duplication in 

certification requirements (particularly for telecommunications products). 

 Despite national treatment commitments, to date, China has accredited 68 Chinese enterprises to 

test for and certify the CCC mark, but has not accredited any foreign-invested conformity 

assessment bodies. 

Other Internal Policies 

State-Owned and State-Invested Enterprises

• China agreed that purchases of goods and services by state-owned and state-invested enterprises for 

commercial non-governmental purposes would be subject to WTO rules, in particular that they would be based 

on commercial considerations. 

• USTR notes that U.S. companies have not complained regarding WTO compliance in this area. 

State Trading Enterprises

• China agreed that state trading enterprises would provide full information on their pricing mechanisms and 

ensure transparent and WTO-consistent import purchasing procedures. 

• USTR notes the following deficiencies: 

 So far, in response to requests for information regarding the pricing and purchasing practices of 
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state trading enterprises, China has only provided general information, not sufficient to 

meaningfully assess China’s compliance efforts. 

Government Procurement

• China is not a member of the WTO Agreement on Government Procurement (GPA) but committed to initiate 

negotiations to accede to the GPA. In the interim, China agreed that central and local governments would 

conduct procurement in a transparent manner. 

• USTR notes that U.S. companies have expressed concern regarding implementing rules on government 

software procurement that are being drafted by MOF. The draft reportedly mandated that central and local 

governments should purchase domestic software to the extent possible. The concern is focused on China’s 

apparent restrictive definition of “domestic products.” 

5. Investment6

• China committed to eliminate export performance, local content and foreign exchange balancing requirements 

from its laws, regulations and other measures. China agreed that importation or investment approvals would 

not be conditioned on these requirements or other requirements such as technology transfer and offsets. 

• USTR notes the following deficiencies: 

 Although not formally requiring it, some of China’s revised laws and regulations continue to 

“encourage” technology transfer. In practice this “encouragement” will effectively be a 

“requirement” in many cases. 

 In 2004, U.S. companies report that some Chinese officials still consider factors such as export 

performance and local content when making investment approval decisions. 

• Although China had committed, by accession, to revise its Industrial Policy for the Automotive Sector to make 

it WTO-consistent, China missed the deadline. China circulated a draft revised automobile industrial policy in 

2003 and issued the final version in May 2004.

• USTR notes the following deficiencies: 

 The new auto industrial policy contains discriminatory provisions that discourage the 

importation of auto parts and encourage the use of domestic technology.

 The new policy also contains some provisions too vague to assess (e.g., regarding complete 

knocked-down auto kits). 

• In 2004, the State Council made no changes to the 2002 Sectoral Guidelines Catalogue for Foreign 

Investment. 

• USTR notes the following concern: 

 China’s placement of the production and development of genetically-modified plant seeds in the 

“prohibited” category for foreign investment is an exception to China’s progress in opening up 

other sectors to foreign investment. 

 

6

 See USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at pages 47-49. 
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6. Agriculture7

Tariffs 

• In 2004, China implemented required tariff changes on agricultural goods on schedule. 

China’s Biotechnology Regulations 

• In 2002 and 2003, the U.S. had serious concerns with China’s regulations and procedures for issuing final 

safety certificates, particularly for U.S. exports of soybeans, corn and other commodities. The U.S. and China 

agreed to a series of interim solutions through issuance of temporary safety certificates so as to avoid 

disrupting trade. This issue appears to have been resolved when, in February 2004, China issued a final safety 

certificate for biotech soybeans and subsequently issued safety certificates for corn, canola, and cotton. 

• USTR notes the following concerns: 

 Despite the resolution of the safety certificate issue, USTR notes that concerns remain regarding 

other areas covered by China’s biotechnology regulations, particularly risk assessment, labeling 

and field trials. 

Tariff-Rate Quotas on Bulk Agricultural Commodities 

• China committed to replace quotas on certain bulk commodities (e.g., wheat, corn, cotton and vegetable oils) 

and to provide market access through a transparent system of TRQs, with established rules regarding quota 

applications, allocations and re-allocations. 

• Initially, in 2002, China’s operation of its TRQ system was plagued with problems including regulations that 

provided inadequate transparency, imposed burdensome licensing procedures, and appeared to provide 

separate sub-quotas for the processing and re-export trade. In addition, China’s allocation of the TRQs showed 

favoritism to domestic farm interests. Because of its concerns, the U.S. requested formal consultations with 

China. 

• Subsequently, in 2003, China’s bettered its performance but the U.S. noted that the problems of transparency, 

sub-division of the TRQ, small allocation sizes, and burdensome licensing persisted. 

• China issued new regulations in 2004 and its operation of the TRQ system generally improved. 

• USTR notes the following concerns: 

 USTR notes that, despite much improvement, transparency continues to be a problem. 

Sanitary and Phytosanitary Issues 

• Through the SPS Agreement, China committed that SPS measures would address legitimate scientific-based 

concerns, not discriminate arbitrarily, and not be disguised restrictions on trade. 

• USTR notes the following concerns: 

 In 2004, U.S. agricultural exports faced increased SPS measures that raised WTO concerns, in 

particular, measures covering BSE (Bovine Spongiform Encephalopathy, known as “mad cow” 

disease) and AI (Avian Influenza). 

o BSE: in December 2003, China banned U.S. bovine products after a case of BSE found in 

 

7

 See USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at pages 49-58. 
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the U.S. China banned not only beef but low-risk bovine products as well (which do not pose 

a risk of BSE and should not have been banned under international standards). In 

September/November 2004, China agreed to allow resumption of imports of most low-risk 

bovine products but, as of December 2004, imports of these products had not yet resumed. 

o AI: in February 2004, China banned U.S. poultry due to cases of low-pathogenic AI in 

Delaware. In November 2004, China lifted the general ban (but retained a ban on poultry 

products from Connecticut and Rhode Island). 

 Regarding wheat: (1) China’s imposition of a maximum residue level (MRL) for selenium that is 

below the international standard threatens all U.S. wheat exports to China; (2) although there is 

no international standard, China imposed a MRL for vomitoxin in wheat. {However, USTR 

notes that China appears not to be enforcing these measures.}

 Regarding raw poultry and meat, China applies certain non-science-based standards (e.g., zero 

tolerance for pathogens) to imports that are not applied to domestic raw poultry and meat. This 

violates national treatment and has slowed imports from the U.S.

 Regarding food additives, China imposes overly restrictive standards that block imports of many 

U.S. processed food products. The banned food additives are widely used in other countries and 

are approved by the World Health Organization (WHO).

 USTR notes that, except for BSE and AI, little progress has been achieved on the foregoing 

issues. 

Inspection-related Requirements 

• During 2002 and 2003, the U.S. expressed concerns about AQSIQ’s administration of import licensing 

procedures, in particular about arbitrary use of inspection-related requirements (e.g., import inspection permits; 

quarantine inspection permits) to restrict, delay and increase the cost of such U.S. exports as soybeans, cotton, 

meat and poultry. 

• In 2004, the U.S. continued to raise these concerns. 

• In June 2004, China issued a new regulation (Decree 73) that made quarantine inspection permits more 

workable. 

• USTR notes the following deficiencies: 

 Decree 73 raised new concerns regarding required contract terms and commercial risk. 

 U.S. shippers complained that Decree 73 increased the financial risk for exporters shipping 

commodities to China. 

 With respect to soybeans, although U.S. soybean exports to China continued to go forward, 

Decree 73 appears to have created uncertainty in the market and contributed to general 

downward pressure on world soybean prices. 

Export Subsidies 

• China committed to eliminate all export subsidies upon accession. 

• In 2002 and 2003, U.S. industry expressed concerns that China was providing export subsidies on corn, as 

China was exporting significant quantities of corn at prices 15-20% below domestic prices. 

• In 2004, USTR notes that it appeared China was becoming a net importer of corn and its corn exports were 

being made on a commercial basis. 
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7. Intellectual Property Rights8

Legal Framework 

• At the time of accession and thereafter, China modified its IPR laws, regulations and implementing rules 

regarding patents, trademarks and copyrights. In 2003, China issued additional new measures on patents, 

trademarks and copyright. 

• USTR observes that, overall, China’s IPR laws are generally in compliance with the TRIPS Agreement, 

although some improvements still need to be made. 

• China continued to make improvements to its laws and regulations in 2004, such as in the recognition of 

foreign well-known marks. China also issued a series of new Customs Administration regulations and 

implementing rules regarding protections against the import and export of IPR infringing products 

• USTR notes the following concerns: 

 In some areas, China’s new regulations and implementing rules are not clear or need revision, 

such as regarding the storage/disposition of infringing goods and transferring cases for possible 

criminal prosecution.

 Although not required to do so, at the April 2004 JCCT meeting, China agreed to ratify and 

implement the WIPO treaties as soon as possible. By December 2004, China had not yet acceded 

to the 1996 WIPO Internet-related treaties. 

Enforcement 

• Under the WTO TRIPS Agreement, China is obligated to implement effective IPR enforcement procedures, 

including deterrent-effective civil and criminal remedies. 

• USTR notes the following concerns: 

 In 2004, IPR infringement was rampant and, in the view of some U.S. businesses, had worsened. 

U.S. losses due to IPR piracy are estimated to be between $2.5-$3.8 billion annually. 

 In 2004, IPR infringement affected a wide range industries. Examples include films, music, 

publishing, software, pharmaceuticals, chemicals, information technology, consumer goods, 

electrical equipment, automotive parts and industrial products. 

 China has failed to provide effective IPR enforcement. This is the result of lack of coordination 

between government ministries and agencies, local protectionism and corruption, high 

thresholds for criminal prosecution, lack of training and weak sanctions for infringement. 

Administrative Enforcement

• USTR notes the following concerns: 

 Although China continues to take administrative enforcement actions against IPR violators, the 

actions have been largely ineffective in deterring IPR violations for a number of reasons 

including: 

o Extremely low fines are imposed (because value of infringing goods is based on price for the 

infringing goods, not the genuine goods). 

o Evidence of warehousing infringing goods is not sufficient to prove an intent to sell them. 

o Rarely are administrative cases forwarded to the Ministry of Public Security for criminal 

investigation. 

 

8

 See USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at pages 58-67. 
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 Although China Customs issued new regulations on administrative penalties in September 2004, 

the fines to be imposed are too low (the lower of 30% of the value of the goods confiscated, or 

RMB 50,000 ($6,030)). 

Criminal Enforcement

• Presently, criminal enforcement has virtually no deterrent effect. 

• At the April 2004 JCCT meeting, China agreed to apply criminal sanctions to a wider range of IPR-infringing 

activities and to increase the penalties for IPR violations. China also pledged that, by the end of 2004, it would 

issue judicial interpretations that lower the value thresholds for criminal investigations/prosecutions, and apply 

criminal sanctions to the import, export, distribution and storage of counterfeit goods and to on-line piracy. 

(NOTE: As of the date of USTR’s report, China was still drafting these judicial interpretations. They were 

issued in late December 2004). 

• USTR notes the following concerns: 

 China needs to revise its laws, including judicial interpretations, and investigate, prosecute, 

convict and sentence a much higher percentage of IPR infringers, as well as increase criminal 

penalties. 

 Prosecution of IPR crimes requires coordination between national and local agencies, but 

coordination remains problematic. 

 Criminal liability thresholds have been very high and seldom met. They also require proof of 

sales of the infringing goods, which is often not available. 

Civil Enforcement

• IPR civil actions in Chinese courts are increasing due to the ineffectiveness of administrative and criminal 

enforcement. 

• USTR notes the following concerns: 

 In 2004, U.S. companies still complained that Chinese courts did not provide consistent and fair 

IPR enforcement, due to factors such as inadequate technical training and ineffective court rules 

regarding evidence, expert witnesses, and protection of confidential information. 

 Enforcement of IPR rights in Chinese courts is slow. For example, a patent rights case can take 

between four to seven years to complete. 

8. Services9

Financial Services -- Banking 

• China committed to phase in banking services by foreign banks over 5 years. 

• Although China has generally met its WTO commitments to liberalize, it has also imposed restrictions that 

have made it difficult for foreign banks to set up in China. 

• USTR notes the following concerns: 

 Following accession, the People’s Bank of China imposed, on foreign banks’ headquarters and 

branches, working capital requirements and other prudential rules that went beyond 

international norms, and which made it more difficult for foreign banks to set up in China. 

 Although China made reductions in capital requirements in December 2003 and July 2004, the 

 

9

 See USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at pages 67-80. 
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U.S. continued to urge China to align its prudential requirements with international norms. 

Financial Services – Insurance

• China committed that, within three years of accession, it would phase out geographic restrictions on all types 

of insurance operations, and expand ownership rights and scope of activities for foreign firms. 

• The China Insurance Regulatory Commission (CIRC) issued regulations after accession that created problems 

in three areas – unreasonably high capitalization requirements, inadequate transparency, and vague rules 

regarding branching rights (China has required existing non-life insurer branches that seek to branch in China 

to set up as a subsidiary, which is both costly and unnecessary). 

• USTR notes the following concerns: 

 Following consultations with the U.S. in 2002 and 2003, China issued final implementing rules in 

May 2004. While the new rules lowered capital requirements for national licenses and branches, 

they did not adequately deal with China’s conditions on branching rights. In addition, in at least 

one instance, China waived this requirement for a foreign firm but has not stated how or 

whether other firms can obtain the same waiver. 

 It appears that China has been issuing concurrent branch approvals (more than one at a time) 

for Chinese insurers, but only approving branches of foreign firms consecutively (one at a time). 

Financial Services – Motor Vehicle Financing

• Upon accession, China agreed to open the motor vehicle financing sector to foreign non-bank financial 

enterprises without any limitations on market access or national treatment. 

• Initially, in the first two year after accession, China failed to meet this obligation. 

• In October 2003, the China Banking Regulatory Commission (CBRC) issued regulations implementing its 

commitments. 

• USTR notes the following concerns: 

 The regulations imposed relatively high capital requirements that make it difficult for small and 

medium-sized enterprises to enter the market.

Legal Services 

• On accession, China committed to allow foreign law firms to provide legal services through one profit-making 

representative office, and to end quantitative and geographical restrictions after one year. 

• Regulations issued in 2001-2002 appeared to impose a needs test for foreign law firms wanting to set up 

offices in China (contrary to GATS), appeared to restrict the types of legal services that could be provided, and 

required unnecessarily time-consuming procedures in setting up an office or branch. 

• USTR notes the following concerns: 

 There has been little progress in addressing the problems cited previously -- economic needs test, 

unreasonable restrictions on types of legal services, and unnecessary time-consuming 

procedures. 

Telecommunications Services 

• Upon accession, China committed to open its telecommunications services market to foreign suppliers through 

JVs with Chinese companies, to increase the foreign stake over time, and to end geographic restrictions within 
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2-6 years. China also committed to have an independent regulator, by separating the regulatory and operating 

functions of the Ministry of Information Industry (MII), and to adopt pro-competitive regulatory principles. 

• China issued regulations in December 2001 implementing China’s commitments. 

• USTR notes the following concerns: 

 China’s regulations established high capital requirements (especially for basic 

telecommunications services) that effectively bar entry for many potential foreign suppliers. 

 China has not established an independent regulator. While MII is nominally separate from the 

current telecommunications operators, MII has extensive influence and control over their 

operations and uses its regulatory authority to disadvantage foreign firms. 

 In contrast to international norms, MII reclassified several telecommunications services from the 

“value-added” category to the “basic” category (slower liberalization; higher capitalization) and 

restricted what new services could be classed as “value added.” As a result, U.S. firms’ access 

has been limited. 

 MII’s licensing process is very slow. USTR is unaware that any application to provide valueadded services has been completed. 

Express Delivery Services 

• China agreed to permit foreign express delivery companies in JVs with Chinese companies to increase their 

stake over time, and to allow wholly foreign-owned subsidiaries within four years of accession. 

• China also agreed to provide an independent regulator by separating the regulatory and operations functions of 

China Post. 

• Following accession, two measures issued by China raised problems. China required foreign service providers 

to obtain “entrustment” authority from China Post (their competitor) and China imposed weight/rate 

restrictions on letters the foreign providers could handle. These problems were addressed and resolved in 

September 2002 when China issued revised regulations. 

• USTR notes the following concerns: 

 In July-November 2003, China circulated draft amendments to the postal services law, which (1) 

gave China Post a monopoly on letters under 500 grams (a horizontal commitment violation as it 

restricted existing scope of activities), and (2) failed to establish an independent regulator. At the 

April 2004 JCCT, China indicated that the weight restriction would not resurface as a problem. 

However, the July 2004 draft amendment still contained a weight restriction (reduced to 350 

grams). 

Construction and Related Engineering Services 

• On accession, China agreed to permit foreign companies to provide construction and related engineering 

services in JVs with Chinese companies, limited to foreign-invested projects and subject to capitalization 

requirement. Within three years of accession, China committed to remove these restrictions and to allow 

wholly foreign-owned subsidiaries provide services in four types of projects. 

• USTR notes the following concerns: 

 China issued regulations in September 2002 that raised a number of problems, including 

imposing new and more restrictive conditions than existed prior to accession when foreign 

companies could work on a project-by-project basis. The regulations also required foreign firms 

to obtain qualification certificates; required foreign-invested enterprises to incorporate in China; 

and imposed high minimum registered capital requirements and foreign personnel residency 

requirements. Except for the incorporation requirement, these rules went into effect in April 

2004. The incorporation requirement is to be effective in July 2005, and foreign companies will 
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face uncertainty after that date. 

 In November 2004, China issued another problematic regulation. It states that a company 

providing project management services on a project may not provide both construction services 

and related construction engineering design services on the same project. U.S. companies often 

provide all of these services in combination. 

Aviation Services 

• Although China made no WTO commitments regarding aviation services, China signed an agreement with the 

U.S. in July 2004 to increase market access for U.S. providers of aviation services. 

Maritime Services 

• Although China made no WTO commitments regarding maritime services, China signed an agreement with the 

U.S. in December 2003 to increase market access for U.S. providers of maritime services. 

Other Services 

• In some sectors (e.g., several types of professional services, tourism and travel-related services, educational 

services and environmental services), China has implemented its commitments to phase in market access. 

• In its audio-visual services commitments, China agreed to permit 20 foreign films per year for theatrical 

release. 

• USTR notes the following deficiencies: 

 China has applied a restrictive interpretation to its market access commitments. China treats its 

commitment to permit 20 foreign films per year as an upper limit rather than as a minimum. 

This interpretation has encouraged illegal copying and sale of foreign films in China. 

• China revised Foreign Trade Law (April 2004) appears to provide broad authority for services safeguards. 

• USTR notes the following deficiencies: 

 The WTO Services Agreement does not provide for safeguard measures on services. 

9. Legal Framework10

Transparency 

• China committed to providing, before implementation, a reasonable period for public comment on new or 

modified laws and regulations. 

• China also committed to translating its trade-related laws and regulations into one (or more) of the WTO 

languages (English; French; Spanish) and to publish them in an official journal. 

 

10 See USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at pages 80-84. 
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Public Comment

• Following accession, China repealed, revised, or enacted many trade-related laws and regulations. In 2002 and 

2003, China was deficient in providing opportunity for public comment before new or modified laws and 

regulations were implemented. 

• USTR notes the following deficiencies: 

 Despite progress, in 2004, provision for public comment continued to be uneven. For example, 

drafts of the Foreign Trade Law, automobile industrial policy, rules of origin regulations, and 

customs regulations were either selectively circulated or not circulated at all.

 China has been deficient in providing translations of its trade-related laws and regulations. 

Enquiry Points

• China has established various enquiry points where WTO members, foreign companies or individual can 

obtain information. USTR notes that U.S. companies have generally found China’s enquiry points to be 

responsive and helpful. 

Official Journal

• China committed to establish or designate an official journal for publication of its trade-related laws, 

regulations and other measures. 

• USTR notes the following deficiencies: 

 China has yet to either establish or designate an official journal for publication of its traderelated laws, regulations and other measures 

Uniform Application of Laws

• China committed to apply, implement and administer its trade laws, regulations and other measures in a 

uniform and impartial manner throughout China. China also agreed to establish an internal review mechanism 

to examine instances of non-uniform application.

• USTR notes the following deficiencies: 

 China established an internal review mechanism in 2002. However, in 2004, USTR notes that the 

actual operation of this mechanism still is unclear. 

 In 2004, as in prior years, some problems with uniformity continued (reviewed in sections on 

Customs, Taxation, Investment and Intellectual Property Rights). 

Judicial Review 

• China agreed to establish independent and impartial tribunals to review administrative actions on trade-related 

matters. China has designated certain courts to handle administrative decisions related international trade 

issues and intellectual property rights, but, so far, foreign companies have not had much experience with these 

courts. 

• China had made progress in improving the quality of its judges, but there are still many judges with little legal 

training. 

• USTR notes the following deficiencies: 

 In 2004, many U.S. companies still are concerned about the independence of China’s judiciary, 

as they are often influenced by political, government or business pressures. 
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C. Other Reports on China’s WTO Compliance

1. American Chamber of Commerce – PRC

 In September 2004, the American Chamber of Commerce in China issued its 2004 White 

Paper: American Business in China, which covers a range of issues concerning the business 

climate in China including the impact and implementation of China’s WTO commitments. In 

general, the 2004 White Paper strikes a positive note about China’s efforts to comply with its 

WTO obligations, as indicated by the following: 

With the exception of intellectual property rights, we believe China 

is substantially in compliance with its WTO deadlines and specific 

obligations. While some commitments remain problematic and 

there continue to be many areas where the market access 

opportunities anticipated still have not been realized, China has 

taken noteworthy steps this year to comply with its basic 

commitments in the areas of trading rights, insurance, auto finance, 

and agriculture, among others. 

* * * 

As we are essentially at the mid-point of the five-year WTO 

implementation timetable, our members indicate that China needs 

to complement its overall solid 2004 WTO performance with 

greater transparency in the drafting of its commercial laws and 

regulations and ensuring that local and provincial governments do 

not thwart market access commitments made at the national 

level.11

 Despite the White Paper’s broad optimistic note, it focuses specific attention on 

intellectual property rights (IPR) and acknowledges China’s shortcomings in that area: “Our 

 

11 American Chamber of Commerce-PRC, 2004 White Paper: American Business in China (September 2004) at 

4. 
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members report that the situation in IPR seems to be worsening, with over three-quarters 

reporting that they are negatively affected by IPR infringement.12

 In its review of China’s WTO compliance, the White Paper identifies the following major 

areas of concern, among others. 

Intellectual 

Property 

Rights 

“Widespread infringement of intellectual property rights in China continues to impact a 

broad variety of products and technologies, across sectors such as media and entertainment, 

pharmaceuticals, information technology, consumer goods, electrical equipment, 

automotive parts, and many others. While China has put in place a sound basic legal and 

regulatory framework designed to address this problem, it lacks an effective enforcement 

system and, overall, we believe the situation in the marketplace is worsening, not 

improving. * * * Few counterfeiters or copyright pirates are subject to criminal sanctions 

in China, and the administrative sanctions imposed on them fall short of the TRIPSmandated standard of effective enforcement that has a ‘deterrent’ impact.”13

Regulatory 

Transparency 

“Of great importance to the American business community . . . is the opportunity to 

review and comment on ‘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 enforced.’ * * * Chinese ministries have from time to time asked our individual 

member companies to comment on draft regulations that affect their respective industries. 

Nonetheless, such consultation between the Chinese government and the foreign business 

community remains carefully managed and selective, with widely varying practices among 

different ministries.”14

Agricultural 

Market 

Access 

“China committed to make systemic changes designed to create fairness, predictability, and 

transparency in agricultural trade. China has only partially fulfilled these commitments. * 

* * Another problematic area is China's use of a tariff rate quota (TRQ) system on 

agricultural products, which acted as a non-tariff barrier on imports of foreign agricultural 

goods.”15

 

12 American Chamber of Commerce-PRC, 2004 White Paper: American Business in China (September 2004) at 

4-5. 

13 American Chamber of Commerce-PRC, 2004 White Paper: American Business in China (September 2004) at 

28. 

14 American Chamber of Commerce-PRC, 2004 White Paper: American Business in China (September 2004) at 

28, quoting China’s Protocol of Accession, Part 1, Sec. 2(c)1. 

15 American Chamber of Commerce-PRC, 2004 White Paper: American Business in China (September 2004) at 

30. 
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Value-Added 

Taxes 

“China uses value-added tax (VAT) policies to encourage or protect domestic production in 

a number of industrial and agricultural sectors.”16

Trade and 

Distribution 

MOFCOM issued the regulations specifying “how foreign-invested commercial enterprises 

may conduct retail, wholesale, franchise, or commission agency business. Overall, the 

regulation satisfies China's WTO commitments in the distribution sector. However, the 

regulation states that new stores opened by foreign-invested distribution companies must 

suit the urban and commercial development plans of the city in which the store will be 

located and present local government documentation to that effect when submitting an 

application. Given the discretionary latitude possessed by local officials in this regard, this 

requirement could be used as a market-entry barrier to restrict the number of foreign 

distribution operations in a given city. Additionally, the regulations failed to address direct 

selling, which China's WTO commitments define as one type of distribution service . . . .”17

National 

Treatment 

“In express delivery, the U.S. industry has significant reservations regarding the proposed 

extension of China Post's monopoly to deliveries of domestic letters weighing less than 500 

grams, according to the draft postal regulations. These draft regulations create a new 

unspecified charge on express industry revenues to help support China Post's universal 

service, as well as a new, unworkable licensing regime that gives new powers of 

supervision, inspection, and punishment to the postal regulator.”18

2. U.S. Chamber of Commerce

In September 2004, the U.S. Chamber of Commerce issued a report assessing China’s 

WTO compliance.19 The report noted that China has made progress in meeting its WTO 

commitments in many areas, “particularly in tariff reduction, revising existing laws and drafting 

 

16 American Chamber of Commerce-PRC, 2004 White Paper: American Business in China (September 2004) at 

30. 

17 American Chamber of Commerce-PRC, 2004 White Paper: American Business in China (September 2004) at 

32. 

18 American Chamber of Commerce-PRC, 2004 White Paper: American Business in China (September 2004) at 

32. 

19 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004); 

http://www.uschamber.com/NR/rdonlyres/egs772a3dr2jt6mv5stek2wsrq3loxvurxmurefam36o4r7aqnw77uexc

zfojybzyt3ku3q6xifyt4pegdsllllsw4f/WTOFINAL9%2e21FINALdocPress.pdf 
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and passing new ones to comply with its WTO requirements, and educating its officials and 

companies about its WTO obligations.” Notwithstanding China’s compliance positives, the 

Chamber’s report highlights areas where China has not fully met its commitments. Some of the 

areas noted include the following sampling: 

Market 

Access 

“China has made positive regulatory changes that appear to presage greater market access 

for foreign companies as specified under its WTO commitments. At the same time, 

however, China appears to be adopting new policies that undercut these changes. China’s 

continuing reliance on high capitalization requirements to restrict the market access that it 

promised in its accession agreements and use of proprietary standards that discount foreign 

IPR and shield emerging domestic players from global competition are examples where 

China appears to be undercutting meaningful implementation of its WTO commitments.” 20

“Excessive capitalization requirements to enter or expand in many key sectors, including 

insurance, telecommunications, auto finance, and banking, remain a major concern for 

many U.S. Chamber members.”21

“China should actively adopt measures that open its market in ways that comply with the 

spirit of its WTO obligations, even if it is not strictly bound to do so under its WTO 

commitments. New PRC policy directives that affect sectors of strong interest to U.S. 

Chamber member companies could greatly limit their ability to provide goods and services 

in the China market. . . . China should refrain from adopting policies that are more 

restrictive than those in place prior to its WTO accession, as it has done in the case of 

construction and engineering services and as it appears to be doing in the area of 

government procurement. In these cases, U.S. goods and service providers face a rolling 

back of the market access they have enjoyed.22

IPR “China’s intellectual property rights (IPR) enforcement and broader protection efforts are 

inadequate.”23

“After nearly three years as a member of the global trading body, it is clear that China has 

not addressed key weaknesses in its IPR enforcement system and the protection that is 

 

20 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 2. 

21 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 

13. 

22 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 

3-4. 

23 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 2. 
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accorded to companies of all sizes fails on the whole to meet the standards of effectiveness 

and deterrence set out in the TRIPS Agreement.” 24

“Counterfeit pharmaceuticals are a significant and increasing problem in China, especially 

over-the-counter products sold outside of hospitals, and the agriculture sector reports 

evidence of counterfeit fertilizer. Pirated music, books, business software, movies, and 

video games are also readily available on the market, and unauthorized use of software by 

business is rampant, hindering the ability of both indigenous and U.S. creators and rights 

holders to build successful businesses.”25

“Full protection under PRC law and enforcement of IPR in China as set forth in China’s 

TRIPS obligations are critical to the interests of foreign and PRC companies in China, as 

well as to China’s public health and safety, the integrity and attractiveness of China’s 

investment regime, and its broader economic development goals.”26

“Protection and enforcement of IPR, as defined in the WTO TRIPS agreement, is of 

increasing in importance to automakers operating in China. Since China’s accession to the 

WTO, there has been an increase in IPR violations of autos and automotive products, such 

as automotive braking, steering, and emissions systems.”27

Transparency “Regulatory transparency remains a key concern of U.S. Chamber member companies. The 

U.S. Chamber applauds the measures that MOFCOM adopted at the end of 2003 that 

promote the ministry’s compliance with China’s WTO transparency commitments, 

specifically those that require People’s Republic of China (PRC) authorities to provide a 

“reasonable period for comment to the appropriate authorities” before trade-related 

measures are implemented. Other PRC ministries and agencies, however, have been far less 

progressive in their approaches to circulating draft regulations to foreign companies and in 

providing a reason able window for comment. We urge the Chinese government to have all 

its rulemaking ministries and agencies follow MOFCOM’s example in fulfilling China’s 

transparency obligations under the WTO. China also needs to fulfill its recent promise to 

fully separate the regulatory and commercial functions in the express delivery and 

telecommunications sectors.”28

“PRC ministries outside of MOFCOM continue to circulate draft regulations to foreign 

companies in ad hoc fashion. In instances when PRC authorities circulate regulations to the 

foreign business community, comment periods for foreign companies remain woefully 

short. Many companies report cases of receiving regulations only through their PRC joint 

venture partners. And, while new trade-related regulations are increasingly available via 

 

24 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 7. 

25 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 8. 

26 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 8. 

27 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 

20. 

28 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 3. 
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online, trade gazettes, and other sources, PRC agencies continue to lag in translating such 

regulations into WTO-authorized languages.”29

Trading and 

distribution 

rights 

“China’s full and consistent implementation of its trading rights and distribution services 

obligations by December 11, 2004, is of critical interest to foreign companies. The U.S. 

Chamber applauds China’s early phase-in of trading rights for wholly foreign-owned 

companies on July 1. Further, it hopes that MOFCOM will release implementing 

regulations soon that clarify how new and existing wholly foreign-owned businesses in 

China can acquire distribution rights to allow foreign businesses to begin distribution 

services on the December 11, 2004, phase-in date.”30

“The Regulations on Management of Foreign Investment in the Commercial Sector, issued 

in mid-April, provide new guidance to foreign companies on how they may conduct retail, 

wholesale, franchise, and commission agency services in the China market. But, the 

regulations fail to offer details on how existing foreign-invested companies in China can 

incorporate distribution services into their existing scopes of business.”31

Standards The U.S. Chamber is concerned about China’s use of discriminatory standards to erect 

barriers to fair competition and in violation of its WTO obligations. * * * China has 

moved to develop, adopt, and increasingly mandate unique national technology standards 

across a wide range of technology products. Examples include a mandated encryption 

standard for wireless communications devices and the development of unique national 

standards for AVS for media/TV, IGRS for connectivity, and EVD for recording media. * 

* * China’s adoption of mandatory national technology standards that are out of step with 

international standards efforts and that don’t consistently respect intellectual property are 

troubling to U.S. Chamber members, many of whom have made significant investments in 

China. 

China also continues to maintain for certain imported products a tiered conformity 

assessment process that is incompatible with its WTO obligations under Article 13.4(a) of 

the Agreement on Technical Barriers to Trade, which requires that China maintain no more 

than one conformity assessment process for all imported goods. 

China’s implementation of its new certification regime, centered on the China Compulsory 

Certification (CCC) mark, remains a work in progress, with many imported products still 

facing additional inspection processes beyond the CCC-qualifying process. 

National 

treatment 

“U.S. Chamber members continue to harbor concerns over China’s lackluster application of 

the WTO’s national treatment and nondiscrimination principles in the areas of price 

 

29 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 

10-11. 

30 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 3. 

31 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 

17. 
China in the WTO – Year 3: A Research Report Prepared for 

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January 21, 2005 

Page 26

controls on medicines and drug reimbursement. China’s actions in this area appear designed 

to benefit domestic pharmaceutical manufacturers at the expense of their foreign 

counterparts.”32

Agriculture “While China has eliminated or reduced some tariff barriers, foreign companies are 

experiencing problems with several nontariff barriers that restrict trade into China, create 

significant marketplace uncertainty, and discourage further foreign investment.”33

These include such measures as: 

• a new animal and plant quarantine regulation that “requires that Quarantine Import 

Permits (QIPs) be approved prior to signing contracts, which appears to provide 

China’s AQSIQ with blanket authority to annul or void import permits in the case of 

a government-issued warning or ban.”34

• “U.S. soybean, cotton, and meat traders have reported significant restrictions on 

exports of products to China stemming from AQSIQ’s issuance of Import of Animal 

and Plant Quarantine permits and its inspection procedures.”35

3. US-China Business Council

The US-China Business Council has compiled a WTO Scorecard covering China’s “Year 

Three Commitments.”36 The USCBC observes that China has fulfilled the bulk of its market 

opening commitments but that China's fulfillment of its commitments is “not always clear-cut.”37 

Some of the areas in which the Scorecard notes compliance concerns are the following. 

 

32 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 

31. 

33 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 

22. 

34 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 

22. 

35 U.S. Chamber of Commerce, China’s WTO Implementation: A Three-Year Assessment (September 2004) at 

23. 

36 See US-China Business Council, WTO SCORECARD: CHINA'S YEAR THREE COMMITMENTS 

(December 15, 2004); http://www.uschina.org/public/documents/2005/01/wtoscorecard.html. 

37 See US-China Business Council, WTO SCORECARD: CHINA'S YEAR THREE COMMITMENTS 

(December 15, 2004); http://www.uschina.org/public/documents/2005/01/wtoscorecard.html. 
China in the WTO – Year 3: A Research Report Prepared for 

the US-China Economic and Security Review Commission 

January 21, 2005 

Page 27

• Trading Rights: China issued regulations but no companies have been approved. 

• Distribution: China issued regulations regarding wholesale, retail, and commission 

agents' services, but implementation remains unclear. China is late in issuing regulations 

regarding retailing and wholesaling of pharmaceuticals and retailing of refined fuels. 

• Telecom: China met its commitment to open this market but has imposed strict 

conditions which effectively block foreign entry. 

• Construction: China met its commitment to open this market but has imposed strict 

conditions which effectively block foreign entry. 

• Freight Transport Services: China is late in opening market to wholly foreign–owned 

road enterprises and storage and warehousing enterprises. 

• Repair, Maintenance, and Leasing: China is late in issuing regulations to permit wholly 

foreign–owned enterprises to enter this market. 

• Autos: China is late in raising to $90 million the level of foreign investment in auto 

manufacturing that requires provincial approval.38

II. China WTO Issues and U.S. Enforcement

A. The Use of China-Specific Safeguards in the United States

1. China Accession Provisions

China’s protocol of accession, as well as the working party report, included two special 

safeguard provisions that are available to all WTO Members during transitional periods and that 

are applicable to China specifically. First, WTO members may apply a product-specific 

transitional safeguard to deal with import surges of particular products from China that cause 

market disruption. Second, WTO members may apply a special textile safeguard provision in 

order to deal with market disruption due to increased imports of Chinese textile and apparel 

products. 

 

38 See US-China Business Council, WTO SCORECARD: CHINA'S YEAR THREE COMMITMENTS 

(December 15, 2004); http://www.uschina.org/public/documents/2005/01/wtoscorecard.html.
China in the WTO – Year 3: A Research Report Prepared for 

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January 21, 2005 

Page 28

a. Product-Specific Safeguards

China’s accession protocol provides for a general “product-specific special safeguard” 

measure, which is applicable to any type of product (i.e., industrial and agricultural goods) and is 

available to the U.S. (and other WTO Members) for 12 years following China’s accession to the 

WTO (until December 11, 2013).39 This provision allows WTO Members to take action to 

restrain imports of Chinese goods that cause or threaten to cause “market disruption” to the 

domestic industry producing such goods. 

The transitional product-specific safeguard is unique to China. No other acceding 

country (either to GATT or the WTO) has been subject to a transitional product-specific 

safeguard. Members insisted, however, that because China acceded to the WTO before it had 

achieved all necessary trade reformations or met all WTO obligations, a product-specific 

safeguard mechanism was necessary to protect other WTO Members from increased imports 

from China during China's transitional period. 

The product-specific safeguard’s injury standard is "market disruption," which exists 

wherever imports of an article, like or directly competitive with an article produced by the 

domestic industry, are increasing rapidly, either absolutely or relatively, so as to be a significant 

cause of material injury, or threat of material injury to the domestic industry.40 This standard is 

substantially less than the “serious injury” standard of a typical safeguard action. 

 

39 Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001), art. 16. 

40 Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001), art. 16.4. 
China in the WTO – Year 3: A Research Report Prepared for 

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January 21, 2005 

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The Protocol provides that before a product-specific safeguard measure is applied, a 

consultation process should take place to see if the parties can reach a mutually satisfactory 

solution.41 If consultations succeed, China "shall take such action as to prevent or remedy the 

market disruption."42 If, however, consultations do not succeed within 60 days, the WTO 

member may take action to prevent or remedy the market disruption by imposing a productspecific safeguard measure.43

Product-specific safeguard measures may be in place for two years where there has been 

a relative increase in imports, and three years where the increase is absolute. After these 

respective periods, however, China may “retaliate” by suspending substantially equivalent 

concessions or obligations under the WTO Agreement.44

b. Textile Safeguards

The working party report to China's accession established a special textile safeguard 

mechanism that is available to WTO Members through December 31, 2008.45 The safeguard is 

applicable to textile and apparel products covered by the Agreement on Textiles and Clothing 

ATC as of the date the WTO Agreement entered into force (January 1, 1995). 

 

41 Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001), art. 16.1. 

42 Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001), art. 16.2. 

43 Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001), art. 16.3. 

44 Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001), art. 16.6. 

45 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), paras. 241-242. 
China in the WTO – Year 3: A Research Report Prepared for 

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January 21, 2005 

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Paragraph 242 of the working party report sets out the46 terms of the special textile 

safeguard. If a WTO Member believes (and can show) that imports of certain Chinese textile 

and apparel products are “threatening to impede orderly development of trade in these products” 

due to “market disruption,” the WTO Member can request consultations with China “with a view 

to easing or avoiding such market disruption.”47 The injury standard (“market disruption”) is 

less stringent than the “serious injury” test of a regular safeguard action. 

Upon receipt of a request, China will “hold its shipments ... to a level no greater than 7.5 

per cent (6 per cent for wool product categories) above the amount entered during the first 12 

months of the most recent 14 months preceding” the request.48 Consultations would be held 

within 30 days of the request with the aim of reaching a "mutually satisfactory solution" within 

90 days of the request.49 If no solution can be reached, consultations, and export restraints, 

continue.50 Textile safeguards may be applied from the date that consultations are requested 

through December 31 of that year.51 In general, no textile safeguard may last longer than one 

year unless it is reapplied through further consultations, or otherwise agreed to by China and the 

WTO member.52

 

46 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), para. 242. 

47 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), para. 242(a). 

48 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), para. 242(c). 

49 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), para. 242(b). 

50 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), para. 242(d). 

51 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), para. 242(e). If, 

however, three or fewer months remain in that year, then the export restraints may stay in place for up to one 

year from the date of the request for consultations. 

52 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), para. 242(f). 
China in the WTO – Year 3: A Research Report Prepared for 

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January 21, 2005 

Page 31

2. U.S. Application of China-Specific Safeguards

a. Product-Specific Safeguards

The China product-specific safeguard was enacted in U.S. law by Section 421 of the 

Trade Act of 1974, as amended, 19 U.S.C. § 2451. Section 421 permits U.S. domestic industries 

and workers adversely affected by increased imports from China to seek relief. 53 

As of January 2005, there have been only five Section 421 investigations. The last active 

investigation was completed in March 2004. Of the five Section 421 investigations, the ITC 

made an affirmative injury determination and recommended relief in three cases and made a 

negative determination in two cases. No case has resulted in relief to a domestic industry, 

however, as the President denied relief in the three affirmative cases. 

Section 421 Investigations 

Product Investigation 

Initiated 

ITC Determination Recommended 

Relief 

President’s 

Determination 

Pedestal 

actuators 

August 19, 2002 Affirmative (3-2) 

October 18, 2002 

Quotas Denied relief on 

grounds of national 

economic interest 

(January 17, 2003) 

Steel wire 

garment 

hangers 

November 27, 

2002 

Affirmative (5-0) 

January 27, 2003 

Additional duties Denied relief on 

grounds of national 

economic interest 

(April 25, 2003) 

Brake drums 

and rotors 

June 6, 2003 Negative (5-0) 

August 5, 2003 

Not applicable Not applicable 

Ductile iron 

waterworks 

fittings (DIWF) 

September 5, 2003 Affirmative (6-0) 

December 4, 2003 

3-year tariff-rate 

quota 

Denied relief on 

grounds of national 

economic interest 

(March 3, 2004) 

Innersprings January 6, 2004 Negative (6-0) 

March 8, 2004 

Not applicable Not applicable 

 

53 For a description of the substantive and procedural provisions of Section 421, see Terence P. Stewart, China's 

Compliance With World Trade Organization Obligations: A Review Of China's 1st Two Years Of 
China in the WTO – Year 3: A Research Report Prepared for 

the US-China Economic and Security Review Commission 

January 21, 2005 

Page 32

The following tables summarize the five Section 421 actions that have been completed as 

of January 2005. 

TA-421-01: PEDESTAL ACTUATORS FROM CHINA

Petition Filed: August 19, 2002, on behalf of Motion Systems Corp., Eatontown, NJ. 

Investigation Instituted: effective August 19, 2002; Pedestal Actuators from China, 67 Fed. Reg. 54822 

(Institution) (ITC August 26, 2002). 

ITC Injury Determination: Affirmative. On October 18, 2002, by a vote of 3-2, the USITC determined that 

pedestal actuators from the People’s Republic of China are being imported into the United States in such 

increased quantities or under such conditions as to cause market disruption to the domestic producers of like or 

directly competitive products. See Pedestal Actuators from China, 67 Fed. Reg. 69557 (Determination) (ITC 

November 18, 2002). 

ITC Remedy Recommendation: October 29, 2002. The Commission recommended import relief in the form of a 

quota. 

• Commissioners Hillman and Miller recommended a quantitative import restriction for 3 years in the amount 

of 5,626 units in year 1; 6,470 units in year 2; and 7,440 units in year 3. 

• Commissioner Koplan recommended a quantitative import restriction for 3 years in the amount of 4,425 

units in year 1; 4,514 units in year 2; and 4,604 units in year 3. 

The Commission transmitted its remedy proposals to the President and U.S. Trade Representative on November 7, 

2002. See Pedestal Actuators from China, 67 Fed. Reg. 69557 (Determination) (ITC November 18, 2002). 

Views of Commission: Pedestal Actuators from China, TA-421-1, USITC Pub. 3557 (November 2002). 

President's Decision: On January 17, 2003, the President announced that he was not providing relief because he 

had determined that import relief was not in the national economic interest and that import relief would have an 

adverse impact on the United States economy clearly greater than the benefits of such action. The President 

provided the following reasons for his decision not to grant relief: 

In determining not to provide import relief, I considered its overall costs to the U.S. economy. 

The facts of this case indicate that imposing the USITC's recommended quota would not likely 

benefit the domestic producing industry and instead would cause imports to shift from China to 

other offshore sources. 

Even if the quota were to benefit the primary domestic producer, the cost of the quota to 

consumers, both the downstream purchasing industry and users of the downstream products, 

would substantially outweigh any benefit to producers' income. The USITC's analysis confirms 

this conclusion. 

 

Membership; A Report Prepared for the U.S.-China Economic and Security Review Commission (March 19, 

2004) at pages 206-211. 
China in the WTO – Year 3: A Research Report Prepared for 

the US-China Economic and Security Review Commission 

January 21, 2005 

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TA-421-01: PEDESTAL ACTUATORS FROM CHINA

In addition, downstream industries are already under pressure to migrate production offshore to 

compete with lower-cost imports of finished products. Higher component costs resulting from 

import relief would add to this pressure. Given the significantly larger number of workers in the 

downstream purchasing industry when compared with the domestic pedestal actuator industry, I 

find that imposing import restrictions would do more economic harm than good. 

Finally, a quota would negatively affect the many disabled and elderly purchasers of mobility 

scooters and electric wheelchairs, the primary ultimate consumers of pedestal actuators. 

Memorandum of January 17, 2003--Presidential Determination on Pedestal Actuator Imports From the People's 

Republic of China, 68 Fed. Reg. 3155 (Presidential Document January 22, 2003). 

TA-421-02: STEEL WIRE GARMENT HANGERS FROM CHINA

Petition Filed: November 27, 2002, on behalf of CHC Industries, Inc., Palm Harbor, FL; M&B Hangers Co., 

Leeds, AL; and United Wire Hanger Corp., South Hackensack, NJ. 

Investigation Instituted: effective November 27, 2002; Certain Steel Wire Garment Hangers from China, 67 Fed. 

Reg. 72700 (Institution) (ITC December 6, 2002). 

ITC Injury Determination: Affirmative. On January 27, 2003, by a vote of 5-0, the USITC determined that 

certain steel wire garment hangers from the People’s Republic of China are being imported into the United States 

in such increased quantities or under such conditions as to cause market disruption to the domestic producers of 

like or directly competitive products. See Certain Steel Wire Garment Hangers from China, 68 Fed. Reg. 8926

(Determination) (ITC February 26, 2003). 

ITC Remedy Recommendation: February 5, 2003. The Commission recommended import relief in the form of an 

additional duty. 

• Commissioners Okun, Hillman, and Miller recommended relief in the form of an additional duty for 3 years: 

25% year 1; 20% in year 2; and 15% in year 3. In addition, they recommended expedited consideration of 

trade adjustment assistance for firms and/or workers affected by the subject imports. 

• Commissioner Bragg recommended relief in the form of an additional duty for 2 years: 20% year 1; 15% in 

year 2. 

• Commissioner Koplan recommended relief in the form of an additional duty of 30% for 3 years. In addition, 

he recommended expedited consideration of trade adjustment assistance for firms and/or workers affected by 

the subject imports. See Certain Steel Wire Garment Hangers from China, 68 Fed. Reg. 8926

(Determination) (ITC February 26, 2003). 

The Commission transmitted its remedy proposals to the President and U.S. Trade Representative on February 14, 

2003. See Notice of Proposed Measure and Opportunity for Public Comment Pursuant to Section 421 of the 

Trade Act of 1974: Certain Steel Wire Garment Hangers From the People's Republic of China, 68 Fed. Reg. 

10765 (USTR March 6, 2003). 

Views of Commission: Certain Steel Wire Garment Hangers from China, TA-421-2, USITC Pub. 3575 (February 

2003). 
China in the WTO – Year 3: A Research Report Prepared for 

the US-China Economic and Security Review Commission 

January 21, 2005 

Page 34

TA-421-02: STEEL WIRE GARMENT HANGERS FROM CHINA

President's Decision: On April 25, 2003, the President announced that he was not providing relief because he had 

determined that import relief was not in the national economic interest and that import relief would have an 

adverse impact on the United States economy clearly greater than the benefits of such action. The President 

provided the following reasons for his decision not to grant relief: 

The facts of this case indicate that imposing additional tariffs on Chinese imports would affect 

domestic producers unevenly, favoring one business strategy over another. While most of the 

producers would likely realize some income benefits, additional tariffs would disrupt the longterm adjustment strategy of one major producer, which is based in part on distribution of imported 

hangers, and cause that producer to incur substantial costs. 

In addition, most domestic producers, including the petitioners, have begun to pursue adjustment 

strategies. While these strategies have included consolidation, modernization of production 

facilities, and expansion into complementary products and services, domestic producers are also 

expanding their use of imports. Indeed, a substantial part of the surge in imports during the most 

recent period measured was brought in by domestic producers themselves, including the 

petitioners. 

Moreover, after 6 years of competing with Chinese imports, domestic producers still account for 

over 85 percent of the U.S. wire hanger market. With this dominant share of the market, domestic 

producers have the opportunity to adjust to competition from Chinese imports even without import 

relief. 

Furthermore, there is a strong possibility that if additional tariffs on Chinese wire hangers were 

imposed, production would simply shift to third countries, which could not be subject to section 

421's China-specific restrictions. In that event, import relief would have little or no benefit for any 

domestic producer. 

Additional tariffs would have an uneven impact on domestic distributors of wire hangers. For 

some distributors, the tariffs would likely lead to some income benefits. However, the tariffs 

would likely harm other distributors in light of their business models. 

Additional tariffs would also likely have a negative effect on the thousands of small, familyowned dry-cleaning businesses across the United States that would either have to absorb the 

resulting increased costs or pass them on to their customers. 

Memorandum of April 25, 2003--Presidential Determination on Wire Hanger Imports from the People's Republic of 

China, 68 Fed. Reg. 23017 (Presidential Document April 29, 2003). 

TA-421-03: BRAKE DRUMS AND ROTORS FROM CHINA

Petition Filed: June 6, 2003, on behalf of the Coalition for the Preservation of American Brake Drum and Rotor 

Aftermarket Manufacturers (consisting of Dana Corp. (Brake and Chassis Division)/Brake Parts, Inc.; Federal 

Mogul Corp.; and Thyssen Krupp Waupaca/Waupaca Foundry, Inc.). 

Investigation Instituted: effective June 6, 2003; Certain Brake Drums and Rotors from China, 68 Fed. Reg. 
China in the WTO – Year 3: A Research Report Prepared for 

the US-China Economic and Security Review Commission 

January 21, 2005 

Page 35

TA-421-03: BRAKE DRUMS AND ROTORS FROM CHINA

35702 (Institution) (ITC June 16, 2003). 

ITC Injury Determination: Negative. On August 5, 2003, by a vote of 5-0, the USITC determined that certain 

brake drums and rotors from the People’s Republic of China are not being imported into the United States in such 

increased quantities or under such conditions as to cause market disruption to the domestic producers of like or 

directly competitive products. See Certain Brake Drums and Rotors from China, 68 Fed. Reg. 48938

(Determination) (ITC August 15, 2003). 

ITC Remedy Recommendation: None.

Views of Commission: Certain Brake Drums and Rotors from China, TA-421-3, USITC Pub. 3622 (August 

2003). 

President's Decision: None. 

TA-421-04: DUCTILE IRON WATERWORKS FITTINGS FROM CHINA

Petition Filed: September 5, 2003, on behalf of McWane, Inc., Birmingham, AL, and three subsidiaries: Clow 

Water Systems Co., Coshocton, OH, Tyler Pipe Co., Tyler, TX, and Union Foundry Co., Anniston, AL. 

Investigation Instituted: effective September 5, 2003; Certain Ductile Iron Waterworks Fittings from China, 68 

Fed. Reg. 54010 (Institution) (ITC September 15, 2003). 

ITC Injury Determination: December 4, 2003. By a vote of 6-0, the USITC determined that certain ductile iron 

waterworks fittings from the People’s Republic of China are being imported into the United States in such 

increased quantities or under such conditions as to cause market disruption to the domestic producers of like or 

directly competitive products. See Certain Ductile Iron Waterworks Fittings from China, 68 Fed. Reg. 69421 

(Determination) (ITC December 12, 2003). 

ITC Remedy Recommendation: December 15, 2003. The Commission recommended import relief in the form of 

a tariff-rate quota for a three-year period: 

• 50% tariff on imports exceeding 14,324 short tons in year 1; 

• 40% tariff on imports exceeding 15,398 short tons in year 2; and 

• 30% tariff on imports exceeding 16,553 short tons in year 3. 

The Commission further recommended expedited consideration of trade adjustment assistance for firms and/or 

workers affected by the subject imports. 

The Commission transmitted a report on its determination, as well as its remedy proposals, to USTR on December 

24, 2003. 

Views of Commission: Certain Ductile Iron Waterworks Fittings from China, TA-421-4, USITC Pub. 3657 

(December 2003). 

President's Decision: On March 3, 2004, the President announced that he was not providing relief because he had 

determined that import relief was not in the national economic interest and that import relief would have an 
China in the WTO – Year 3: A Research Report Prepared for 

the US-China Economic and Security Review Commission 

January 21, 2005 

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TA-421-04: DUCTILE IRON WATERWORKS FITTINGS FROM CHINA

adverse impact on the United States economy clearly greater than the benefits of such action. The President 

provided the following reasons for his decision not to grant relief: 

The facts of this case indicate that imposing the USITC's recommended tariff-rate quota remedy or 

any other import relief available under section 421 would be ineffective because imports from 

third countries would likely replace curtailed Chinese imports. The switch to third country imports 

could occur quickly because the major U.S. importers already import substantial quantities from 

countries such as India, Brazil, Korea, and Mexico. Because importers' existing inventories of 

imports will likely cover demand for approximately 6 to 12 months from the imposition of import 

relief, a switch from China to alternative import sources would not likely lead to significant 

additional demand for domestically produced pipe fittings, even accounting for a time lag in 

making that switch. Under these circumstances, import relief would provide no meaningful benefit 

to domestic producers. 

In addition, import relief would cost U.S. consumers substantially more than the increased income 

that could be realized by domestic producers. Indeed, the USITC estimated that its recommended 

remedy would generate a negative net domestic welfare effect of between $2.3 million and $3.7 

million in the first year alone. 

While not necessary in reaching my determination that imposing import relief would have an 

adverse impact on the United States economy clearly greater than the benefits, it is also worth 

noting two additional points: 

• First, evidence suggests that domestic producers enjoy a strong competitive position in the 

U.S. market, and in fact the largest domestic producer recently announced price increases 

nationwide ranging from 8 to 35 percent. The two smaller domestic producers and the major 

U.S. importers have publicly indicated that they would follow these price increases. 

• Second, in 2002 and 2003, imports of this product have been relatively stable in volume terms 

and have shown a slight decline in value terms. 

The circumstances of this case make clear that the U.S. national economic interest would not be 

served by the imposition of import relief under section 421. I remain fully committed to exercising 

the important authority granted to me under section 421 when the circumstances of a particular 

case warrant it. 

Memorandum of March 3, 2004--Presidential Determination on Imports of Certain Ductile Iron Waterworks 

Fittings From the People's Republic of China, 69 Fed. Reg. 10597 (Presidential Document March 8, 2004). 

TA-421-05: INNERSPRINGS FROM CHINA

Petition Filed: January 6, 2004, on behalf of the U.S. member companies of The American Innerspring 

Manufacturers (AIM), Memphis, TN. Petitioning firms include Atlas Spring, Gardena, CA; Hickory Springs 

Manufacturing Co., Hickory, NC; Leggett & Platt, Carthage, MO; and Joseph Saval Spring & Wire Co., Inc., 

Taylor, MI. 
China in the WTO – Year 3: A Research Report Prepared for 

the US-China Economic and Security Review Commission 

January 21, 2005 

Page 37

TA-421-05: INNERSPRINGS FROM CHINA

Investigation Instituted: effective January 6, 2004; Innersprings from China, 69 Fed. Reg. 2002 (Institution) 

(ITC January 13, 2004). 

ITC Injury Determination: Negative. On March 8, 2004, by a vote of 6-0, the USITC determined that 

uncovered innerspring units from the People’s Republic of China are not being imported into the United States in 

such increased quantities or under such conditions as to cause market disruption to the domestic producers of like 

or directly competitive products. See ITC News Release 04-022: ITC Announces Determination in China 

Safeguard Investigation Concerning Uncovered Innerspring Units from China (March 8, 2004). 

ITC Remedy Recommendation: None. 

Views of Commission: Uncovered Innerspring Units from China, TA-421-5, USITC Pub. 3676 (March 2004). 

President's Decision: None. 

b. Textile Safeguards

The special China textile safeguard set out in the Working Party Report to China's WTO 

accession became effective upon China's entry into the WTO on December 11, 2001. In the 

United States, the textile safeguard was not implemented by statute. Rather, the textile safeguard 

was implemented by procedural rules issued by the Committee to Implement Textile Agreements 

(“CITA”), the official U.S. government entity responsible for administering the Agreement on 

Textiles and Clothing (“ATC”). In May 2003, CITA issued the procedural rules for bringing a 

special safeguard action to seek relief from Chinese imports.54 55

The following summarizes the China textile safeguard requests made and government 

actions taken in the U.S. since China’s accession. 

 

54 See Procedures for Considering Requests from the Public for Textile and Apparel Safeguard Actions on 

Imports from China, 68 Fed. Reg. 27787 (CITA, May 21, 2003). 

55 For a description of CITA’s procedural rules for a China textile safeguard action, see Terence P. Stewart, 

China's Compliance With World Trade Organization Obligations: A Review Of China's 1st Two Years Of 
China in the WTO – Year 3: A Research Report Prepared for 

the US-China Economic and Security Review Commission 

January 21, 2005 

Page 38

• September 2002 

The American Textile Manufacturers Institute (ATMI) petitioned CITA to impose special 

textile quotas on five product categories: (1) knit fabric; (2) gloves; (3) dressing gowns; 

(4) brassieres; and (5) textile luggage.56 In addition, ATMI identified a sixth product, 

textured filament yarn from China, and asked CITA to prepare a case for the possible 

imposition of quota restraints on imports of that product in the event that imports 

continued to increase.57 In making its request, ATMI cited a 119% increase in textile 

imports from China in the first six months of 2002 and stated that imports of Chinese 

textile products were "experiencing their greatest surge in history."58

During the first six months of the year, Chinese exports of textile and 

apparel products to the United States increased by almost 900 million 

square meters, with the textile portion increasing by more than 700 million 

square meters. On the strength of this increase, China surpassed both 

Pakistan and Canada to become the second largest textile and apparel 

exporter to the United States, shipping 1.9 billion square meters during the 

first six months of the year. China accounted for 60 percent of the increase 

in world-wide imports of textile and apparel products during the first half 

of the year.59

ATMI also presented the following data with respect to the product categories identified 

in its petition. 

1) Knit fabric – Chinese knit fabric exports rose 22 thousand percent and 

the average price of Chinese knit fabric dropped by 60 percent, 

catapulting China from being the 26th largest supplier of such exports 

to the U.S. to the 5th place among all foreign suppliers; 

2) Gloves – China’s exports of gloves to the United States tripled over 

the last six months, with the result that Chinese exports are now twice 

as large as those from the next largest supplier; 

3) Nightwear/Dressing Gowns – Chinese exports of nightwear more than 

quadrupled, vaulting China from seventh to first place among 

 

Membership; A Report Prepared for the U.S.-China Economic and Security Review Commission (March 19, 

2004) at pages 202-206. 

56 ATMI press release, ATMI Calls for New Quotas on Surging Chinese Imports, September 5, 2002. 

57 ATMI press release, ATMI Calls for New Quotas on Surging Chinese Imports, September 5, 2002. 

58 ATMI press release, ATMI Calls for New Quotas on Surging Chinese Imports, September 5, 2002. 

59 ATMI press release, ATMI Calls for New Quotas on Surging Chinese Imports, September 5, 2002. 
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supplying countries. The Chinese surge was accompanied by a 47% 

drop in Chinese prices; 

4) Brassieres – In less than six months, China leapfrogged the top two 

long-standing largest suppliers – Mexico and the Dominican Republic 

– as China’s price per dozen dropped to $29, by far the lowest of any 

major supplier; 

5) Luggage – Chinese exports of textile luggage have quadrupled to 71 

million kilograms while imports from every other supplier have 

simultaneously dropped, some by as much as 60 percent. Chinese 

prices fell by 62% during the same period of time. China now ships 

more than five times as much as the next largest supplier; 

6) Textured filament yarn – Chinese exports have only recently 

begun to surge and remain relatively small. However, over the 

past two months, Chinese exports increased at a rate of 400,000 

kilograms a month.60

At the time the petitions were filed, importers questioned whether ATMI was eligible to 

request textile safeguards with respect to certain of the products identified because ATMI 

members do not make four of the five products for which ATMI petitioned for relief (i.e., 

dressing gowns, brassieres, gloves, and textile luggage).61 However, ATMI members do 

produce and supply the fabric used in making these products. A press article noted at the 

time that: 

For CITA to impose a safeguard, it would have to apply an expansive 

definition of market disruption that would cover upstream suppliers of a 

given product, an ATMI source said. Under this definition, quotas could 

be imposed on a given product if it disrupted U.S. exports of fabric used to 

make these items, he said. This would be consistent with the market 

disruption definition CITA has applied in the past to invoke quotas under 

the Multifiber Arrangement (MFA), he said. 

* * * 

A Commerce Dept. official said this week that given this first request, 

CITA is looking at both the specific categories as well as the whole 

process for evaluating the request. This includes questions of whether 

upstream suppliers can claim market disruption or whether petitioners 

 

60 ATMI press release, ATMI Calls for New Quotas on Surging Chinese Imports, September 5, 2002. 

61 ATMI Seeks Relief Under China-Specific Safeguard on Five Import Categories, Inside US-China Trade, 

September 11, 2002. 
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have to meet a standing requirement, he said. He said that CITA would “at 

some point” decide how to proceed on the request.62

• May 2003 

Prior to CITA's issuance of procedural rules applicable to special textile safeguard 

requests in May 2003, CITA took no official action with respect to ATMI's September 

2002 petitions.63 When CITA issued its procedural rules, however, it resolved the 

question about ATMI's standing by determining that, in accord with past CITA practice, 

domestic producers of components used in producing like or directly competitive 

products were eligible to request safeguards: 

Consistent with longstanding Committee practice in considering textile 

safeguard actions, requests may be filed by an entity (which may be a 

trade association, firm, certified or recognized union, or group of workers) 

that is representative of either: (A) a domestic producer or producers of a 

product that is a like or directly competitive with the subject Chinese 

textile or apparel product; or (B) a domestic producer or producers of a 

component used in the production of a product that is like or directly 

competitive with the subject Chinese textile or apparel product.64

Once the new procedural rules were issued, it was determined that ATMI (the only 

petitioner for a China-specific textile safeguard so far) would need to re-file the petitions 

it had initially filed in September 2002. 

. . . Commerce has indicated that it will have to re-file a petition on 

Chinese safeguards now that the regulations outlining the process have 

been published . . . . One source said that while some officials have said a 

new petition is not needed, ATMI will need to include new information, 

 

62 ATMI Seeks Relief Under China-Specific Safeguard on Five Import Categories, Inside US-China Trade, 

September 11, 2002. 

63 A press report noted: "The [ATMI's] petition has so far been held in abeyance because there are no rules 

governing the process of receiving and deciding on petitions under the safeguards." China Seeks Meeting to 

Convince ATMI to Drop Safeguard Petition, Inside US-China Trade, May 7, 2003. 

64 See Procedures for Considering Requests from the Public for Textile and Apparel Safeguard Actions on 

Imports from China, 68 Fed. Reg. at 27788. 
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which means it will effectively have to file a new document with CITA 

before the process begins.65

• July 2003 

On July 24, 2003, ATMI, together with certain other textile groups, filed petitions 

requesting that a textile and apparel safeguard action be taken against China with respect 

to four product categories. 

• August 2003 

In August 2003, CITA accepted three of the petitions filed by ATMI (knit fabric, dressing 

gowns, and brassieres) and rejected the fourth (gloves). The following summarizes the 

petitioners, product categories, and status of and the four petitions: 

Petitioners Product Category Status 

• American Yarn Spinners 

Association 

• American Manufacturing 

Trade Action Coalition 

• American Textile 

Manufacturers Institute 

• National Textile Association 

Knit fabric 222 Accepted by 

CITA 

• American Manufacturing 

Trade Action Coalition 

• American Textile 

Manufacturers Institute 

• National Textile Association 

Cotton and manmade fiber dressing 

gowns 

350/650 Accepted by 

CITA 

• American Manufacturing 

Trade Action Coalition 

• American Textile 

Manufacturers Institute 

• National Textile Association 

Cotton and manmade fiber 

brassieres 

349/649 Accepted by 

CITA 

• American Manufacturing 

Trade Action Coalition 

• American Textile 

Manufacturers Institute 

• National Textile Association 

Cotton and manmade fiber gloves 331/631 Rejected by 

CITA 

 

65 ATMI May File Limited Petition In Light Of New China Textile Safeguard, Inside US-China Trade, May 29, 

2003. 
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On August 18, 2003, CIT published a notice in the Federal Register soliciting public 

comments on the three safeguard requests that it had accepted.66 The petitions on these 

three product categories showed substantial increases in imports of various textile and 

apparel products from China. For example, the petition on certain knit fabrics showed an 

increase in imports from a little over 31,000 kilograms in 2001 to more than 7 million 

kilograms in 2002, accompanied by price declines of more than 50 percent.67 The 

petitions on the other products also showed increases in imports from China of 300 to 

more than 500% and price declines of 44-50 percent between 2001 and 2002.68 The 

public comment period for the three textile petitions ended on September 17, 2003. 

• December 2003 

On December 23, 2003, CITA determined that Chinese-origin knit fabric, dressing 

gowns, and brassieres are, due to market disruption (and the threat thereof), threatening to 

impede the orderly development of trade in such products, and that imports of such 

products from China play a significant role in the existence (and threat) of market 

disruption. Pursuant to these findings, on December 29, 2003, CITA issued notices in the 

Federal Register announcing that it had (1) established import limits for knit fabric, 

dressing gowns, and brassieres, and (2) requested consultations with China.69 The import 

 

66 See Solicitation of Public Comments on Request for Textile and Apparel Safeguard Action on Imports from 

China, 68 Fed. Reg. 49440 (knit fabric; category 222) (CITA, August 18, 2003); Solicitation of Public 

Comments on Request for Textile and Apparel Safeguard Action on Imports from China, 68 Fed. Reg. 49444 

(dressing gowns; category 350/650) (CITA, August 18, 2003); Solicitation of Public Comments on Request for 

Textile and Apparel Safeguard Action on Imports from China, 68 Fed. Reg. 49448 (brassieres; category 

349/649) (CITA, August 18, 2003). 

67 See Solicitation of Public Comments on Request for Textile and Apparel Safeguard Action on Imports from 

China, 68 Fed. Reg. at 49444. 

68 See Solicitation of Public Comments on Request for Textile and Apparel Safeguard Action on Imports from 

China, 68 Fed. Reg. at 49448 and 49452. 

69 See Announcement of Request for Bilateral Textile Consultations with the Government of the People’s 

Republic of China and the Establishment of an Import Limit for Knit Fabric, Category 222, Produced or 

Manufactured in the People’s Republic of China, 68 Fed. Reg. 74944 (CITA, December 29, 2003); 

Announcement of Request for Bilateral Textile Consultations with the Government of the People’s Republic of 

China and the Establishment of an Import Limit for Brassieres and Other Body Supporting Garments, 

Category 349/649, Produced or Manufactured in the People’s Republic of China, 68 Fed. Reg. 74945 (CITA, 

December 29, 2003); Announcement of Request for Bilateral Textile Consultations with the Government of the 

People’s Republic of China and the Establishment of an Import Limit for Cotton and Man-Made Fiber 

Dressing Gowns and Robes, Category 350/650, Produced or Manufactured in the People’s Republic of China, 

68 Fed. Reg. 74947 (CITA, December 29, 2003). 
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limits established by CITA on these textile products from China became effective on 

December 24, 2003 and be in effect until December 23, 2004.70

• June 2004 

On June 28, 2004, U.S. producers of socks and other textile producers filed a safeguard 

petition covering cotton, wool, and man-made fiber socks (categories 332/432 and 632 

part). 

• October 2004 

Up to October 2004, CITA had imposed 3 textile safeguards. On October 8, 2004, a U.S. 

textile industry coalition filed a new special textile safeguard petition covering product 

categories 347 and 348 (men’s and boys’ and women’s and girls’ cotton trousers) and 

based upon a “threat” of increased imports.71 

Upon the filing of the new petitions, U.S. retailer and importer groups argued that there 

was no basis in CITA’s rules for accepting a safeguard petition based only on the “threat” 

of increased imports rather than actual increased imports.72

On October 12, 2004, U.S. textile and apparel groups filed 4 new threat-based safeguard 

petitions covering man-made fiber trousers (categories 647/648), man-made fiber knit 

shirts (categories 638/639), man-made fiber and cotton shirts (categories 340/640), and 

cotton knit shirts and blouses (categories 338/339).73

On October 15, 2004, U.S. textile and apparel groups filed a threat-based safeguard 

petition covering cotton and man-made fiber underwear (categories 352/652).74

 

70 Id. 

71 American Manufacturing Trade Action Council (AMTAC) press release, Threat-Based Special Textile China 

Safeguard Petition Filings Announced, October 12, 2004; available at www.amtacdc.org/media/041012.asp. 

72 U.S. Textile Groups File Threat-Based Safeguards Against China, Inside US-China Trade, October 6, 2004 at 

1. 

73 See the website of the U.S. Department of Commerce, International Trade Administration, Office of Textiles 

and Apparel for copies of the safeguard petitions: http://www.otexa.ita.doc.gov/Safeguard_intro.htm. CITA 

published requests for public comments in the Federal Register: 69 Fed. Reg. 64911, 64912, 64913, 64915 

(November 9, 2004). 

74 CITA published a request for public comments in the Federal Register: 69 Fed. Reg. 64914 (November 9, 

2004). 
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On October 27, 2004, U.S. textile and apparel groups filed a threat-based safeguard 

petition covering combed cotton yarn (category 301).75

On October 29, 2004, as provided for under paragraph 242 of the Report of the Working 

Party on China’s WTO accession,76 the U.S. requested consultations with China with 

respect to imports of Chinese origin cotton, wool, and man-made fiber socks. The U.S. 

established a 12-month limit on socks from China, beginning on October 29, 2004, and 

extending through October 28, 2005.77

• November 2004 

On November 8, 2004, U.S. textile and apparel groups filed a threat-based safeguard 

petition covering synthetic filament fabric (category 620).78

On November 10, 2004, U.S. textile and apparel groups filed a threat-based safeguard 

petition covering wool trousers (category 447).79

On November 19, 24, and 30, 2004, respectively, U.S. textile and apparel groups filed 

new safeguard petitions requesting extension of the current safeguards on the 3 products 

that would expire on December 24, 2004 (i.e., knit fabric, dressing gowns, and 

brassieres).80

 

75 CITA published a request for public comments in the Federal Register: 69 Fed. Reg. 68133 (November 23, 

2004). 

76 Paragraph 242 of the Working Party Report allows WTO Members that believe imports of Chinese origin 

textile and apparel products are, due to market disruption, threatening to impede the orderly development of 

trade in these products to request consultations with the People's Republic of China with a view to easing or 

avoiding such market disruption. Consultations with China will be held within 30 days of receipt of the 

request for consultations, and every effort will be made to reach agreement on a mutually satisfactory solution 

within 90 days of receipt of the request for consultations. 

77 69 Fed. Reg. 63371 (CITA November 1, 2004). 

78 CITA published a request for public comments in the Federal Register: 69 Fed. Reg. 70661 (December 7, 

2004). 

79 CITA published a request for public comments in the Federal Register: 69 Fed. Reg. 71781 (December 10, 

2004). 

80 CITA published requests for public comments in the Federal Register: 69 Fed. Reg. 77516 (December 17, 

2004), 69 Fed. Reg. 77232 (December 27, 2004), 69 Fed. Reg. 77998 (December 29, 2004). 
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The following table identifies the textile safeguard petitions filed with CITA since 

October 8, 2004. 

Source: http://www.otexa.ita.doc.gov/chinare1dec1.pdf 

• December 2004 

On December 1, 2004, the U.S. Association of Importers of Textiles and Apparel filed 

suit in the U.S. Court of International Trade challenging CITA’s acceptance of textile 

safeguard petitions on the basis of a “threat” of increased imports and requested that the 

CIT issue preliminary injunction enjoining CITA from granting relief. The CIT case 
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name and court number are: U.S. Association of Importers of Textiles and Apparel v. 

United States, Court No. 04-00598. 

Following briefing and oral argument on the plaintiff’s motion for a preliminary 

injunction, on December 30, 2004, CIT Judge Goldberg granted the motion for a 

preliminary injunction and issued an order enjoining CITA from proceeding on the 

threat-based safeguard requests during the pendency of the court action. The court’s 

order is set out below: 

ORDER 

Court No. 04-00598 

Upon consideration of plaintiff U.S. Association of Importers of Textiles and Apparel’s 

Motion for a Preliminary Injunction and the accompanying Memorandum of Points and 

Authorities in support thereof, defendant’s Motion to Dismiss and Opposition to 

Plaintiffs’ Motion for a Preliminary Injunction and the accompanying Memorandum in 

support thereof, the Declarations filed by plaintiff in support of its Motion for a 

Preliminary Injunction, Defendant’s Response in Opposition to Declarations Filed by 

USA-ITA in Support of its Motion for a Preliminary Injunction, upon all other papers and 

proceedings had herein, and upon due deliberation, it is hereby 

ORDERED that plaintiff’s Motion for a Preliminary Injunction is granted; and it is 

further 

ORDERED that defendant United States, together with its delegates, officers, agents, 

servants, and employees, including defendants Secretary of Commerce Donald Evans, 

Secretary of State Colin L. Powell, Secretary of the Treasury John W. Snow, U.S. Trade 

Representative Robert B. Zoellick, Secretary of Labor Elaine L. Chao, and all officers, 

agents, servants, and employees of the United States, the U.S. Department of Commerce, 

the U.S. Department of State, the U.S. Department of the Treasury, the Office of the U.S. 

Trade Representative, and the U.S. Department of Labor, shall be, and hereby are, 

enjoined, during the pendency of this action, from accepting, considering, or taking any 

further action on petitions filed pursuant to the procedures published at 68 Fed. Reg. 

27787 (May 21, 2003), and the clarification thereto published at 68 Fed. Reg. 49440 

(Aug. 18, 2003), that are based on the threat of market disruption by Chinese textile or 

textile products; and it is further 

ORDERED that the Committee for the Implementation of Textile Agreements shall be, 

and hereby is, enjoined, during the pendency of this action, from self-initiating 

consideration of whether to impose safeguards pursuant to the procedures published at 68 

Fed. Reg. 27787 (May 21, 2003), and the clarification thereto published at 68 Fed. Reg. 

49440 (Aug. 18, 2003), based on the threat of market disruption by Chinese textile or 

textile products; and it is further 

ORDERED that plaintiff will not be required to post a bond or security in conjunction 

with the issuance of this preliminary injunction. 
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3. Effectiveness and Possible Modifications to China-Specific Safeguards

a. Product-Specific Safeguards

To date, the China-specific product-specific safeguard remedy (Section 421action) has 

not provided relief to any U.S. industry. The expectations of its utility as a measure to provide 

relief to U.S. industries injured from a surge in Chinese imports have not been realized. 

Of the five cases brought so far, the International Trade Commission found in three cases 

that the domestic industry was injured by a surge in Chinese imports and recommended relief. 

However, the President chose in each instance to deny relief. 

It has been more than a year since the last Section 421 petition was filed. It is likely that 

the paucity of cases in the last year is due, not to a decrease in Chinese imports (which have 

continued to increase rapidly), but because U.S. industries have observed the results of the first 

five cases and have judged that the prospective relief to be gained from a petition is not worth the 

costs and time to bring it. 

Moreover, domestic parties may also have been discouraged from bringing 421 petitions 

by the political tenor of the ultimate decision making process as they have seen the effect of 

lobbying by China in each of the affirmative 421 determinations to discourage the President from 

granting relief.81 The apparent political nature of the 421 determinations by the President to date 

has been criticized by legal observers and legislators.82

 

81 See, e.g., Chinese Official Complains about China-Specific Safeguards, ChinaTradeExtra.com, posted 

December 6, 2002 (China's Vice-Minister for Trade, Long Yongtu, came to Washington and met with 

Commerce Department officials in December 2002, arguing that the use of Section 421 would undermine 

China’s market access to the United States); U.S. Holds Door Open to Settlement in First China-Specific 

Safeguard Case, Inside US-China Trade, November 13, 2002 (indicating that some administration officials 

believed imposition of a safeguard measure on Chinese imports could have negative political consequences in 
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As to possible modifications in the 421 statute to make it more effective toward its 

purpose, one constant uncertainty is the element of discretion granted to the President as the 

ultimate decision maker regarding relief. However, one possible statutory modification that 

should be considered is legislation to provide monetary relief (at least to the extent of covering 

legal costs) to those U.S. industries that bring a 421 petition, receive an affirmative 

determination and a recommendation for relief from the ITC but are then denied relief by the 

President. This small measure of compensation would assist U.S. industries (particularly those 

comprised of small and medium-sized companies) to benefit from the Section 421 remedy. 

More substantive modifications, such as making relief if proposed by the USITC 

mandatory as long as consistent with WTO durational limits (without retaliation rights) are more 

desirable but would presumably be resisted institutionally by the Administration since it reduces 

its role/discretion in the process. 

 

that "a decision to impose the ITC remedy could lead to increased use of the China-specific safeguard, which 

could further complicate the bilateral trade relationship"); Chinese Officials Meet in U.S. to Argue Against 421, 

Furniture AD Case, Inside US-China Trade, January 14, 2004 (“Officials from China’s Ministry of Commerce 

met this week with officials in the U.S. Trade Representative’s Office in an effort to convince them to reject 

recommendations from the International Trade Commission that the U.S. impose a tariff, a quota or a 

combination of both in order to limit imports of Chinese ductile iron waterworks fittings (DIWF). Informed 

sources said MOFCOM officials would meet with USTR yesterday (Jan. 13), and said the MOFCOM 

delegation consisted of officials from its Bureau of Fair Trade.”).

82 See, e.g., Eliza Patterson, The U.S. President, Once Again, Rejects Import Sanctions Against China, ASIL 

Insights (May 2003) (observing that the President’s denial of relief in the second Section 421 case concerning 

steel wire garment hangers could be viewed as "an overtly political decision by the President made under 

pressure from the Chinese government and a signal that this administration has no intention of ever granting 

relief under Section 421.”); Administration Keeps Unbroken Record of Not Standing Up for American Workers 

and Businesses Against Injurious Imports from China - Puts Another 5000 U.S. Manufacturing Jobs at Peril, 

Comments of Rep. Sander Levin criticizing President Bush’s decision to deny relief in the DIWF 421 case 

(March 5, 2004), available at http://www.insidetrade.com/secure/pdf5/wto2004_1302.pdf. 
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Separately, the USITC itself appears to add obligations on domestic petitioning industries 

that are not contained in the statute and which appear to misapprehend the purpose of Section 

421. The Commission requires domestic industries to supply adjustment plans similar to a 

section 201 action even though the premise of the statute is implementing rights under the 

accession protocol to deal with the transitional period when China is undergoing further 

significant legal and economic reform. Bringing USITC practice into conformity with the 

underlying purpose and intent of the statute doesn’t require legislative activity but possibly 

Congressional oversight. 

b. Textile Safeguards

Since China’s accession in December 2001, CITA has imposed only four textile 

safeguard measures, and the nine petitions filed since October 8, 2004 are now suspended as the 

result of a preliminary injunction issued by the Court of International Trade. Thus, the track 

record so far of the textile safeguard is very limited and it would be premature at this stage to 

pronounce an assessment of the effectiveness of the textile safeguard as a remedial measure. 

However, the fact that, of the five petitions that were filed prior to October 8, 2004, CITA 

rejected only one (cotton and man-made fiber gloves) is an indication that the textile safeguard is 

working as envisioned by the U.S. and other WTO Members. Of course, the outcome of the 

present challenge in the CIT to CITA’s authority to accept petitions based upon the threat of 

increased imports will be relevant in the short term to the ability of U.S. companies and their 

workers to obtain relief before a significant track record of increased imports for remaining 

products being reintegrated. While the preliminary injunction may delay the merits being 

considered (and hence may cost workers their jobs and some companies their continued 
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viability), the industry and workers will be able to file cases certainly by the second half of 2005 

if imports surge as anticipated. 

B. China’s Exchange Rate Policy and the Likelihood of a Successful 

WTO Challenge

1. China’s Exchange Rate Policy

For ten years, China has maintained a fixed exchange rate for their currency relative to 

the dollar. As noted in the latest Treasury Department report to Congress, “China kept its fixed 

exchange rate of 8.28 renminbi to the U.S. dollar throughout the reporting period, a rate it has 

maintained since 1995, through periods of both upward and downward pressures on the balance 

of payments.”83 Although the U.S. has urged China to move toward a flexible, market-based 

exchange rate regime and to reduce controls on capital flows, and although China has indicated 

publicly and at senior levels that it will move to a flexible exchange rate regime, China has not 

done so to date.84

 

83 U.S. Department of Treasury, Report to Congress on International Economic and Exchange Rate Policies, 

December 3, 2004; http://www.ustreas.gov/press/releases/js2127.htm. 

84 See U.S. Department of Treasury, Report to Congress on International Economic and Exchange Rate Policies, 

December 3, 2004; http://www.ustreas.gov/press/releases/js2127.htm: 

The Administration has urged Chinese leaders to move as soon as possible to greater flexibility, and 

has initiated an unprecedented level of engagement with the Chinese government and other major 

trading partners of the United States to help bring this about. * * * China has publicly stated its 

commitment to move to a flexible exchange rate regime. * * * China is laying the groundwork for 

a shift to a market-based, flexible exchange rate. * * * The U.S. Government will pursue 

persistently and firmly its approach to promote economic, financial and market reforms in China and 

assist China to move as soon as possible to a flexible exchange rate regime. 
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Many economists have estimated that China’s currency is undervalued by as much as 

40% or more.85 As a result, Chinese goods compete domestically and internationally at prices 

that are artificially low hurting U.S. producers in the U.S. market, in the Chinese market and in 

third country markets. It is argued that China’s pegged exchange rate effectively acts as a tax on 

U.S. exports and a subsidy to China’s exports, which causes the loss of U.S. manufacturing jobs. 

Concern about China's undervalued currency and its effects on U.S. manufacturing and increased 

imports led to a number of proposals in the 108th Congress to address this problem. For 

example, Senator Schumer introduced a bill (S. 1586)86 that would have found that: 

(1) China's currency is artificially pegged below its market value by 15-40 

percent, or an average of 27.5 percent; 

(2) the undervaluation of the yuan makes exports from China less expensive for 

foreign consumers and foreign products more expensive for Chinese 

consumers, which effectively result is a subsidy to China's exports and a 

virtual tariff on foreign imports; 

(3) China's undervalued currency and the U.S. trade deficit with China is 

contributing to significant U.S. job losses and harming U.S. businesses; 

(4) China has intervened in the foreign exchange markets to hold the value of 

the yuan within an artificial trading range; and 

(5) China's undervalued currency and intervention in the value of its currency 

violates the spirit and letter of the world trading system. 

The Schumer bill would have imposed a 27.5% additional rate of duty on Chinese imports unless 

the President certified to Congress that China was no longer manipulating its exchange rate and 

that its currency was valued in accordance with accepted market-based trading policies. 

 

85 See Testimony of Franklin J. Vargo, National Association of Manufacturers, before the House Committee on 

International Relations, Hearing on U.S.-China Ties: Reassessing the Economic Relationship at 4 (October 21, 

2003).

86 The text of S. 1586 is available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_ 

bills&docid=f:s1586is.txt.pdf. 
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In 2004, other attempts were made to address China’s exchange rate policy. In particular, 

two Section 301 petitions were filed with the U.S. Trade Representative seeking U.S. action 

regarding China’s exchange rate policy. Initially, the Fair Currency Alliance, a group of trade 

associations and unions representing manufacturing, agriculture and labor, prepared a Section 

301 petition87 to address the problem of Chinese currency manipulation but eventually chose not 

to file the petition with USTR. 

Thereafter, on September 9, 2004, the China Currency Coalition, another coalition of 

U.S. industrial, service, agricultural, and labor organizations, filed a Section 301 petition seeking 

immediate elimination of the Chinese currency’s undervaluation.88 On the same day it was filed, 

USTR rejected the petition. 

On September 30, 2004, another Section 301 petition on China’s currency policy (nearly 

identical to the CCC’s petition) was filed by 30 members of the House and Senate.89 On 

November 12, 2004, USTR rejected the 301 petition filed by the 30 members of Congress.90 

2. Possible Grounds for a WTO Challenge to China’s Exchange Rate Policy

Various bases for a WTO challenge to China’s exchange rate policy have been proposed. 

The primary grounds for challenging China's exchange rate policy are that China's 

 

87 See Fair Currency Alliance Says China Understating Global Trade Surplus, Inside US-China Trade, June 16, 

2004 (“Zoellick and other cabinet officials said in late April that they would reject a Section 301 petition on 

China’s currency policies if it were filed. However, the Alliance has said it might still file the petition, and will 

monitor the Bush Administration’s progress on the issue over the summer before deciding how to proceed.”). 

88 See http://www.aflcio.org/issuespolitics/manufacturing/upload/petition.pdf.

89 See USTR Delays China Currency 301 Decision Until Meeting With Congress, Inside US-China Trade, 

October 6, 2004 at 3-4. 

90 See USTR Rejects Currency 301; Schumer, Levin Blast Lack of Consultations, Inside US-China Trade, 

November 17, 2004 at 1. 
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undervaluation of the yuan constitutes a prohibited export subsidy within the meaning of various 

GATT articles and WTO Agreements, violates GATT Article XV:4, and violates China’s 

obligations under the International Monetary Fund’s Articles of Agreement.. In brief, these 

potential grounds to a WTO challenge are: 

Prohibited Export Subsidy: 

 WTO SCM Agreement: Article 3.1(a) of the SCM Agreement prohibits “subsidies, 

contingent in law or in fact, ... upon export performance....” Article 3.2 of the SCM 

Agreement states that WTO Members States “shall neither grant nor maintain” 

prohibited export subsidies. In its accession protocol, China committed to 

"eliminate all subsidy programmes falling within the scope of Article 3 of the SCM 

Agreement upon accession." 91

 GATT Article VI: The Ad Note to GATT Articles VI:2 and VI:3 provides that 

“multiple currency practices can in certain circumstances constitute a subsidy to 

exports which may be met by countervailing duties . . . . By ‘multiple currency 

practices’ is meant practices by governments or sanctioned by governments.” 

GATT, Ad. Article VI, paras. 2-3, note 2.92

 GATT Article XVI: This article expressly recognizes that export subsidies “. . . 

may cause undue disturbance to . . . normal commercial interests, and may hinder 

the achievement of the objectives of this Agreement.” GATT Article XVI:2. 

Paragraph 4 prohibits export subsidies by directing that "contracting parties shall 

cease to grant either directly or indirectly any form of subsidy on the export of any 

product other than a primary product which subsidy results in the sale of such 

product for export at a price lower than the comparable price charged for the like 

product to buyers in the domestic market.” GATT Article XVI:4. 

 WTO Agriculture Agreement: According to Article 3.2 of the Agriculture 

Agreement, Members shall not provide export subsidies in excess of those specified 

in their schedule of commitments. Article 9.1 identifies specific types of export 

 

91 Protocol on the Accession of the People's Republic of China, WT/L/432 (23 November 2001) at art. 10.3. 

92 Some U.S. industry groups have stated that one way to address the effect of China’s exchange rate policy is by 

changing U.S. policy regarding the application of CVD law to China and other NME countries. Such a change 

would enable U.S. industries to argue that China’s exchange rate policy acts as a countervailable subsidy. See, 

e.g., China CVD Bill Increasingly Seen as Way to Attack China Currency, Inside US-China Trade, June 30, 

2004 at 1. 
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subsidies subject to reduction commitments, and Article 10.1 further specifies that 

export subsidies not identified in Article 9.1 shall not be applied in contravention of 

Members’ export subsidy commitments. In the working party report to China's 

accession, China expressly committed that “by the date of accession, China would 

not maintain or introduce any export subsidies on agricultural products.”93 

Violation of GATT Article XV:4: 

 GATT Article XV:4 states: “Contracting parties shall not, by exchange action, 

frustrate* the intent of the provisions of this Agreement, nor, by trade action, the 

intent of the provisions of the Articles of Agreement of the International Monetary 

Fund.”94 China’s undervaluation of its yuan constitutes an “exchange action” that 

frustrates the intent of various provisions of the GATT Agreement, particularly 

Article I (MFN), Article II (tariff bindings), Article III (national treatment), Articles 

VI and XVI (export subsidies prohibited), and Article XI (bars taxes & charges 

(other than duties) that restrict imports).

 China’s undervaluation also constitutes a “trade action” that frustrates the intent of 

the IMF’s Articles of Agreement, particularly Article IV, Section 1(iii) (each IMF 

member shall “avoid manipulating exchanges rates or the international monetary 

system in order to prevent effective balance of payments adjustment or to gain an 

unfair competitive advantage over other members.”). 

IMF Agreement Violation: 

 China’s undervaluation of the yuan violates China’s obligations under IMF Article 

IV (each IMF member shall: “(iii) avoid manipulating exchange rates or the 

international monetary system in order to . . . gain an unfair competitive advantage 

over other members.”) by giving China’s exports an unfair competitive advantage 

in trade with the U.S. and other IMF members.

 China’s undervaluation of the yuan violates China’s obligations under IMF Article 

VIII, section 3 (“No member shall engage in, or permit any of its fiscal agencies ... 

to engage in any discriminatory currency arrangements or multiple currency 

practices ....”) by discriminating against U.S. products to China’s benefit.

 

93 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at para. 234. 

94 The Ad Note states: “The word ‘frustrate’ is intended to indicate, for example, that infringements of the letter 

of any Article of this Agreement by exchange action shall not be regarded as a violation of that Article if, in 

practice, there is no appreciable departure from the intent of the Article....” 
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3. Likelihood of a Successful WTO Challenge to China’s Exchange Rate 

Policy

On substance, the potential grounds for challenging China's exchange rate policy at the 

WTO have prima facie merit. Although currency practices have not commonly been challenged 

at the WTO (or the predecessor GATT) as export subsidies or as actions frustrating the intent of 

the GATT and IMF Agreements, there has long been an acknowledgement that currency 

manipulation practices could constitute export subsidies. Notwithstanding the inherent merit of 

these arguments, however, a realistic assessment must recognize that, given that the 

Administration has twice rejected Section 301 petitions that were based on the complaints that 

China's manipulation of its exchange rate policy constituted a prohibited export subsidy within 

the meaning of GATT Article VI and XVI, the SCM Agreement, and the WTO Agriculture 

Agreement, as well as an exchange and a trade action that frustrates the intent of the GATT and 

IMF Agreements, it is not likely that the same Administration would favor a WTO challenge of 

China's exchange rate policy on the same grounds that it rejected in the Section 301 petitions.95

Separately, US antidumping law could be modified to permit currency manipulation to be 

treated as a form of dumping consistent with the original GATT notes. 

 

95 See Bush Re-Election Dampens Hopes for Progress on China Currency, Inside US-China Trade, November 

10, 2004 at 1 ("Supporters of efforts to get China to re-value its renminbi in order to reduce what they consider 

an unfair trade advantage over the U.S. said it is highly unlikely that the Bush Administration in its second 

term would change its strategy in this area. As a result, they said, it seems unlikely that any real progress 

would be made with China in the near future.") 
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C. Non-Market Economy Status of China in U.S. Antidumping 

Proceedings and Prospects for Change

For purposes of U.S. antidumping duty proceedings, the U.S. Department of Commerce 

has determined that China is a non-market economy (NME) country. NME status means that, in 

antidumping duty investigations concerning imports from China, the Department of Commerce 

uses a special NME methodology to calculate antidumping duty margins because Commerce 

considers Chinese exporters to be operating within a centrally planned economy in which the 

government controls pricing and production decisions. Therefore, except in cases where 

individual companies can demonstrate an absence of government control over their export 

activities, Commerce treats all exporters as a single enterprise for dumping purposes. Exporters 

who show an absence of government control, however, are eligible to receive a separate dumping 

margin specific to their imports. 

1. NME Country Definition

A “non-market economy country” is defined by statute in Section 771(18) of the Tariff 

Act of 1930, as amended; 19 U.S.C. § 1677(18): 

(18) Nonmarket economy country. 

(A) In general. 

The term ‘nonmarket economy country’ means any foreign 

country that the administering authority determines does not 

operate on market principles of cost or pricing structures, so that 

sales of merchandise in such country do not reflect the fair value of 

the merchandise. 
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(B) Factors to be considered. 

In making determinations under subparagraph (A) the 

administering authority shall take into account – 

(i) the extent to which the currency of the foreign 

country is convertible into the currency of other countries; 

(ii) the extent to which wage rates in the foreign 

country are determined by free bargaining between labor 

and management, 

(iii) the extent to which joint ventures or other 

investments by firms of other foreign countries are 

permitted in the foreign country, 

(iv) the extent of government ownership or control of 

the means of production, 

(v) the extent of government control over the allocation 

of resources and over the price and output decisions of 

enterprises, and 

(vi) such other factors as the administering authority 

considers appropriate. 

 The statute also states that any determination of NME country status “shall remain in 

effect until revoked by the administering authority” (Commerce).96 Thus, China’s NME country 

status shall remain in effect until Commerce changes that status. This does not mean, however, 

that Commerce may change China’s NME status without a full on the record consideration of the 

issue in a specific case context. Rather, as noted by James J. Jochum, then Assistant Secretary 

for Import Administration of the U.S. Department of Commerce: 

Any decision to graduate China to market economy status, 

whenever that decision is made, must be made in the context of a 

formal, quasi-judicial proceeding in accordance with Section 771, 

subparagraph 18(b) of the Tariff Act of 1930, as amended, and 

would be based solely on facts in evidence placed on the 

 

96 See 19 U.S.C. § 1677(18)(C).
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administrative record of such proceeding. As in previous 

proceedings undertaken pursuant to this statute, the record would 

be developed from data and information gathered from expert third 

party sources such as the OECD and World Bank, as well as from 

comments received from interested parties and the public.97

2. NME Methodology

Normally, Commerce calculates antidumping duty margins based on the amount by 

which the “normal value” (i.e., the price in the foreign market) exceeds the “export price” (i.e.,

U.S. price) for the merchandise at issue. However, in antidumping duty cases concerning 

imports from an NME country such as China, Commerce does not base “normal value” on prices 

of the merchandise in the NME but rather uses a "factors of production" methodology for 

determining normal value.98 

The “factors of production” typically are comprised of the labor hours, energy amounts, 

and quantities of raw materials needed to make the product.99 Commerce values these factors 

(except for labor) for the NME country based on costs from a “surrogate country.” Commerce 

selects a “surrogate country” (or countries) that is at a level of economic development 

comparable to the NME country. For example, in numerous past cases, Commerce has used 

India as a surrogate country for China. For labor, Commerce publishes the rate that will be used. 

Commerce often uses imports into the surrogate country to value raw materials and energy prices 

 

97 U.S. Department of Commerce, International Trade Administration, Import Administration, Hearing before the 

US-China Joint Commission on Commerce and Trade Working Group on Structural Issues, June 3, 2004 at 6-7 

(opening remarks of James J. Jochum). 

98 See 19 U.S.C. § 1677b(c) (nonmarket economy countries). 

99 See 19 U.S.C. § 1677b(c)(4) (valuation of factors of production); see also 19 C.F.R. § 351.408. 
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in the surrogate country to value energy. Commerce calculates the “normal value” by summing 

the products of the factors of production times their surrogate-country values and then adding to 

that sum an amount for factory overhead, selling, general, and administrative expenses (GS&A), 

and profit. The values for producers' factory overhead, GS&A and profit are taken from public 

sources in the surrogate country for producers of the same or similar types of products. There 

are a number of exceptions to the above that have developed over time and many domestic 

petitioners perceive that Commerce has developed a methodology that in many cases will result 

in a gross understatement of a realistic normal value. 

Once the NME’s normal value is calculated, it is compared to the export price, and if the 

export price is less than the normal value, then Commerce determines that the product has been 

sold for less than fair value (dumped). For NME investigations, Commerce determines a 

“country-wide” dumping margin for imports from the NME country that have been 

manufactured by state-controlled enterprises and an individual company dumping margin for 

NME imports that have been manufactured by a particular company (provided that company has 

demonstrated that its export operations are not controlled by the government). 

3. U.S.-China Working Group on China’s NME Status

China has been seeking a change in its NME status under U.S. antidumping duty law.100 

This issue was a topic at the 15th session of the U.S.-China Joint Commission on Commerce and 

 

100 See, e.g., Aldonas Says IPR Main Focus of JCCT, Seeks Talks to Change China’s NME Status, Inside USChina Trade, April 14, 2004 at 1. 
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Trade (JCCT)101 which took place on April 21, 2004, in Washington, DC. The JCCT was 

chaired by Commerce Secretary Donald Evans, U.S. Trade Representative Robert Zoellick and 

Chinese Vice Premier Wu Yi and resulted in a number of agreements, including the 

establishment of a working group on China’s NME status and the steps necessary for China to 

become a market economy, as described below. 

Leveling the Playing Field -- Structural Issues and Market 

Economy Status 

One of President Bush’s key goals in the trade arena is to ensure 

that the playing field is level, meaning that competition is 

determined by the market, rather than government intervention. In 

prior decisions, the Commerce Department has found that China 

does not yet qualify as a market economy under the U.S. 

antidumping law. In the case of China, the surest means to ensure 

that the playing field is level is to encourage China’s ongoing 

structural reforms, which are intended to create a market economy. 

In order to assess China’s reforms to date, as well as to identify the 

steps China would have to take, under U.S. law, to achieve market 

economy status, China and the U.S. agreed during the JCCT 

meetings to the establishment of a working group, to be jointly 

chaired by James Jochum, Assistant Secretary for Import 

Administration from the Department of Commerce, and the 

appropriate Director General from MOFCOM. The immediate 

goals of the group will be to: 

o Consult closely regarding the criteria under U.S. law 

needed to achieve market economy status; 

o Review, under the framework established by U.S. law, the 

broad spectrum of policies and practices that are a part of 

the ongoing structural reform in China ; and 

 

101 The U.S.-China Joint Commission on Commerce and Trade (JCCT) is a government-to-government 

consultative mechanism that provides a forum to resolve trade concerns and promote bilateral commercial 

opportunities. The JCCT was established in 1983 and has provided a formal process whereby the U.S. and 

China are able to meet and discuss trade issues of mutual interest and concern, generally on a yearly basis. 
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o Identify the steps necessary for China to qualify as a market 

economy under U.S. law.102

 In May 2003, the Department of Commerce requested public comments concerning the 

identification of relevant topics and issues for discussion in the working group on China’s NME 

status.103 In response, U.S. industry groups generally argued that China must make substantial 

changes in its economic structure before the U.S. makes any change to China’s NME status.104 

The press described the tenor of these responses as follows: 

 

102 See The U.S.-China JCCT: Outcomes, http://www.mac.doc.gov/china/JCCT%20outcomes%20-

%20Commerce.pdf. 

103 See 69 Fed. Reg. 24132-33 (May 3, 2004). 

104 The Law Offices of Stewart and Stewart submitted comments to Commerce regarding China’s NME status and 

recommended a list of benchmarks that Commerce should employ to assess whether China has made the 

changes to its economy necessary to achieve designation as a market economy. See Stewart and Stewart 

Comments (May 19, 2004); http://ia.ita.doc.gov/download/us-china-jcctwg/comments/stewart-stewart-jcctwgcmt.pdf. The recommended benchmarks are summarized in the following table. 

Recommended Benchmarks that the Commerce Department should use for determining 

whether China’s economy is properly categorized as a market economy: 

1. Currency convertibility • whether China has dismantled the currency exchange/controls and has obtained a 

freely floating currency. 

• At a minimum, the currency should be valued at a level that approximates the 

underlying value vis-à-vis the U.S. dollar. 

2. Wages freely set • whether China has fully implemented ILO core labor standards (and the related 

topic of dramatic improvement in its record on human rights). 

3. Joint ventures and other investments • whether China has fully implemented its WTO trading rights obligations, 

• whether China has removed restrictions on foreign investments on industries 

where such restrictions do not exist in the United States, 

• whether, based on surveys of U.S. producers, China is directly or indirectly 

forcing technology transfer for companies investing in China, and 

• whether China is in full compliance with its TRIMs obligations. 

4. The extent of government ownership 

or control of the means of production • whether China’s extent of government ownership or control of the means of 

production (including central, provincial and local governments) is at or below 

the average for OECD countries. 

5. The extent of government control over 

the allocation of resources and over the 

price and output decisions of 

enterprises 

• whether China’s extent of government control over the allocation of resources and 

over the price and output decisions of enterprises is at or below the average for 

OECD countries. 
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Commerce largely received comments from U.S. industry groups 

arguing that the U.S. must ensure that China takes real steps to 

address the six [statutory] factors ... before market economy status 

is granted. Some argued that China is so far from a market 

economy determination that it is just too early to consider changing 

China’s status .... 

* * * 

Regardless of the level of opposition to a change in China’s 

economic status, these groups and several others noted that China 

must address U.S. complaints in several areas before the U.S. 

could consider such a change. These areas include the pegging of 

the renminbi to the dollar, wage rate controls, investment 

restrictions, government control of prices and resources, banking 

restrictions, the absence of the rule of law in China, subsidies, 

transparency, discriminatory taxes, and the existence and practices 

of state-owned companies.105

 

6. Such other factors as the Department 

of Commerce may consider relevant 

a. Effective enforcement of 

intellectual property rights 

• whether China’s enforcement of intellectual property rights results in a level of 

piracy/counterfeit goods being present in the market which is at or below the 

average for OECD countries, as well as 

• whether effective enforcement exists for claims against other forms of IP rights 

losses. 

b. Elimination of limitations on 

trading rights for all products 

and controls on pricing of goods 

and services 

• whether China has eliminated state trading and designated trading for all goods. 

c. Clean up of banking sector and 

elimination of all government 

interference/control on the 

banking activities within China 

• whether Chinese banks and companies are operating on commercial principles 

including making loans based on commercial considerations reflecting the risk of 

a particular enterprise, and 

• whether the level of bad debts by Chinese companies is at or below the average 

for OECD countries. 

d. Compliance with WTO subsidy 

obligations contained in China’s 

protocol of accession and 

Working Party Report 

• whether China is in full compliance with its subsidy obligations undertaken as 

part of its WTO accession 

e. State-owned and state invested 

enterprises • whether the level of state-owned and state-invested enterprises in China is at or 

below the average for OECD countries. 

f. Discrimination against foreign 

goods • whether China has eliminated all forms of discrimination against foreign goods 

that are not expressly permitted by the WTO. 

105 See China Downplays Market Distortions in Bid to Convince U.S. of Market Status, Inside US-China Trade, 

May 26, 2004 at 1, 6-7. 
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Subsequent to the agreement to establish a working group, U.S. and China officials met 

in July 2004 to set up procedures for the operation of the working group. The U.S. and China 

agreed that the working group on China’s NME status would meet twice a year with the next 

meeting to occur in Washington D.C. in either January or February 2005.106 Concerning the 

substantive issues that the working group will address, the press reported the views of the U.S. 

Assistant Secretary of Commerce for Import Administration, James J. Jochum: 

In terms of substance, Jochum said he expects the market economy 

group would likely discuss the six statutory criteria under U.S. law 

that describe the conditions of a country must meet in order to be 

considered a market economy country in trade remedy cases. 

Those factors are the degree of currency convertibility, free wage 

rate determination, foreign investment, government ownership or 

control of production, government ownership over the allocation of 

resources, and a sixth catch-all category that allows Commerce to 

look at “other appropriate factors.”107

4. Prospects for Change in China’s NME Status

It is more likely than not that China’s status as a NME country for purposes of 

antidumping duty law will not change in the near future. 

First, the U.S. negotiated the right to apply the NME antidumping methodology to 

Chinese imports subject to antidumping investigations for 15 years after China’s WTO accession 

in the U.S.-China Bilateral Trade Agreement (signed November 15, 1999). This right was 

 

106 See U.S., China Agree to Format of Market Economy, Trade Remedy Groups, Inside US-China Trade, August 

4, 2004 at 1. 

107 See U.S., China Agree to Format of Market Economy, Trade Remedy Groups, Inside US-China Trade, August 

4, 2004 at 1, 7. 
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subsequently included in China’s Protocol of Accession.108 Thus, China agreed that WTO 

Members could use an NME antidumping methodology through December 11, 2016. China is, 

however, permitted to demonstrate that market conditions prevail in its economy as a whole or in 

a particular industry, and, if such a demonstration is accepted by a WTO Member's investigating 

authority and it concludes that China is a market economy country, the Member must thereafter 

employ the normal rules in determining price comparability in antidumping duty cases.109

Second, in June 2004, Commerce Secretary Evans “strongly downplayed the idea that the 

Bush Administration is moving rapidly toward giving China market economy status (MES) ... 

and said China among other things still must relinquish its tight control over its economy and 

state ownership of assets before the U.S. could consider changing its designation.”110 In 

particular, Secretary Evans identified the following factors that supported maintaining the current 

NME status of China: 

We are well aware that achieving market economy status is a high 

priority for China. The Structural Issue working group, also 

established at the April JCCT, is the place where we will engage 

on the range of non-market-based policies and practices present in 

the Chinese economy -- such as currency convertibility, labor and 

wage issues, and the extent of government intervention in the 

market. 

China must significantly reduce government micromanagement of 

its economy and introduce a far higher level of transparency-- 

among many other changes-- before it can achieve a full transition 

to a market-driven economy. 

 

108 See Protocol of Accession of the Peoples Republic of China, WT/L/432 (23 November 2001), art. 15.

109 See Protocol of Accession of the Peoples Republic of China, WT/L/432 (23 November 2001), art. 15(d).

110 See Evans Downplays Idea That China is Nearing Market Economy Status, Inside US-China Trade, June 30, 

2004, at 1. 
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Only then will China be able to make meaningful and sustainable 

progress. 

Even today, far too many key assets and means of production 

within the Chinese economy are owned and operated by the state. 

We have seen too few “for sale” signs on the commanding heights 

of the Chinese economy. We need to see them. 

We need to see them because market forces won’t control China’s 

economy until there is a substantial rollback of its control over raw 

materials, financial system, real estate, utilities, and large 

enterprises within China. When a government controls the means 

of production, it radically distorts economic conditions, 

undermines efficient capital usage, and compromises long-term 

potential and stability. 

For example, I just returned from North Eastern China where the 

state still owns outright or controls a majority interest of roughly 

90 percent of all manufacturing enterprises. None of us should be 

surprised that the region now supplies only eight percent of 

China’s output—down from 14 percent in 1981. 

When markets operate with accurate information, they send price 

signals about risk and reward in a marketplace. 

China’s leaders realize that treating the symptoms may buy time, 

but it won’t cure the structural flaws that are inviting insolvency 

and only grow worse with time. But they have huge obstacles 

ahead. 

There continues to be a troubling level of non-performing loans in 

the portfolios of China’s state-run banking system. 

Last year, I advised China to lift its capital controls so that the 

Chinese entrepreneurs could experience greater financial freedom. 

These controls undermine opportunities for entrepreneurship and 

expanded prosperity. The hopes, dreams, and aspirations of the 

Chinese people depend on an open financial system that offers the 

promise of financial security and independence. 

China’s capital controls misallocate the country’s wealth and 

compromise the widespread prosperity that an industrious and 
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entrepreneurial people like the Chinese would otherwise be 

creating. 

The unsound banking practices that are funded through the fruits of 

the capital controls are equally troubling. 

China’s state-run banks have routinely extended loans to stateowned-enterprises that are not expected to be repaid. And right 

now, the big four state banks in China are, for all practical 

purposes, insolvent. 

This month, the Commerce Department held preliminary hearings 

to gather information about China’s economy. 

Based on multiple submissions and testimony, it’s clear that U.S. 

industry feels that many of China’s policies, including its currency 

practices, place American companies at a significant competitive 

disadvantage. 

We also heard testimony that Chinese enterprises were operating 

without bearing the costs associated with operating in a market 

economy. Under state control, many Chinese state-owned 

manufacturers are operating with the benefit of state sponsored 

subsidies, including: rent, utilities, raw materials, transportation, 

and telecommunications services. That is not how we define a 

level playing field. 

China has a lot of work to do but we know they are moving in the 

right direction. We’re committed to working with the Chinese 

leadership to adopt the sweeping changes that can begin the first 

steps on the path toward free-market principles. It won’t be easy. It 

won’t happen overnight. 

But we’re committed to staying the course because the day that 

market forces govern China’s economy will be a great day for both 

the Chinese and the American people.111

 

111 Remarks by Secretary Donald L. Evans to the President’s Export Council - American Chamber Of Commerce 

in Beijing, China, June 23, 2004. The full text of Secretary Evans’ speech is available at the website of the 
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 In addition, Commerce Assistant Secretary Jochum indicated in July 2004 that China was 

aware that it had to make extensive changes to its economy before the U.S. would change 

China’s NME status. Jochum stated that, in June 2004: 

[China had presented] to the U.S. a number of internal reforms 

China has undertaken, after which Chinese officials implied that 

China is well on its way toward creating a market economy. 

However, Jochum said China did not press for an immediate 

decision from the U.S., and seemed to understand that the U.S. is 

not ready to consider China a market economy until much deeper 

reforms are made.112

D. Status of U.S. Policy Regarding Application of Countervailing Duty 

Law to China and Other Non-Market Economy Countries

Current U.S. Commerce Department policy is that countervailing duty law is not 

applicable to non-market economy countries. The United States considers China to be a nonmarket economy country. Therefore, at present the Commerce Department views U.S. 

countervailing duty law is not applicable to China. This means that, at present, U.S. industries 

cannot petition for the imposition of countervailing duties when they are injured by reason of 

Chinese imports benefiting from government subsidies. 

The current position of the U.S. Department of Commerce is not required by the statute. 

Rather, it was established by an administrative determination (which determination was affirmed 

in court litigation) and could be reversed or changed by administrative action. 

 

U.S. Department of Commerce: http://www.commerce.gov/opa/speeches/Evans/2004/ 

June_23_Evans_ChinaBeijingAmcham.htm. 

112 See U.S., China Agree to Format of Market Economy, Trade Remedy Groups, Inside US-China Trade, August 

4, 2004 at 7. 
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1. Definition of a Non-Market Economy Country

A “non-market economy country” is defined by statute in Section 771(18) of the Tariff 

Act of 1930, as amended; 19 U.S.C. § 1677(18). It provides: 

(18) Nonmarket economy country. 

(C) In General. 

The term ‘nonmarket economy country’ means any foreign 

country that the administering authority determines does not 

operate on market principles of cost or pricing structures, so that 

sales of merchandise in such country do not reflect the fair value of 

the merchandise. 

(D) Factors to be considered. 

In making determinations under subparagraph (A) the 

administering authority shall take into account – 

(i) the extent to which the currency of the foreign 

country is convertible into the currency of other countries; 

(ii) the extent to which wage rates in the foreign 

country are determined by free bargaining between labor 

and management, 

(iii) the extent to which joint ventures or other 

investments by firms of other foreign countries are 

permitted in the foreign country, 

(iv) the extent of government ownership or control of 

the means of production, 

(v) the extent of government control over the allocation 

of resources and over the price and output decisions of 

enterprises, and 

(vi) such other factors as the administering authority 

considers appropriate. 

2. Background to Current Policy

Since 1984, the U.S. Department of Commerce, International Trade Administration, the 

administering authority of U.S. countervailing duty (CVD) law, has considered that CVD law is 
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not applicable to exports from a Non-Market Economy (NME) country because subsidization is 

a market economy phenomenon and cannot exist in an NME. 

The two proceedings in which Commerce first made this determination were Carbon 

Steel Wire Rod from Czechoslovakia, 49 Fed. Reg. 19370 (May 7, 1984) (final negative CVD 

determination) and Carbon Steel Wire Rod from Poland, 49 Fed. Reg. 19374 (May 7, 1984) 

(final negative CVD determination). As a result of its determination in the Wire Rod cases, 

Commerce then rescinded initiations of CVD investigations on imports of potash from the Soviet 

Union and the German Democratic Republic. At that time, all four countries (Czechoslovakia; 

Poland; Soviet Union; German Democratic Republic) were considered non-market economies 

because each was characterized by central government control over prices and the allocation of 

resources. 

Commerce's NME classification was founded on an economic analysis that concluded 

that “markets” did not exist in countries that relied on government central planning to allocate 

resources and prices. Commerce said in the Wire Rod cases: 

We believe a subsidy (or bounty or grant) is definitionally any 

action that distorts or subverts the market process and results in a 

misallocation of resources, encouraging inefficient production and 

lessening world wealth. 

In NMEs resources are not allocated by a market. With varying 

degrees of control, allocation is achieved by central planning. 

Without a market, it is obviously meaningless to look for a 

misallocation of resources caused by subsidies. There is no market 

process to distort or subvert. Resources may appear to be 

misallocated in an NME when compared to the standard of a 

market economy, but the resource misallocation results from 

central planning, not subsidies. 
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It is this fundamental distinction -- that in an NME system the 

government does not interfere in the market process, but supplants 

it -- that has led us to conclude that subsidies have no meaning 

outside the context of a market economy.113

In countries with pervasive control of prices and resources, Commerce said it could not 

disaggregate government actions so as to identify the exceptional action that is a subsidy. In 

sum, Commerce believed that, in an NME country where “markets” did not exist, there would be 

no way to quantify subsidies. 

On appeal, Commerce's determination was reversed by the U.S. Court of International 

Trade (CIT).114 Subsequently, however, the U.S. Court of Appeals for the Federal Circuit 

(CAFC) reversed the CIT's decision and affirmed Commerce's determination.115 The CAFC 

affirmed Commerce’s determination because it could not say that Commerce’s decision was 

“unreasonable, not in accordance with law, or an abuse of discretion” in view of the discretion 

accorded administrative agencies.116 

Thus, Commerce’s policy is based on the view that while a subsidy is a government 

action that distorts markets, there is no “market” in an NME, so it is not possible for subsidies to 

distort that which does not exist. 

 

113 Carbon Steel Wire Rod from Czechoslovakia, 49 Fed. Reg. 19370, 19371 (May 7, 1984) (final negative CVD 

determination) (emphasis added); Carbon Steel Wire Rod from Poland, 49 Fed. Reg. 19374, 19375 (May 7, 

1984) (final negative CVD determination) (emphasis added). 

114 Continental Steel Corp. v. United States, 614 F. Supp. 548 (CIT 1985). 

115 Georgetown Steel Corp. v. United States, 801 F.2d 1308 (Fed. Cir. 1986). 

116 Georgetown Steel Corp., 801 F.2d at 1318, citing Chevron U.S.A. Inc. v. Natural Resources Defense Council, 

Inc., 467 U.S. 837 (1984). 
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3. Possible Ways to Address Chinese Subsidy Practices

In the context of countervailing duty law, the U.S. can address Chinese subsidies if (1) 

the statute is amended to expressly direct Commerce to apply CVD law to NME countries, or (2) 

Commerce changes its present policy (which it has discretion to do). Outside the context of 

CVD law, the U.S. can address Chinese subsidies in the WTO pursuant to the Agreement on 

Subsidies and Countervailing Measures. Indeed, the U.S. Commerce Department position is 

bizarre at the present time in light of the heavy emphasis the U.S. placed on eliminating subsidies 

as part of China’s accession process to the WTO. If subsidies in modern day China don’t distort 

markets, why did the U.S. insist time and time again that such subsidies had to be eliminated, 

reduced, identified and/or reported? 

a. Statutory amendment

Congress could amend the countervailing duty law to expressly provide that CVD law 

applies to non-market economy countries. In the 108th Congress, bills were introduced in both 

the House and Senate to make such a change. The House bill (H.R. 3716) and the Senate bill (S. 

2212) both would have amended the law as follows: “Section 701(a)(1) of the Tariff Act of 1930 

(19 U.S.C. 1671(a)(1)) is amended by inserting `(including a nonmarket economy country)' after 

`country' each place it appears.” 

b. Change in policy by Commerce

The present U.S. policy that CVD law does not apply to NME countries was established 

by Commerce in 1984 and Commerce has the discretion to change that policy so as to apply 

CVD law to NME countries such as China. There are a number of factors that would support 

such a change. 
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First, in 1984, the term “subsidy” was not defined. GATT Article XVI, paragraph 1, 

referred to “any subsidy” as including “any form of income or price support, which operates 

directly or indirectly to increase exports of any product from, or to reduce imports of any product 

into" a country. The 1979 Subsidy Code used the terms “subsidy” and “subsidize” without 

elaboration. This definitional gap was filled in 1994 by the WTO Agreement on Subsidies and 

Countervailing Measures (SCM Agreement). Article 1 (“Definition of a Subsidy”) of the SCM 

Agreement provides that a subsidy shall be deemed to exist if: 

(a) (1) there is a financial contribution by a government or public body,117

or 

(a) (2) there is any form of income or price support in the sense of Article 

XVI of GATT 1994; 

and 

(b) a benefit is thereby conferred.118

Article 2 of the SCM Agreement requires that, to be actionable, a subsidy must be given to a 

specific enterprise or industry or group of enterprises or industries. 

Significantly, the SCM Agreement, unlike Commerce's 1984 working definition and 

GATT Article XVI, defines a subsidy based on what it is, instead of whether it distorts a market. 

This approach is practical because if a subsidy can be identified by its characteristics, it is not 

necessary to examine the market effects of a subsidy in order to determine whether, in fact, a 

subsidy exists. Compared to the SCM Agreement’s definition of a subsidy, the Commerce 

 

117 This includes any direct transfer of funds; fiscal incentives such as tax credits; provision of goods (other than 

general infrastructure) or purchase of goods; payments to a funding mechanism or direction of a private body 

to carry out what would normally be government functions. SCM Agreement, art. 1.1(a)(1)(i)-(iv). 

118 SCM Agreement, art. 1.1. 
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policy’s focus on economic effects to determine whether a subsidy exists would appear to be 

outdated. 

Second, with respect to China, the accession agreements acknowledged that subsidies 

exist in China, as they identify Chinese domestic and export subsidies and provide alternate 

methods of subsidy measurement. Neither the U.S. nor any other Member expressed a belief that 

that subsidies do not or could not exist in the present Chinese economy. 

In fact, the U.S. successfully negotiated to impose disciplines on Chinese subsidies. In 

the Protocol of Accession, China agreed to eliminate all export subsidies.119 China also agreed 

that WTO Member Authorities could use non-Chinese benchmarks for subsidy quantification if 

Chinese benchmarks were not available or could not be adjusted.120 In addition, Annex 5A of 

the Protocol listed 24 existing domestic subsidy programs maintained by China (which some 

Members considered to be incomplete).121 And, in Annex 5B to the Protocol, China listed three 

export subsidies that it agreed to phase out (although some members considered this list to be 

incomplete as well).122

Third, the question of quantifying subsidies in NME countries absent benchmarks can be 

practically addressed. A common benchmark in CVD investigations in measuring preferential 

loans or identifying the discount rate for grants is the market rate of interest. To the extent the 

 

119 Protocol of Accession of the Peoples Republic of China, WT/L/432 (23 November 2001), art. 10.3. 

120 Protocol of Accession of the Peoples Republic of China, WT/L/432 (23 November 2001), art. 15. 

121 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001), at para. 173. In 

particular, they felt that some subsidies, such as “policy” loans by State owned banks, forgiveness of debt, and 

the selective use of “below-market” interest rates should have been notified. There was also reference to 

unnotified tax subsidies, and subsidies provided by sub-national governments. 
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International Monetary Fund publishes interest rates for various non-market economy countries, 

that measure could be used. For China, for example, the IMF’s International Financial Statistics

publishes three rates: the Bank Rate, Deposit Rate, and Lending Rate. Moreover, specifically 

with respect to China, the Protocol of Accession, Item 15(b) provides that WTO Members may 

use alternative valuation approaches for Chinese subsidies, including external benchmarks.123

Finally, given that Commerce's policy is not required by statute, should Commerce 

determine to change its policy so as to apply CVD law to NME countries, the change is likely be 

upheld by Commerce's reviewing courts as long as Commerce supports the change with reasoned 

analysis. 

c. Action at the WTO

Notwithstanding the current U.S. policy not to apply CVD law to NME countries, the 

U.S. could address Chinese subsidies at the WTO through the consultation and dispute 

settlement procedures set out in the SCM Agreement. Notably, in the third Transitional Review 

Mechanism, the U.S. requested that China provide detailed information regarding a number of 

programs and practices that appeared to constitute subsidies. In one request, the U.S. asked why 

China had not yet submitted any subsidy notifications required under Article 25 of the SCM 

Agreement, and also asked for information regarding the status of certain programs that appeared 

to involve subsidies: 

• Semiconductors – whether China grants VAT rebates on semiconductor exports; 

 

122 Id. at para. 166. 

123 Protocol of Accession of the Peoples Republic of China, WT/L/432 (23 November 2001), art. 15. 
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• Copper – whether China grants VAT rebates on imports of copper scrap or on exports of 

copper-based, semi-fabricated or finished products; 

• Subsidies to State-Owned Enterprises Running at a Loss – whether China has eliminated 

these subsidies as promised in the accession agreement; 

• Non-Performing Loans – China’s injection of US$ 45 billion into the Bank of China and 

the China Construction Bank; China’s debt forgiveness as part of the Northeast 

Revitalization Programme; 

• Price Controls – whether certain price control programs provide subsidies.124

In another submission,125 the U.S. identified a number of programs and practices that 

appeared to constitute prohibited subsidies under Article 3 of the SCM Agreement (subsidies 

contingent upon export performance; subsidies contingent upon the use of domestic over 

imported goods), as well as other programs that appeared to constitute subsidies under Article 1 

(financial benefit) and Article 2 (specific) of the SCM Agreement. They were: 

• Subsidies Contingent Upon Export Performance 

o Honourable Enterprises – preferential benefits 

o Export-Contingent Tax Reduction for FIEs in Special Zones 

o Income Tax Refund for Foreign Investors Investing in Export-Oriented Businesses 

o Special Steel for Processing Exports Policy 

o Export-Contingent Income Tax Reduction for FIEs or Tax Allowance for FIEs 

o Export Subsidies for High-Technology Products 

o Customs Duty and VAT Refund on Imported Capital Equipment Used for Production 

of Products for Exports 

o Government Assistance to Increase Fabric Exports 

o Tax Incentives for Dehydrated Garlic Exports 

o Guangdong Grants Provided for Export Performance 

o Low Interest Loans for Processors of Agricultural Products in Henan Province 

• Subsidies Contingent Upon the Use of Domestic Over Imported Goods 

o VAT Rebate on Purchases of Domestic Equipment by FIEs 

o Enterprise Income Tax Reduction for Purchase of Domestically Made Machinery and 

Equipment 

 

124 Questions from the United States to China Concerning Subsidies and Price Controls, G/SCM/Q2/CHN/8 (6 

October 2004). 

125 Request from the United States to China Pursuant to Article 25.8 of the Agreement on Subsidies and 

Countervailing Measures, G/SCM/Q2/CHN/9 (6 October 2004). 
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• Other Programmes 

o Assistance Provided to Forest Products: 

 Financing for development of fast-growth-high-yield plantations 

 Financing for technology renovations of state-owned paper mills 

 Financing for wood processing projects 

 Local government development policies for the pulp, paper, and wood industries 

o Assumption of Interest on Loans for Technology Upgrades 

o Assistance for Capacity Expansion in the Soda Ash Industry 

o Assistance Provided to the Textile Industry 

o Chendu Assistance to the Semiconductor 

o Reduction in VAT for Sino-Russian Border Trade 

o Subsidies Listed in Annex 5A of China’s Protocol of Accession 

E. Intellectual Property Rights

1. Problems of Infringement and Enforcement

One of the most serious issues that face U.S. companies vis-à-vis China is the problem of 

intellectual property piracy and counterfeiting. As the Department of Commerce noted in its 

report Manufacturing in America, the importance of IPR enforcement to U.S. manufacturers 

cannot be overstated: 

For U.S. manufacturers, protection of intellectual property is not an 

abstract concept. America’s competitive edge ensues directly from 

innovation and rising productivity. Intellectual property protection 

is the best means for ensuring that American manufacturers enjoy 

the benefits of their investments in research and development and 

of their efforts to raise productivity. It is also the means best 

calculated to ensure that they can enjoy the investment they make 

in customer service and creating a brand name that distinguishes 

them from other manufacturers.126

 

126 U.S. Dept. of Commerce, Manufacturing in America: A Comprehensive Strategy to Address the Challenges to 

U.S. Manufacturers (January 2004) at 54. 
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The two principal problems with protecting intellectual property in China are continued 

rampant piracy and China’s failure to enforce intellectual property rights. The rate of piracy and 

counterfeiting in China is enormous, estimated to be about 90 percent over the last 15 years for 

certain types of products. USTR’s 2004 WTO compliance report notes that “current estimates of 

U.S. losses due to the piracy of copyrighted materials alone range between $2.5 billion and $3.8 

billion annually.”127

As noted in testimony by the President of the International Intellectual Property Alliance 

(an IP trade association): 

Copyright piracy dominates the local market almost completely. 

Piracy rates have consistently been over 90 percent in China for 

the last 15 years, and that is despite massive raiding and seizures ... 

throughout China and particularly in the Southern part, where 

piracy has been the worst. 

* * * 

[T]he bottom line is that with piracy rates over 90 percent, China is 

not in compliance with its TRIPS obligations under Articles 41 and 

61 of the WTO agreement, TRIPS agreement. Put simply, the 

Chinese enforcement system has failed to significantly lower 

piracy levels in any significant way over the last few years. 

* * * 

We estimate losses to U.S. companies through copyright piracy in 

China to be at least $1.8 billion annually, and if you add that up 

over the last 15 or 20 years, it’s massive losses to the U.S. 

economy.128

 

127 USTR, 2004 Report to Congress on China’s WTO Compliance December 11, 2004) at 63. 

128 Testimony of Eric Smith, President, International Intellectual Property Alliance, printed in China and the 

WTO: Compliance and Monitoring, Hearing Before the U.S.-China Economic and Security Review 

Commission, 108th Cong., 2d Sess., February 5, 2004, at 134. 
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Since acceding to the WTO, China has taken some steps to decrease piracy and better 

enforce intellectual property rights, but unacceptably high levels of piracy and counterfeiting 

have continued. While China has promulgated intellectual property laws (copyright; patent; 

trademark) that generally comply with its WTO obligations, there has been a chronic problem in 

enforcement. For example, the U.S. Commercial Service has noted: 

While industries report improved cooperation with administrative 

enforcement agencies in regard to raids, the administrative 

penalties for IPR violations, often no more than confiscation of the 

counterfeit products or nominal fines, are generally insufficient to 

deter counterfeiters. Very few cases are referred to criminal 

prosecution because the threshold for initiating criminal cases for 

IPR infringements remain very high. China’s criminal sanctions 

against IPR violations are seldom used, in part because of 

restrictions on types of admissible evidence and unclear mandates 

for law enforcement authorities with little experience in 

prosecuting IPR violations.129 

U.S. industry representatives generally acknowledge that China’s legal framework of 

intellectual property laws are adequate but that enforcement is fundamentally deficient. For 

example: 

China has no equal either as a source of counterfeit and pirated 

goods to the world or as a market in which fakes are produced and 

sold locally. Despite significant improvements in China’s IP legal 

regime over the last few years, ... the enforcement system 

continues to be fraught with weaknesses and inefficiencies that 

facilitate massive counterfeiting and piracy.130

 

129 U.S. Commercial Service, China Country Commercial Guide FY 2004 (July update): A Guide to Doing 

Business in China & Information on Current Economic Conditions; http://www.usembassychina.org.cn/fcs/doc/complete_and_final.html. 

130 International AntiCounterfeiting Coalition (IACC), Comments submitted to Trade Policy Staff Committee, 

September 15, 2004 at 3. 
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* * * 

The shortfall in China’s intellectual property protection lies not in 

its legal framework but more in the area of intellectual property 

rights enforcement.131

2. U.S. Efforts to Address IPR Problems

USTR has stated that “addressing weak IPR protection and enforcement in China is one 

of the Administration's top priorities.”132 The U.S. made IPR one of its highest priorities for the 

April 2004 meeting of the U.S.-China Joint Commission on Commerce and Trade (JCCT). At 

the JCCT meeting, the U.S. secured a commitment from China's Vice Premier Wu Yi that China 

would undertake a series of actions to significantly reduce IPR infringements throughout the 

country. 

As an outcome of the JCCT meeting, the U.S. and China agreed to set up a working 

group on IPR issues, and China agreed to step up its efforts at IPR enforcement, particularly by 

promising to reduce IPR infringement levels, increase criminal penalties, apply criminal 

sanctions, conduct nation-wide IPR enforcement actions, increase customs enforcement actions, 

and launch an education campaign in China. 

In particular, China agreed to the following: 

 

131 Information Technology Association of America (ITAA), Comments submitted to Trade Policy Staff 

Committee, September 15, 2004 at section II. 

132 USTR, 2004 Special 301 Report, Section 306 – China (May 3, 2004); http://www.ustr.gov/Document_Library/ 

Reports_Publications/2004/2004_Special_301/2004_Special_301_Report_Section_306.html 
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Intellectual Property 

China presented an action plan designed to address the piracy and 

counterfeiting of American ideas and innovations. Under this plan, China 

has committed to: 

• Significantly reduce IPR infringement levels. 

• Increase penalties for IPR violations by taking the following actions 

by the end of 2004: 

o Subject a greater range of IPR violations to criminal 

investigation and criminal penalties. 

o Apply criminal sanctions to the import, export, storage and 

distribution of pirated and counterfeit products. 

o Apply criminal sanctions to on-line piracy. 

• Crack down on violators by: 

o Conducting nation-wide enforcement actions against piracy 

and counterfeiting – stopping the production, sale and trade of 

infringing products, and punishing violators. 

o Increasing customs enforcement action against the import and 

export of infringing products and making it easier for rightsholders to secure effective enforcement at the border. 

• Improve protection of electronic data by: 

o Ratifying and implementing the World Intellectual Property 

Organization (WIPO) Internet Treaties as soon as possible. 

o Extending an existing ban on the use of pirated software in 

central government and provincial agencies to include local 

governments. 

• Launch a national campaign to educate its citizens about the 

importance of IPR protection (campaign started on April 6). The 

campaign will include press events, seminars and outreach through 

television and print media. 

• Establish an intellectual property rights working group under the 

JCCT. Under this working group, U.S. and Chinese trade, judicial 

and law enforcement authorities will consult and cooperate on the 

full range of issues described in China’s IPR action plan. 133

 

133 The U.S.-China JCCT: Outcomes; http://www.mac.doc.gov/china/JCCT%20outcomes%20-

%20Commerce.pdf. 
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In addition, at the JCCT meeting, China pledged that it “would undertake a series of nearterm actions with the objective of significantly reducing IPR infringement levels.” In particular, 

China agreed to: 

Promulgate a judicial interpretation before the end of the year from 

the Supreme People's Court and the Supreme People's 

Procuratorate that: 

• appropriately lowers thresholds for applying criminal sanctions 

for acts of IPR infringement; and 

• stipulates guidelines for applying criminal sanctions for the 

import, export, storage, and transport of counterfeit and pirated 

products and for online piracy. 

The new judicial interpretation is an attempt to remedy China's 

failure to make effective use of its criminal enforcement regime to 

address IPR issues.134

China did not issue the judicial interpretation until December 21, 2004 and did not 

provide the U.S. with any drafts of the document before issuance. Early press reports indicate 

that the new judicial interpretation “falls short of U.S. government demands in at least three 

areas.” 135

{T}he interpretation in many cases only slightly lowers the 

thresholds that IPR violators need to exceed before criminal 

penalties can be applied .... 

* * * 

Secondly, the interpretation maintains China’s previous system of 

subjecting corporations and individuals to different thresholds .... 

* * * 

 

134 USTR, 2004 Special 301 Report, Section 306 – China (May 3, 2004); http://www.ustr.gov/Document_Library/ 

Reports_Publications/2004/2004_Special_301/2004_Special_301_Report_Section_306.html 

135 China’s IPR Enforcement Decision Falls Well Short of U.S. Demands, Inside US-China Trade, January 5, 

2005. 
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In addition, sources noted that while the interpretation talks about 

the possibility of fines, it does not spell out what these fines will 

be. 

* * * 

In light of these shortfalls, industry sources said the interpretation 

means China will essentially maintain the same IPR enforcement 

regime that has led to increasing complaints from the U.S., and in 

some cases will only slightly modify the thresholds triggering 

criminal sanctions.136

Regarding follow-up to the JCCT meeting, USTR reports that the U.S. and China have 

had several bilateral meetings where the U.S. “has pressed China to move forward aggressively 

in pursuit of significantly reduced IPR infringement levels.”137 In addition, “Vice Premier Wu 

pledged that China would move forward with the legislative and judicial measures needed to 

improve China’s IPR protection regime.”138 Despite these optimistic statements, however, in 

September 2004, in comments submitted to the U.S. Trade Representative concerning China’s 

WTO compliance, numerous U.S. industry groups said that “China has so far done little to 

improve intellectual property rights protections,” despite the JCCT promises to do so.139

As a follow-up to the JCCT’s IPR agreements, in September 2004, the U.S. Trade 

Representative announced that, in early 2005, it would be conducting an out-of-cycle Special 

301 review of China to evaluate China’s implementation of the commitments announced at the 

 

136 China’s IPR Enforcement Decision Falls Well Short of U.S. Demands, Inside US-China Trade, January 5, 

2005. 

137 USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at 60. 

138 USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at 60. 

139 Industry Groups Say Little Has Changed in China on IPR Since JCCT, Inside US-China Trade, September 22, 

2004, at 3. 
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JCCT meeting on April 7, 2004 and whether China’s actions are achieving results.140 USTR 

indicated that it would publish a Federal Register notice in the coming months regarding the 

review and that it would be seeking from U.S. industry information about the prevalence of IPR 

infringement in China and examples of specific cases of IPR infringement.141 

In addition, on October 4, 2004, the U.S. Trade Representative announced, in conjunction 

with the Departments of Commerce, Justice and Homeland Security, a new coordinated 

government-wide initiative, the Strategy Targeting Organized Piracy (STOP), to block the 

importation of counterfeit and pirated goods.142 The STOP initiative is targeted at worldwide 

counterfeiting, but China is clearly one of the major targets of the program. 

3. Potential Ways to Reduce Infringement and Improve Enforcement of IPR

 The problem of rampant IPR infringement in China coupled with poor and inadequate 

IPR enforcement is clearly a primary target that needs improvement. USTR and private sector 

groups have recommended a number of actions that China could take to reduce infringement and 

improve enforcement. Representative among these are the following: 

• China should “revise its IPR legal framework to provide for substantially higher 

administrative fines, and the administrative authorities then need to impose and publicize 

 

140 See Letter to Industry from Amb. Josette S. Shiner Regarding 2005 Out-of-Cycle Review on China; 

http://www.ustr.gov/Trade_Sectors/Intellectual_Property/2005_China_Out_of_Cycle_Review/Letter_to_Indus

try_from_Amb._Josette_S._Shiner_Regarding_2005_Out-of-Cycle_Review_on_China.html. 

141 See Letter to Industry from Amb. Josette S. Shiner Regarding 2005 Out-of-Cycle Review on China; 

http://www.ustr.gov/Trade_Sectors/Intellectual_Property/2005_China_Out_of_Cycle_Review/Letter_to_Indus

try_from_Amb._Josette_S._Shiner_Regarding_2005_Out-of-Cycle_Review_on_China.html. 

142 See USTR Press Release, U.S. Announces Major New Initiative to Fight Global Trade in Fakes, October 4, 

2004; http://www.ustr.gov/Document_Library/Press_Releases/2004/October/U.S._Announces_Major_New_ 

Initiative_to_Fight_Global_Trade_in_Fakes.html. 
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them so they will have a deterrent effect, including facilitating referrals for criminal 

prosecution.” (USTR at 65)143

• China should “revise its laws, regulations and other measures, including judicial 

interpretations, and investigate, prosecute, convict and sentence a much higher 

percentage of IPR infringers, particularly those engaged in commercial-scale 

counterfeiting or piracy and repeat offenders. China also needs to increase the criminal 

penalties available.” (USTR at 66) 

• China should eliminate or substantially lower criminal liability thresholds for IPR 

violations. (USTR at 66; U.S. Chamber at 8)144

• China should seize and destroy infringing products and, where appropriate, the 

equipment used in producing or packaging counterfeit goods. (U.S. Chamber at 9) 

• China should clarify the standards for obtaining preliminary injunctions in civil disputes 

involving IPR. (U.S. Chamber at 9) 

• China should circulate for comment draft judicial interpretations on IPR violation 

criminal thresholds. (U.S. Chamber at 9) 

• China should increase resources for police investigations into counterfeiting and piracy. 

(U.S. Chamber at 9) 

• China should accede to the 1996 WIPO Internet-related treaties. (USTR at 62; U.S. 

Chamber at 9) 

• The U.S. should continue to work with China’s central and local government officials to 

improve China’s IPR enforcement, through regular bilateral discussions and technical 

assistance programs for central and local government officials on TRIPS Agreement 

rules, IPR enforcement and rule of law issues. (USTR at 64) 

• The U.S. should intensify efforts to block counterfeit and pirated goods at the U.S. 

border. (USTR at 64) 

 

143 “USTR” refers to the USTR’s 2004 Report to Congress on China’s WTO Compliance (December 11, 2004). 

144 “U.S. Chamber” refers to the U.S. Chamber of Commerce’s report China’s WTO Implementation: A ThreeYear Assessment (September 2004). 
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F. Areas of China’s WTO Non-Compliance That Should Be Considered 

For Possible WTO Challenges

 Three years have passed since China acceded to the WTO. In that time, “while China’s 

efforts to fulfill its WTO commitments are impressive, they are far from complete and have not 

always been satisfactory, and China at times has demonstrated difficulty in adhering to WTO 

rules.”145 As a new member of the WTO, other Members, understandably, have allowed China a 

grace period to adjust and conform its trade policies and practices to WTO rules before asserting 

dispute settlement challenges. So far, only one WTO dispute settlement case has been filed with 

respect to China. That case, filed by the U.S. in March 2004 concerning China’s discriminatory 

VAT policies that favored domestic over imported semiconductors, was settled at the 

consultation stage. 

After three years, however, the U.S. should give serious consideration to filing dispute 

settlement cases at the WTO on a number of outstanding issues where China is not in compliance 

with its commitments. Used prudently, WTO dispute settlement cases are a means to induce and 

encourage China to come into full compliance with its commitments to the U.S. and other WTO 

Members. As USTR has stated: 

The Administration is ... committed to working with China to 

resolve problems in our trade relationship before they become 

broader bilateral irritants. When this process is not successful, 

however, the Administration will not hesitate to employ the full 

range of dispute settlement and other tools available through 

China’s WTO accession agreement.146

 

145 USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at 3. 

146 USTR, 2004 Report to Congress on China’s WTO Compliance, December 11, 2004, at 8 (emphasis added). 
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 The following areas of China’s non-compliance should be considered as potential topics 

for WTO dispute settlement cases. They are presented in the order in which they appear in 

USTR 2004 compliance report. 

Category Issue Problem 

Trading Rights 

and Distribution 

Service 

Sales Away from a 

Fixed Location 

• China committed to end market access and national treatment 

restrictions for sales away from a fixed location (direct selling) by 

December 11, 2004. During 2004, MOFCOM drafted three 

regulations to implement the direct selling commitment, but China 

did not make these draft regulations available for public comment.

• Problems: 

 National treatment: the draft regulation permits direct 

selling of domestically-produced goods, but restricts selling 

of imported goods to a fixed location. 

 Other provisions have requirements that appear to make 

direct selling commercially unviable. 

See USTR 2004 Report at 20-21

Import Regulation Customs Valuation • Upon accession, China assumed the obligations of the WTO 

Agreement on Customs Valuation and agreed to implement these 

without a transition period. In January 2002, China issued customs 

valuation regulations. In addition, by December 11, 2003, China had 

committed to value digital products (e.g., floppy disk, cd-rom) based 

on the value of the underlying carrier medium, rather than the 

imputed value of the content. 

• Problems: 

 China has not uniformly implemented its regulations with 

the result that U.S. exporters are still encountering valuation 

problems at Chinese ports. These problems include: (1) 

valuation based on reference pricing instead of transaction 

value; (2) addition of royalties and license fees to the dutiable 

value of imported software; (3) non-uniform valuation by 

ports of particular digital products; and (4) valuation of 

high-value electronic media to be used to produce multiple 

copies of products (e.g., DVDs) based on the estimated value 

of the future copies instead of the value of the carrier 

medium itself. 

See USTR 2004 Report at 22-24 

Export Regulation Export Quotas on 

Fluorspar 

• China agreed to maintain export restrictions in accordance with 

WTO rules, which generally prohibit (with exceptions) export 

restrictions (other than duties, taxes or other charges) (GATT Article 

XI). 

• Problem: 

 China has continued to impose export restrictions on 

fluorspar. China imposes quotas and license fees on 

fluorspar exports, but does not restrict domestic users of 
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Category Issue Problem 

fluorspar. 

See USTR 2004 Report at 34 

Internal Policies 

Affecting Trade 

Nondiscrimination • Problems: 

 U.S. pharmaceutical manufacturers have experienced 

national treatment problems regarding price controls on 

medicines and drug reimbursement. 

 From accession, China has continued to discriminate in 

applying SPS measures. 

 With respect to fertilizer, China exempts all phosphate 

fertilizers except DAP (a fertilizer the U.S. exports to China) 

from a 13% VAT. So far, China has not changed this policy. 

See USTR 2004 Report at 35-37

Internal Policies 

Affecting Trade 

Consumption 

Taxes 

• Problem: 

 The effective consumption tax rate on imported products 

(e.g., spirits/alcoholic beverages, tobacco, cosmetics and 

skin/hair care preparations, jewelry, fireworks, rubber, 

motorcycles and automobiles) is substantially higher than 

the rate applied to domestic products because China uses 

different tax bases to compute consumption taxes for 

domestic and imported products. 

See USTR 2004 Report at 38

Internal Policies 

Affecting Trade 

Standards Testing • Problem: 

 Despite China’s changes to its standards testing regime, in 

some sectors, foreign products are tested in specially 

designated laboratories that are separate from those 

laboratories used to test domestic products. This disparate 

testing can lead to uneven treatment. 

See USTR 2004 Report at 41 

Internal Policies 

Affecting Trade 

Conformity 

Assessment 

Procedures 

• China has established one safety mark (“China Compulsory 

Certification” or “CCC” mark), issued to both Chinese and foreign 

products. 

• Problem: 

 Despite national treatment commitments, to date, China has 

accredited 68 Chinese enterprises to test for and certify the 

CCC mark, but has not accredited any foreign-invested 

conformity assessment bodies. 

See USTR 2004 Report at 44-45 

Investment Auto Industrial 

Policy 

• Although China had committed, by accession, to revise its Industrial 

Policy for the Automotive Sector to make it WTO-consistent, China 

missed the deadline. China circulated a draft revised automobile 

industrial policy in 2003 and issued the final version in May 2004.

• Problem: 

 The new auto industrial policy contains discriminatory 

provisions that discourage the importation of auto parts and 

encourage the use of domestic technology.

See USTR 2004 Report at 48-49 

Agriculture Sanitary and 

Phytosanitary 

• Through the SPS Agreement, China committed that SPS measures 

would address legitimate scientific-based concerns, not discriminate 
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Category Issue Problem 

arbitrarily, and not be disguised restrictions on trade. 

• Problems: 

 Regarding raw poultry and meat, China applies certain nonscience-based standards (e.g., zero tolerance for pathogens) 

to imports that are not applied to domestic raw poultry and 

meat. This violates national treatment and has slowed 

imports from the U.S.

 Regarding food additives, China imposes overly restrictive 

standards that block imports of many U.S. processed food 

products. The banned food additives are widely used in 

other countries and are approved by the World Health 

Organization (WHO).

See USTR 2004 Report at 56

Services Financial Services 

– Insurance 

• Problem: 

 China has been issuing concurrent branch approvals (more 

than one at a time) for Chinese insurers, but only approving 

branches of foreign firms consecutively (one at a time). 

See USTR 2004 Report at 72 

Services Express Delivery 

Services 

• Problems: 

 In July-November 2003, China circulated draft amendments 

to the postal services law, which (1) gave China Post a 

monopoly on letters under 500 grams (a horizontal 

commitment violation as it restricted existing scope of 

activities), and (2) failed to establish an independent 

regulator. At the April 2004 JCCT, China indicated that the 

weight restriction would not resurface as a problem. 

However, the July 2004 draft amendment still contained a 

weight restriction (reduced to 350 grams). 

See USTR 2004 Report at 76-78

Please note that we have not listed intellectual property rights as an area that the U.S. 

should consider as ripe for a near-term WTO complaint. This is because we think that the 

working group on IPR established between the U.S. and China as a result of the JCCT meeting 

and the internal program initiated by China to reduce IPR infringement and improve IPR 

enforcement should both be given sufficient time to put their programs into full effect toward 

achieving their targets. The area of IPR enforcement is also an area where the U.S. should work 

closely with other WTO Members (e.g., EC, Japan, and others) to provide China with stepped up 

training and technical assistance and to coordinate increased pressure on China to make the legal 
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modifications necessary to improve IPR enforcement. Of course, if this course ultimately fails to 

achieve real progress, the U.S. should then consider WTO dispute settlement. 

G. Cooperation and Competition Between the U.S. and Other Members 

Regarding China Issues

1. Areas Where the U.S. Can Work Jointly With Other WTO 

Members to Encourage China’s Compliance With its WTO 

Obligations

There are a host of areas concerning China’s WTO compliance where the interests of the 

U.S. coincide with the interests of other WTO Members. In its efforts to monitor and encourage 

China’s compliance with WTO commitments, the U.S. often finds itself allied with the European 

Communities and Japan, among others. To an extent, on a case-by-case basis, the U.S. and other 

Members have consulted in order to coordinate their strategies toward China. This has occurred, 

for example, in the context of the Transitional Review Mechanism process where the U.S., the 

EC and Japan have been the most active participants. As illustrated by the following table, the 

USTR’s 2004 WTO compliance report identifies a multitude of areas where the U.S. was joined 

by other Members in pushing for greater compliance by China in the context of the TRM 

process. 

Areas Other Members 

Supporting U.S. 

USTR 2004 

Report 

Wholesaling and Commission Agents’ Services EC; Japan 18 

Retailing Services EC; Japan 20 

Import Licensing EC; Japan 25 

Antidumping – transparency and fair procedures EC; Japan 29 

Export quota on coke EC; Japan 34 

Export quota on fluorspar Japan 34 

VAT on semiconductors EC; Japan; Mexico 37 

Subsidies Notification EC 39 

Conformity Assessment Procedures EC; Japan 45 

Investment – technology transfer, export EC; Japan 48 
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Areas Other Members 

Supporting U.S. 

USTR 2004 

Report 

performance, and local content requirements 

Auto Industrial Policy EC; Japan 48 

IPR Enforcement Japan 64 

Banking Services Australia; Canada; EC; Japan 70 

Insurance Services Canada; EC; Japan; Switzerland 71 

Motor Vehicle Financing Services Australia; Canada; EC; Japan 73 

Legal Services EC 74 

Telecom Services EC; Japan 76 

Express Delivery Services EC; Japan 76 

2. Areas Where the U.S. is Likely to Face Competition With Other 

WTO Members With Respect to Favorable Trade Terms With 

China

 Notwithstanding the cooperation that the U.S. enjoys with some other WTO Members in 

dealing with issues related to China’s compliance with WTO obligations and commitments, it is 

also that case that the U.S. faces competition with other WTO Members (and prospective 

members) as they attempt to achieve favorable trade deals with China. A review of recent press 

articles illustrates some of the areas where the U.S. is likely to face competition – energy, 

agriculture, raw materials, oil, aviation, etc. – and some of the WTO Members with whom the 

U.S. will compete – Canada, Australia, Brazil, Venezuela, and the EU. For example, see the 

following excerpts: 

There’s no escaping the buzz around China in the business world. 

And understandably so: The country has 1.3 billion potential 

consumers, is home to a vast army of cheap labour, and is also in 

dire need of natural resources—the likes of which Canada has in 

abundance—to fuel its economic growth and consumer demand. 

Many critics and economists have sounded the alarm that the 

opportunities in China have inevitable and serious downsides. But 

speaking at the Canada-China business council meeting in 

Toronto, the Prime Minister said he believes that “all we should 

see [in China] is opportunity,” he said, encouraging Canadian 
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businesses large and small to continue “developing and 

implementing strategies for China.” 

Martin will undoubtedly be pressing for more deals with China for 

Canada’s natural resources, such as oil and gas, and other raw 

materials such as minerals. As Chinese demand for natural 

resources has been expanding in recent years, the country has 

become Canada’s second-largest trading partner, next only to the 

United States. China has been involved in talks to purchase 

Canada’s largest mining company Noranda, and state-owned 

companies have also reportedly been eyeing Alberta’s Husky 

Energy. 

Canada's PM to Balance Human Rights, Trade on China Trip, The Epoch 

Times, Jan 13, 2005; http://english.epochtimes.com/news/5-1-13/25668.html. 

Brazil has agreed to recognize China as a market economy, and 

China has agreed to support Brazil in its bid to join a new revised 

Security Council in the United Nations. These were just part of the 

deals signed by Chinese president Hu Jintao on his visit to Brasilia. 

Hu's visit to Brazil was in reciprocation for Brazilian president 

Lula da Silva visit to China in May. While the Chinese side was 

mainly focused on getting China recognized as a market economy, 

the Brazilians were most interested in getting investment 

commitments to upgrade Brazil's transport infrastructure. 

China is keenly interested in Brazil as a source for foodstuffs and 

raw materials. Since only 15% of the land in China is arable, and 

the country is undergoing rapid urbanization, the need is 

particularly urgent. Brazil, along with the US, is already a major 

supplier of soybeans to China. Baosteel, China's largest 

steelmaker, already has an iron-ore facility in Brazil. 

On this trip, Brazil was able to secure a deal for China to purchase 

about US$650 million of Brazilian beef annually. China has also 

said that it is interested in investing US$5-7 billion annually to 

upgrade inland road and port infrastructure. These upgrades are 

needed if Brazil is able to sell the amount of foodstuffs and 

minerals it hopes to sell to China. 

Brazil, China Do Mega-Deals, China Business Strategy, November 15, 2004; 

http://www.china-ready.com/news/Nov2004/BrazilChinaDoMegaDeals111504.htm. 
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AWB Ltd., Australia’s monopoly wheat exporter, won a contract 

worth about US$267 million to supply China National Cereals, 

Oils and Foodstuffs Corp., its biggest order from China in at least 

eight years. 

The 1.5 million-ton contract of milling-grade wheat announced 

Monday adds to an order 11 months ago from China’s central 

grain-buying agency for one million tons, Melbourne-based AWB 

said in a statement to the Australian Stock Exchange. 

* * * 

China’s government said Monday wheat imports jumped more 

than 18-fold in the first 10 months of this year to six million metric 

tons compared with a year earlier. China chose Australian wheat 

over supplies from North America and Europe because of 

Australia’s "quality and freight advantage," McBride said. 

China, Australia sign big new wheat deal, People’s Daily Online, November 

23, 2004; http://english.people.com.cn/200411/23/eng20041123_164862.html. 

China and Australia stepped forward to forge a lucrative liquefied 

natural gas (LNG) deal involving millions of tons of the substance 

with the opening of representative office in Beijing on Monday. 

The establishment of the China Representative LNG Office under 

Australia's massive Gorgon gas project is an important step toward 

one of the biggest LNG agreements in the industry's history, as 

foreshadowed in the October 2003 agreement between Gorgon 

Venture and CNOOC (China National Offshore Oil Corporation). 

LNG Deal to Boost Trade Links Between China, Australia, China Daily, April 

28, 2004; http://www.china.org.cn/english/BAT/94225.htm. 

Venezuelan president Hugo Chavez has offered China wideranging access to the country's oil reserves. 

The offer, made as part of a trade deal between the two countries, 

will allow China to operate oil fields in Venezuela and invest in 

new refineries. 
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Venezuela has also offered to supply 120,000 barrels of fuel oil a 

month to China. 

Venezuela - the world's fifth largest oil exporter - sells about 60% 

of its output to the United States. 

Mr Chavez's administration, which has a strained relationship with 

the US, is trying to diversify sales to reduce its dependence on its 

largest export market. 

Venezuela and China sign oil deal, BBC News, December 24, 2004; 

http://news.bbc.co.uk/1/hi/business/4123465.stm. 

Brazil was closer to achieving its goal of feeding millions of 

Chinese with soya that may be grown on cleared Amazonian 

rainforest yesterday, after five days of talks on trade and 

diplomacy between the two nations. 

Luiz Inacio Lula da Silva, the president of Brazil, led a delegation 

of eight cabinet ministers, six state governors and 450 business 

leaders to China in a push to foster closer ties in Asia's fastest 

growing economy. 

The range and dimension of the commercial deals demonstrated a 

degree of economic synergy rarely seen between two developing 

countries. 

Brazil's vast land and mineral resources, and a perennially weak 

currency, mean that it is emerging as a key supplier of the raw 

materials China needs to feed its growing urban population and to 

keep its factories exporting goods. 

The enormous expansion in soya cultivation for export is the most 

visible sign so far of Brazil's success in locking into Chinese 

markets. 

China's plan to move 300 million rural people into the cities by 

2020 poses food supply problems, and Brazil intends to fill the 

gap. 

Lula seals deal to feed China's booming cities, Guardian Unlimited, May 28, 

2004; http://www.guardian.co.uk/brazil/story/0,12462,1226498,00.html. 
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Canada and China are negotiating a broad agreement on energy cooperation in oil, gas and nuclear power that could be signed as 

early as next week when Prime Minister Paul Martin tours the 

Asian economic superpower. 

Among other things, the deal seeks to encourage "mutually 

beneficial commercial partnerships" in sectors such as the oil 

sands, sources say. 

The Canada-China Framework on Energy Co-operation would 

forge closer ties between Ottawa and Beijing on natural resources 

at a time when both countries are eager for something the other has 

to offer. 

* * * 

China is growing rapidly and is on the hunt for new natural 

resources, while Canada, eager to stem a long-term decline in its 

share of global direct investment, is anxious to attract foreign cash 

to develop its petroleum and mineral assets. (Ottawa also wants to 

sell nuclear reactors to electricity-hungry China.) 

* * * 

Sources say the deal could also encourage collaboration on 

uranium, which Canada sells and China needs to power its growing 

number of nuclear reactors. It may also cover research on oil sands 

technology, which Canadian firms use to extract petroleum from 

tarry deposits in northern Alberta. 

* * * 

The Martin government's focus on China is part of its campaign to 

expand trade beyond the United States amid concerns that a string 

of recent free-trade deals signed by Washington is diluting 

Canada's special access to the U.S. market. China is Canada's 

second-largest trading partner with two-way merchandise trade of 

$23.3-billion in 2003, up 16 per cent from 2002. 

* * * 

Separately, Canada and China are negotiating a foreign investor 

promotion and protection agreement, a deal that would take trade 

relations to a new level because it would safeguard the rights of 

investors in each of the countries, giving them the same legal 

standing as domestic businesses. 

Canada-China energy deal in works, The Globe and Mail, January 15, 2005; 

http://aolcanada.workopolis.com/servlet/Content/qprinter/20050115/RTRADE15. 
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A move by the European Union to lift an arms embargo on China 

looks certain to pave the way for a new order for Airbus's A380 

superjumbo. 

The embargo was imposed in the wake of the Tiananmen Square 

massacre and Chinese officials were reported last year to be 

refusing to sign a deal for five of the 555-seater, double decker jets 

because of the EU's reluctance to lift the ban. 

Airbus sees China as a crucially important market if it is to 

maintain its sales lead over American rival Boeing. 

* * * 

Foreign Secretary Jack Straw's revelation yesterday that the arms 

embargo will probably be lifted within the next six months is 

certain to clear the way for the European aircraft maker to try again 

to clinch the Chinese superjumbo deal. 

EU move on China could mean major Airbus order, Liverpool Daily Post, January 

13, 2005; http://icliverpool.icnetwork.co.uk/business/news/tm_objectid=15071000& 

method=full&siteid=50061&headline=eu-move-on-china-could-mean-major-airbusorder-name_page.html 

III. Transitional Review Mechanism

A. Review of the Third Transitional Review Mechanism (TRM)

Three years into China’s membership, the 16 WTO subsidiary bodies and the General 

Council conducted the third annual transitional review of China’s implementation of its WTO 

commitments as required under Article 18 of China’s Protocol on Accession. The third TRM 

which began at the Committee on Market Access on September 23, 2004, and concluded at the 

General Council on December 13, 2004, followed the established normal procedures of the 

previous two TRM reviews. In advance of the review, Members submitted written questions and 
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China submitted the information as required under Annex 1A of Article 18 to relevant 

committees. During each committee review, which was carried out at a regular committee 

meeting, China addressed concerns of other Members with a general introduction from one 

representative and then a second representative made oral responses to individual questions. The 

committee reports generated thereby basically comprise the minutes of the meeting without 

recommendations on China’s compliance efforts. 

1. Member Participation

In the second TRM, there was a pronounced decline in the submission of questions to 

China from Members compared to the first TRM (44 submissions from 7 members versus 74 

submissions from 13 members). At the third review, Member participation registered a similar 

record as the second review. Six Members submitted a total of 44 documents posing questions 

to China with respect to its WTO compliance efforts during the third year of its WTO 

membership, as shown in the table below. 
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AUS CAN EEC JPN TPKM USA

Agriculture 1 1

Antidumping Practices 1 1 1 1

Balance of Payments Restrictions

Customs Valuation

Financial Services 1 1 1 1 1 1

Import licensing 1 1 1

Market Access 1 1 1

Rules of Origins

Safeguards 1 1

Sanitary and Phytosanitary Measures 1 1 1

Subsidies and Countervailing Measures 1 1 1 1

Technical Barriers to Trade 1 1 1

Trade-Related Investment Measures 1 1 2

Council for Trade in Goods 1 1 1

Council for Trade in Services 1 1 1 1

Council for TRIPS 1 1 1

Subtotal by Country 1 1 11 10 8 13 Total 44

Notes: 

AUS = Australia; CAN = Canada; EEC = The European Communities; JPN = Japan; 

TPKM = The Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu; 

USA = The United States of America

 Summary Table of Submissions of Questions to China by WTO Members in the Third TRM

Concerned Members

3

3

3

4

0

2

2

4

Committee 

Subtotal Committees / Councils 

4

3

4

0

0

6

3

3

The TRM was originally designed as a tool to help the Chinese focus on areas of 

concerns to WTO members. China initially had a very negative reaction to the TRM process 

since it was not required of other acceding countries. China’s actions appear to have lowered 

expectations of other WTO members in the TRM process. At the same time, China has in fact 

provided more information and has brought more officials from Beijing to address questions 

during Committee meetings at which TRM issues are addressed. For many countries, the main 

focus of the process is working through problems their exporters are having with China’s 
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policies and actions. Countries have found reasonably responsive Chinese ministries in many 

instances, leading some WTO members to limit their involvement in the TRM process and 

simply pursue resolution bilaterally. For example, at the Committee on Sanitary and 

Phytosanitary Measures, Australia did not submit written questions to China in the context of the 

TRM nor raise concerns orally at the committee review, but rather resorted to the bilateral 

avenue as indicated in the following statement made by its representative during the review at 

the Committee on SPS Measures. 

Australia was continuing to pursue a number of bilateral SPS 

issues with China, some of a long-standing nature. The Australian 

delegation held a constructive meeting with the Chinese delegation 

during the course of the week, and had clarified a number of 

market access issues with the Chinese delegation at that time.147

Nonetheless, a number of WTO members remain involved in the TRM process. Not 

surprisingly, the major trading members (US, EC, Japan) are the most active with other major 

trading nations (Canada, Australia, Taiwan) also raising at least some issues within the 

multilateral context. It should also be noted that no written questions or comments were received 

at the Committee on Balance-of-Payment Restrictions, Committee on Rules of Origin and 

Committee on Customs Valuation in the context of TRM. The first two committees also 

reported no discussion on China’s compliance efforts. This is the first time in the TRM process 

that no submission was received and no discussion was held by a subsidiary body. 

 

147 Report to the Council for Trade in Goods on China’s Transitional Review, Committee on Sanitary and 

Phytosanitary Measures, G/SPS/34 (2 November 2004) at para. 8. 
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2. Interaction Between China and Other Members on Procedural Issues

At the third TRM, whether China should provide responses in written form was not a 

contentious issue. Given the limited likelihood of procedural changes, few Members expressed 

the hope or made the request for written responses. In many committees, China’s efforts in 

providing oral responses and explanations were largely appreciated. Nevertheless, some 

responses were considered insufficient which gave rise to occasional friction over the procedural 

issues between China and concerned Members such as the U.S. 

At the Committee on Subsidies and Countervailing Measures, China was confronted with 

a host of questions and concerns from Members. After the initial response, China did not 

provide further responses to follow-up questions from Members. The representative of China 

stated that the follow-up concerns would be transmitted to the relevant departments in Beijing, 

and recognizing the limited time allocated for the TRM, China was willing to discuss SCM 

issues either before or after this review.148 The U.S. found it a disturbing development that 

China did not provide responses to the substantive questions forwarded by the Members. The 

U.S. representative expressed the willingness to work with China bilaterally over time, but asked 

China to realize that the issues raised were not going to go away.149 The EC also expressed 

disappointment that the review process was cut short and commented that the Committee was 

 

148 Chairman’s Report to the Council for Trade in Goods on Transitional Review of China, Committee on 

Subsidies and Countervailing Measures, G/SCM/115 (22 November 2004), at para. 58. 

149 Id. at para 60. 
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left hanging with respect to a large number of the questions asked without any knowledge when 

the answers would be provided.150 

At the Committee on Import Licensing, a question arose as to whether Members can raise 

the same questions at different committees. China commented about the avoidance of 

unnecessary repetitive work under the TRM and different committees, noting that a number of 

questions that were received under the Import Licensing Committee had already been raised 

under the Market Access Committee and had been replied to clearly by China. China argued that 

the relevance between the implementation issues and the mandate of each committee was clearly 

defined, and Members could not raise the same questions repetitively in different Committees.151 

Members such as the EC stated that they did raise questions in another context but they still had 

issues pending.152 In response, China insisted that it had already provided answers to some 

questions in detail in other contexts and suggested the EC consult the information and responses 

already provided under other contexts.153 

On a related development, at the Council for Trade in Goods (CTG), China went further 

to raise a procedural question on whether the CTG has the mandate to review those issues which 

should be covered by its subsidiary bodies. This move was in response to the statement from the 

U.S. and the EC that at the review by CTG they wanted to seek clarifications about matters that 

 

150 Id. at para. 61. 

151 Report to the Council for Trade in Goods on China’s Transitional Review, Committee on Import Licensing, 

G/LIC/13 (22 November 2004), at para. 3.9. 

152 Id. at para. 3.14. 

153 Id. at para. 3.21. 
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had not been fully answered in some of the CTG subsidiary bodies.154 Specifically, the U.S. 

noted in its submission of questions that “many of these questions relate to matters that were not 

fully addressed by China during the transitional review held before the committees that report to 

the Council for Trade in Goods.”155 The EC pointed out in its submission that “the assessment of 

this year’s TRM exercise in the subsidiary bodies under the CTG is rather disappointing” and 

“China provided replies of a very general nature that lacked specificity...”156 China challenged 

the U.S. for a definition of “fully addressing matters” and the EC for the legal basis for their 

comment on China’s replies. In response, the U.S. interpreted the term “fully addressed” as a 

polite way of saying that the questions listed in the U.S. submission had not been answered. As 

regards to the mandate of the CTG, the U.S. stated that the jurisdiction of the CTG was the 

jurisdiction of the subsidiary bodies and it was entirely proper for Members to address the 

matters that had been raised in those subsidiaries.157 The EC and Japan also voiced the same 

understanding as the U.S. on the mandate of the CTG. No agreement was achieved between 

China and other Members over this issue, and finally the Chairman made the suggestion of 

consulting with the Secretariat’s Legal Affairs Division after the review.158

 

154 Report of the Council for Trade in Goods on China’s Transitional Review, Council for Trade in Goods, 

G/L/722 (10 December 2004), at para. 3.2. 

155 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol on the Accession of the People’s 

Republic of China: Question from the United States to China, Council for Trade in Goods, G/C/W/499 (11 

November 2004) at 1. 

156 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol on the Accession of the People’s 

Republic of China: Communication from the European Communities, Council for Trade in Goods, G/C/W/502 

(23 November 2004) at 1. 

157 Report of the Council for Trade in Goods on China’s Transitional Review, Council for Trade in Goods, 

G/L/722 (10 December 2004), at para. 3.10. 

158 Id. at para. 3.17.
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3. U.S. Concerns and China’s Responses

Many concerns highlighted at the third TRM are of a long-term nature, such as IPR 

enforcement, capitalization requirements in service sectors, TRQ allocations, subsidy 

notification, etc. The following represents a summary of selected issues raised by the U.S. and 

China’s corresponding responses. Areas of concern reviewed include: agricultural TRQs, auto 

policy, subsidies, export restrictions on coke, services, and intellectual property rights (IPR). 

Many of these concerns were also shared by other Members. 

a. Agricultural TRQs

At the Committee on Agriculture, the U.S. noted the following issues respecting China’s 

administration of its agricultural tariff rate quotas (TRQs), pressing China to continue to improve 

its TRQ regime. 

• At the November 2003 meeting of the Committee on Agriculture and again during 

bilateral discussions with the U.S. in April 2004, China agreed to provide certain 

information on quota holders and amounts allocated or reallocated upon written request 

if quota holders have expressed their consent to the Chinese government for release of 

the information. After submitting a written request to China regarding all TRQ 

commodities, the U.S. received an initial list of quota holders for wheat and cotton, but 

no information on the amounts allocated or reallocated, nor any information with 

regard to other TRQ commodities.159

• Can China verify that cotton imported into bonded warehouses, bonded areas and 

export processing zones does not count towards China’s total cotton TRQ allocation? 

Due to the limited transparency in China’s operation of its TRQ system, the U.S. has 

had difficulty in verifying that.160

 

159 China’s Transitional Review Mechanism: Questions to China from the United States, Committee on 

Agriculture, G/AG/W/64 (31 August 2004), at para. 2. 

160 Id. at para. 4. 
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• The U.S. is still concerned that China’s revised TRQ regulations provide for the 

application of out-of-quota tariff rates if a TRQ product imported under a processing 

trade channel is sold in China rather than processed and re-exported. Can China 

confirm that although it never requires that quota holders bring product in as processing 

trade as a condition of any TRQ import certificates, quota holders have the option of 

choosing the processing trade channel as opposed to the general trade channel and 

China counts the product as in-quota imports in either case?161

In response, China provided explanations as follows: 

• On information on quota holders: China is not yet in a position to provide a list of 

enterprises because the information is considered to be confidential business 

information. The enterprises concerned expressed the view that release of this 

information would affect their competitiveness in the market.162

• On cotton: Cotton imported into bonded warehouses and bonded areas does not count 

towards its global cotton tariff quota allocation, as provided for in the annual 

Announcement for Allocation of TRQs for agricultural products.163

• On the matter of processing trade: Under general trade, there is no preferential 

treatment of bonded imports, although imports within quota could be sold in the 

domestic market at the in-quota tariff rate. Processing trade is subject to preferential 

treatment of bonded imports with the prohibition of sale in the domestic market, in 

which case they are subject to out-of-quota tariffs and other penalties. To do otherwise 

would be unfair for the imports conducted under general trade.164 

b. Auto Policy

At the Committee on Market Access and the Committee on TRIMS, the U.S. posed 

questions to China regarding the new Development Policy of the Automobile Industry published 

on June 1, 2004. 

 

161 Id. at para. 5. 

162 Report to the Council for Trade in Goods on China’s Transitional Review, Committee on Agriculture, 

G/AG/19 (3 November 2004), at para. 46. 

163 Id. at para. 48. 

164 Id. at para. 49. 
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• What restrictions apply to the distribution of autos in China and whether an enterprise 

may distribute, through the same network, (1) autos produced by different joint 

ventures, (2) imported and domestically produced autos and (3) different brands?165 

• How does China define completely knocked-down kits for motor vehicles and semiknocked down kits for motor vehicles and what are the tariff rates that are applicable to 

them?166 

• In Article 47 of the new policy, a new auto production plant requires a minimum 

investment of RMB 2 billion, of which owned capital should not be less than RMB 800 

million. The new plant should also include an R&D facility, investment in which 

should not be less than RMB 500 million. Article 47 also requires the establishment of 

an R&D facility in connection with new auto engine manufacturing. Does this Article 

apply to foreign-invested enterprises? If so, how does it comply with China’s 

commitments of not conditioning the right of investment on the conduct of research and 

development in China?167 

• In Annex II of the new policy, technology transfer agreements of the foreign party are 

among the documents required to be filed to seek approvals for new production plants. 

How can China justify this requirement in light of its commitments of not conditioning 

the right of investment on the transfer of technology?168

China provided the following responses at the Committee on TRIMS {part of China's 

responses are not available as regards to the first two questions as the minutes of the review at 

the Committee on Market Access have not been issued}: 

• On the requirement of R&D facility: The reason for the requirement is to equip the 

enterprises with basic technical ability in order to ensure that the newly-established 

enterprises be able to conduct technical reconstruction and research and development 

on their own products, and that they could meet the increasing technical and legal 

requirements on safety, environmental protection and energy saving, as well as 

 

165 China’s Transitional Review Mechanism – Communications from the United States, Committee on Market 

Access, G/MA/W/58 (31 August 2004), at para. 3. 

166 Id. 

167 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol on the Accession on the People’s 

Republic of China – Additional Questions from the United States to China Concerning TRIMS, Committee on 

TRIMS, G/TRIMS/W/37 (23 September 2004). 

168 Id. 
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customer demand in China. There is no specific and mandatory requirement on product 

R&D performance.169

• On the requirement of technology transfer: The reason why China requires “foreign 

technology transfer and contract on technical cooperation” is to prevent illegal 

assembling, to protect intellectual property and to ease up the procedures for product 

testing and accreditation, but not to force foreign parties to transfer their 

technologies.170

c. Subsidies

At the Committee on Subsidies and Countervailing Measures, the U.S. noted quite a few 

concerns concerning subsidies: 

• Three years after the accession, China has still not submitted a notification of any 

subsidy under Article 25 of the SCM Agreement. At the first TRM, China stated that it 

would submit the required notification when the information was accurate and 

complete. At the second TRM, China stated that it was vigorously pushing forward 

work on its notification, but was unable to provide a specific time frame for 

completion. Why has China been unable to meet this obligation?171

• Has China eliminated subsidies to SOEs running at a loss? At the first TRM, China 

said these subsidies were eliminated in 2001. However, 2003 Chinese press reports 

said the government is currently working to eliminate these subsidies by 2005. China 

did not provide response in the second TRM.172 

• In December 2003, the central government injected US$45 billion into the Bank of 

China and the China Construction Bank from its foreign exchange reserves. How do 

the bailouts address the underlying causes of the non-performing loan problem and the 

massive subsidization inherent in it? How do the 2003 bailouts differ from earlier 

 

169 Minutes of the Meeting Held on 26 October 2004, Committee on Trade-Related Investment Measures, 

G/TRIMS/M/19 (5 November 2004), at para. 21. 

170 Id. 

171 Transitional Review Mechanism Pursuant to Section 18 of the Protocol on the Accession of the People's 

Republic of China: Questions from the United States to China Concerning Subsidies and Price Controls, 

Committee on Subsidies and Countervailing Measures, G/SCM/Q2/CHN/8 (6 October 2004), at para. 1. 

172 Id. at para. 6. 
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bailouts? What are the plans for ensuring that all state-owned banks are run on a 

commercial basis and are responsible for their own profits and losses?173 

China's responses to the foregoing statements are as follows: 

• On the subsidy notification: First, China has implemented the commitment of 

eliminating all export subsidies and subsidies for import substitution, therefore could 

not undertake any obligation of further notification in these two areas. Second, China 

made all notifications on subsidy measures maintained and subsidies to be phased out 

(Annexes 5A and 5B to the Protocol of Accession), which reflected the situation with 

respect to Chinese subsidy measures accurately and completely. These two are still 

current and effective, and they fulfill the notification requirements under the SCM 

Agreement. Third, since the accession, China has been actively collecting subsidy 

information. However, there is more than one authority responsible for the 

administration of subsidies in China, and that information collecting and sorting is a 

complex and time consuming exercise.174

• On subsidies to SOEs: The Chinese government undertakes no obligation to verify 

information published on non-official websites, and it does not accept that such 

information can be a basis for making accusations against China’s policies.175 

• On the recent bank bailouts: The latest reorganization and injection of capital into the 

Bank of China and the China Construction Bank are one of the steps needed in the 

overall reform of the banking sector in China. Compared with previous reform 

measures, the latest capital injection measures were designed and implemented with 

commercial considerations in mind. The State, through the Central Weijing 

Corporation, injected USD 45 billion into the two banks to increase their capital funds, 

with future dividends expected as a return on this investment. The action is an 

investment in nature, not a subsidy, and is aimed at fully commercializing the 

operations of the two banks. There is no major difference between this reform by 

China and reforms by other WTO members. Any such reform involves a write-off of 

non-performing loans.176

 

173 Id. at para. 7. 

174 Chairman’s Report to the Council for Trade in Goods on Transitional Review of China, Committee on 

Subsidies and Countervailing Measures, G/SCM/115 (22 November 2004), at paras. 21-23. 

175 Id. at para. 29. 

176 Id. at paras. 31-32. 
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In response to China's comments on the subsidy notification, the U.S. voiced 

disagreement with China over its view that a notification that was supplied in the course of 

accession satisfied an ongoing obligation of all WTO Members. The U.S. also expressed 

disappointment that, despite China's apparent efforts in collecting subsidy information, there 

have been no concrete results in the past three years of China’s WTO membership. 

In addition to the above concerns, China also tried to explain the VAT rebate granted for 

imports of copper scrap177 upon request from the U.S. and other Members and provide responses 

to a series of U.S. questions on pricing mechanism178 during the review at the SCM Committee. 

d. Export Restrictions on Coke

China’s export restriction on coke was a high-profile issue at the third TRM. In 2004, 

China imposed an export quota of 8.3 million MT, down from the 2003 level of 14.3 million 

MT. In the first six months of 2004, China's export quota combined with the illegal selling of 

export quotas caused the export price for Chinese coke to soar.179 At the Committee on Market 

Access and the Council for Trade in Goods, the U.S. raised the following specific questions: 

• WTO rules establish a general prohibition against export restrictions, with only limited 

exceptions. How does China’s export restriction on coke satisfy the GATT Article XX 

exception which allows measures that are made effective in conjunction with 

restrictions on domestic production or consumption? The U.S. notes that in 2003, 

China's policies resulted in China reserving approximately 163 million MT for the 

domestic market, while only allowing less than 15 million MT to be exported.180

 

177 Id. at para. 24-26. 

178 Id. at paras. 33-38. 

179 China's Transitional Review Mechanism: Communication from the United States, Committee on Market 

Access, G/MA/W/58 (31 August 2004), at para. 1. 

180 Id.
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• What is the current status of the China-EU bilateral agreement on coke?181

• Does China have any plans to impose any new or additional domestic restrictions?182

• Does China have any timetable for eliminating the export quota on coke?183

At the Council for Trade in Goods, China made the following comments {part of China's 

responses are not available as the minutes of the review meeting at the Committee on Market 

Access have not been released}: 

Coke was an exhaustible resource, while the coke industry was 

highly pollutive and energy-consuming. Therefore, in order to 

protect the environment and achieve sustainable development, 

China had taken a series of measures to reduce the output of coke. 

Meanwhile pursuant to GATT Article XX(g), as well as the 

relevant domestic laws and regulations, coke export was under a 

global quota administration in China. However, it might take some 

time to see the results of their efforts in terms of restricting coke 

production of domestic industry. In the year 2004 the demand for 

coke in international markets had risen tremendously, which had 

drawn great attention from the Chinese Government. ... On 23 

July 2004, MOFCOM had issued urgent notice on an 

administrating order of coke export which required local 

government and relevant enterprises to strictly comply with the 

export administration restriction to actively improve their 

operations and to thoroughly eliminate sales of export licences for 

coke. The above measures had been proved effective. At present 

China's exportation of coke was stable and prices had declined 

rapidly. The export quota for coke in the year 2005 would be 14 

million tonnes. ... China hoped that WTO Members would realise 

the sacrifices China had made as well as the pressure and the 

dilemma China was facing in terms of environmental protection 

and natural resource preservation. As a WTO Member China 

 

181 Id. 

182 Transitional Review under Section 18 of the Protocol on the Accession of the People's Republic of China: 

Questions from the United States to China, Council for Trade in Goods, G/C/W/49 (11 November 2004), at 

para. 1. 

183 Id. 
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would continue to abide by WTO rules in the future and take 

measures on the basis of non-discrimination, publicity and 

transparency to maintain the stable supply of coke in the 

international markets.184

In response, the U.S. cautioned China on the possible remaining effect and hoped 

that China could finally eliminate the export restriction: 

In 2004 this became a significant problem, as the prices for coke, a 

key steel-related import, more than tripled from the 2003 level, and 

this was due largely to the shrinking export quota in 2004 as well 

as the selling of export licences. The US had discussed these 

issues with China as they arose, and had been pleased with China's 

short-term response. China had expanded the 2004 quota and 

cracked down on the selling of export licences, and as a result the 

price of coke had gone down substantially and more quantities 

were available. He cautioned, however, that these were just shortterm fixes. The US appreciated the measures taken but would also 

like to see China eliminate export quotas, in particular the export 

quota system for coke and other raw materials.185 

e. Services

U.S. concerns at the third TRM with respect to the services sector focused on financial 

services, distribution services, express delivery services, and telecommunications services. 

Financial Services:

• The Regulations on the Administration of Insurance Companies and the Implementing 

Rules for the Regulation on the Administration of Foreign-Invested Insurance 

Companies issued on May 13, 2004 encourage foreign non-life insurers to convert 

existing branch operations to subsidiaries. Can existing branches of non-life insurers 

continue to operate under the existing conditions? Will China allow non-life insurers 

 

184 Report of the Council for Trade in Goods on China's Transitional Review, Council for Trade in Goods, 

G/L/722 (10 December 2004), at para. 3.23. 

185 Id. at para. 3.40(i). 
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already established in China to open branches and sub-branches even if they do not first 

establish as a subsidiary?186 

• The new insurance regulations and implementing rules do not specify the number of 

branches foreign insurers may apply for at one time, whether branch approvals will be 

granted consecutively (one at a time) or concurrently (more than one at a time). Can 

China justify the differential treatment in which foreign insurers have only received 

consecutive approval to open single branch while Chinese insurers are able to receive 

concurrent approvals to open multiple branches?187

• The new insurance regulations and implementing rules require RMB 200 million for 

the initial establishment of insurance companies, whether as a subsidiary of a branch, 

and RMB 20 million for each additional branch. What is the rationale for requiring 

RMB 20 million for each additional branch, particularly in light of the fact that any 

additional branches would still be backed by the full asset base of the parent foreign 

insurer?188

• What is the rationale for the extremely high qualifying threshold (e.g., total assets of 

RMB 5 billion) for insurers to be able to invest their foreign exchange funds in 

overseas funds or equities in the Provisional Measures on the Administration of the 

Overseas Utilization of Insurance Foreign Exchange Funds issued on August 9, 

2004?189

• Pursuant to the Regulations on the Administration of Foreign-Invested Financial 

Institutions and the Detailed Implementing Rules for the Regulations on the 

Administration of Foreign-Invested Financial Institutions, China imposes minimum 

capital requirements for foreign banks, on a branch-by-branch basis, that remain 

extremely high by international standards. At last year's TRM, the U.S. and other 

Members asked China whether it was reviewing high capital requirements to determine 

whether they are necessary and not overly burdensome for foreign banks. What is the 

current status of CBRC's review of these capital requirements?190

 

186 Communication from the United States: Transitional Review Mechanism in Connection with Paragraph 18 of 

the Protocol on the Accession of China, Committee on Trade in Financial Services, S/FIN/W/40 (8 November 

2004), at para. 1. 

187 Id. at para. 2. 

188 Id. at para. 4 

189 Id. at para. 5. 

190 Id. at para. 9. 
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• What is the rationale for the high capital requirement of RMB 300 million in the rules 

issued by the China Securities Regulatory Commission addressing joint venture asset 

management companies for foreign firms to qualify as a joint venture partner?191 

China provided the following answers with regards to the above concerns: 

• On branching: The Implementation Rules allow branches of foreign funded property 

insurance companies to be changed into wholly foreign-owned property insurance 

companies. They can remain as branches or change their status according to this 

regulation.192 

• On licensing: The number of licenses that the CIRC can grant to foreign insurers at one 

time is based on the licensing procedures in the relevant laws and regulations, as well 

as the prudential principle. The available amount of sub-branches for one application is 

not statutorily stipulated in the Chinese law, and therefore it is appropriate in his view 

to set a compulsory number of licences for the CIRC to issue to a particular foreign 

insurer at one time. National treatment does not mean strict equivalence in the number 

of licences for sub-branches issued at one time. What is important for national 

treatment is that the approval procedure and the requirement for sub-branches are equal 

for both domestic and foreign applicants.193 

• On the overseas investment by insurance companies: The qualifying threshold is 

applied to both foreign and domestic insurers based on prudential consideration.194

• On the horizontal issue of minimum capital requirement: China's minimum capital 

requirements are based on prudential considerations and set up according to the level of 

development of China's financial sector and the regulatory capacity of the financial 

authority. The determination of minimum capital requirements is a legitimate right of 

Members when regulating. Depending on the improvement of the risk management 

system of foreign banks and the development of China's regulatory framework, China's 

financial regulatory authorities would relax the minimum capital requirements for 

foreign banks and insurance companies accordingly. Since December 2003, the 

amount of operating capital requirements for branches of foreign-funded banks has 

been reduced and the categories have been simplified. Based on foreign-funded banks' 

 

191 Id. at para. 10. 

192 Transitional Review under Section 18 of the Protocol on the Accession of the People's Republic of China: 

Report to the Council for Trade in Services, Committee on Trade in Financial Services, S/FIN/13 (26 

November 2004), at para. 58. 

193 Id. at para. 58. 

194 Id. at para. 60. 
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business development and risk control capacity, China will continue to adjust the 

operational capital requirement in the future.195 

Distribution Services:

• To implement the important commitment of opening up the distribution services sector, 

China first issued the Regulations on the Administration of Foreign Investment in the 

Commercial Sector on April 16, 2004. However, China has not yet issued necessary 

implementing rules clarifying application procedures, including when approvals may be 

obtained from provincial authorities versus the Ministry of Commerce and permitted 

scope of activities.196 

In response, China drew Members' attention to a Notice issued by China's Ministry of 

Commerce regarding the procedure for the implementation of the Regulations on the 

Administration of Foreign Investment in the Commercial Sector.197

Express Delivery Services

• What is the rationale for the creation of a China Post monopoly on the delivery of 

letters weighing less than 350 grams according to the new draft of the Postal Services 

Law circulated in July 2004?198

• What are China's plans for separating China Post's regulatory and operational 

functions?199

In response, China stated that the draft was for the purpose of seeking comments in the 

law-revising process, not the final draft and some of its provisions were still under consideration 

 

195 Id. at para. 54. 

196 Communication from the United States: Transitional Review Mechanism Pursuant to Paragraph 18 of the 

Protocol on the Accession of China, Council for Trade in Services, S/C/W/243 (9 November 2004), at para. 1. 

197 Report of the Meeting Held on 26 November 2004, Council for Trade in Services, S/C/M/75 (3 December 

2004), at para. 29. 

198 Communication from the United States: Transitional Review Mechanism Pursuant to Paragraph 18 of the 

Protocol on the Accession of China, Council for Trade in Services, S/C/W/243 (9 November 2004), at para. 5. 

199 Id. 
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and review. China also reiterated that the revised Postal Law will not violate relevant WTO 

agreements and China's horizontal commitments.200

Telecommunications Services

• Article 5 of the Regulation on the Administration of Foreign-Invested 

Telecommunications Enterprises establishes RMB 2 billion capital requirement for 

foreign-invested telecom enterprises to engage in national or cross-provincial basic 

services. This high capital requirement limits the ability of foreign firms to access 

China's telecommunications market.201

• The Ministry of Information Industry (MII) in its April 2003 Catalogue of 

Telecommunications Services reclassified several telecommunications services from 

the value-added category to the basic category, contrary to widely accepted 

international practice. Also, the Catalogue omits "code and protocol conversion" from 

the list of value-added services, which is identified in China's Services Schedule as a 

value-added service. These steps limit market access in value-added services.202

• China has not yet established an independent regulator, as MII is not structurally and 

financially separate from all telecommunications operators and providers.203

In response to the above concerns, China only provided an explanation on the omission 

of "code and protocol conversion" from the list of value-added services in MII's Catalogue. 

• On the code and protocol conversion: The approach to classification of 

telecommunication services is based on each Member's development level, economic 

situation and administrative measures. The code and protocol conversion is applied 

when technical criteria or standards in telecommunications are not unified. Its purpose 

is to ensure the interconnection between networks or services using different codes and 

 

200 Report of the Meeting Held on 26 November 2004, Council for Trade in Services, S/C/M/75 (3 December 

2004), at para. 28. 

201 Communication from the United States: Transitional Review Mechanism Pursuant to Paragraph 18 of the 

Protocol on the Accession of China, Council for Trade in Services, S/C/W/243 (9 November 2004), at para. 11. 

202 Id. at paras. 10-11. 

203 Id. at para. 12. 
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protocols. As technical criteria have been gradually unified at the international level, 

there is no demand for this service in China.204

f. Intellectual Property Rights (IPR)

As in the previous two TRM reviews, a wide array of issues were identified at the 

Council for TRIPS during the third review, covering patents, trademarks, copyright, and IPR 

enforcement regime. Major U.S. concerns included: 

• When will China circulate a draft for public comment of the judicial interpretation on 

criminal thresholds which is currently in an advanced stage of drafting? What efforts 

are under way for revising national or local guidelines for referral of cases to criminal 

prosecution or criminal investigation, and for reorganization of entities involved in 

criminal IPR investigation or prosecution?205

• China is by far the largest exporter of infringing goods that are seized at the borders of 

the U.S. by U.S. Customs authorities. What new steps, if any, are being taken to stop 

the exportation of counterfeit and pirated goods from China?206 

• How many well-known trademarks have the Chinese Trademark Office and the 

Trademark Review and Adjudication Board recognized under the rules issued by the 

State Administration of Industry and Commerce in 2003, including the number of 

foreign well-known marks recognized under these rules?207

• What efforts are under way to consolidate content review of copyrighted works through 

"one stop" review, and/or to expedite the overall process, particularly in industries that 

are quite sensitive to the high incidence of piracy in China's market?208

• What steps have been taken to resolve the uncertainty of relevant administrative 

agencies in the judgment as to whether end-user piracy is against the "public interest" 

for purposes of administrative enforcement of China's Copyright Law?209

 

204 Report of the Meeting Held on 26 November 2004, Council for Trade in Services, S/C/M/75 (3 December 

2004), at para. 27. 

205 Transitional Review Mechanism of China: Communication from the United States, Council for Trade-Related 

Aspects of Intellectual Property Rights, IP/C/W/432 (16 November 2004), at paras. 46-47. 

206 Id. at para. 48. 

207 Id. at para. 16. 

208 Id. at para. 19. 
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• What tools are available to non-Chinese companies to fight pre-emptive patent filings 

by Chinese companies for designs they did not create?210

China provided the following answers: 

• On the judicial interpretation of criminal threshold: The Judicial Interpretation and 

Application of the Laws dealing with Criminal Offences of IPR will be promulgated 

soon. In drafting the Interpretation, the Supreme Court and the Supreme Procuratorate 

solicited the comments and questions from various agencies and enterprises, chambers 

and associations of the U.S., EU and Japan. After the comments and questions are 

summarized, the Interpretation will carry out clearer and more definite standards for 

verdicts and lower the threshold for criminal acquisition. When the Interpretation takes 

effect, the provisions of the relevant judicial documents that are inconsistent with the 

Interpretation will automatically be nullified.211

• On Customs enforcement: Measures taken by the General Administration of Customs 

to protect IPR include establishing more laws and regulations on IPR protection, 

training more enforcers of GCA, strengthening cooperation with right holders, 

participating more in cooperation and communication with foreign counterparts, and 

employing more advanced technology to find more pirated products. All these 

measures have proven effective to prohibit exportation and importation of pirated 

goods.212 

• On the determination of well-known trademarks: Since the implementation of 

provisions on determination and the protection of well-known marks on June 1, 2003, 

the Trademark Office and the Trademark Review and Adjudication Board have totally 

determined the status of 153 well-known marks, among which 24 are from abroad, 12 

from the U.S., 12 from other Members.213 

• On pre-emptive patent filings: Pursuant to Article 23 and 45 of the Patent Law, any 

entities or individuals, including foreign nationals, could request a patent right to be 

declared invalid on the grounds that the patent for design is identical or similar to any 

design before the date of filing. In addition, pursuant to rule 79 and rule 86 of the 

implementing regulations of the Chinese Patent Law, where there is a dispute over the 

 

209 Id. at para. 21. 

210 Id. at para. 9. 

211 Transitional Review under Section 18 of the Protocol on the Accession of the People's Republic of China, 

Council for Trade-Related Aspects of Intellectual Property Rights, IP/C/34 (9 December 2004), at para. 15. 

212 Id. at para. 72. 

213 Id. at para. 40. 
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ownership of patent rights, the parties concerned can request administrative authority 

for patent affairs to mediate or institute legal proceedings with a People's Court.214 

In addition, as requested by the U.S., China provided recent statistics on IPR enforcement 

actions.215 

The following two tables present: (1) a list of the document references for the third TRM 

committee and council reports and the minutes of the TRM meetings, and (2) a list of the 

committees and councils in which the U.S. made submissions during the third TRM and the 

areas of concern identified by the U.S. 

Committee/Council Document Symbol of 

Committee/Council 

Reports

Document Symbol of 

Committee/Council 

Minutes

Committee on Agriculture G/AG/19 G/AG/R/40

Committee on Anti-Dumping Practices G/ADP/13 G/ADP/M/27

Committee on Balance-of-Payments Restrictions WTO/BOP/R/75 not available 

Committee on Financial Services S/FIN/13 S/FIN/M/47

Committee on Import Licensing G/LIC/13 G/LIC/M/20

Committee on Market Access G/MA/155 G/MA/M/38

Committee on Rules of Origin G/RO/58 not available 

Committee on Safeguards G/SG/73 G/SG/M/26

Committee on Sanitary and Phytosanitary Measures G/SPS/34 G/SPS/R/35

Committee on Subsidies and Countervailing Measures G/SCM/115 G/SCM/M/52

Committee on Technical Barriers to Trade G/TBT/W/249 G/TBT/M/34

Committee on Trade-Related Investment Measures not available G/TRIMS/M/19

Committee on Customs Valuation G/VAL/57 G/VAL/M/38

Council for Trade in Goods G/L/722 G/C/M/78

Council for Trade in Services S/C/23 S/C/M/75

Council for Trade-Related Aspects of Intellectual 

Property Rights IP/C/34 IP/C/M/46

Committee/Council Reports and Meeting Minutes in the Context of the Third TRM

 

214 Id. at para. 23. 

215 Id. at paras. 51-55. 
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Committee/Council & Document Symbol Areas of Concern

Committee on Agriculture 

G/AG/W/64; G/AG/W/64/Add.1

Committee on Anti-Dumping Practices 

G/ADP/W/441

Committee on Import Licensing 

G/LIC/Q/CHN/12

Committee on Market Access 

G/MA/W/58

Committee on Sanitary and Phytosanitary Measures 

G/SPS/W/153

Committee on Subsidies and Countervailing Measures 

G/SCM/Q2/CHN/8

Committee on Technical Barriers to Trade 

G/TBT/W/245

Committee on Trade-Related Investment Measures 

G/TRIMS/W/35; G/TRIMS/W/37

Council for Trade in Goods 

G/C/W/499

Committee on Financial Services

S/FIN/W/40

Council for Trade in Services S/C/W/243

S/C/W/243

Council for Trade-Related Aspects of Intellectual 

Property Rights 

IP/C/W/432

Legislation and judicial interpretations; 

patents; trademarks and enterprise name 

protection; copyright; general enforcement 

issues; administrative enforcement; civil 

enforcement; criminal enforcement; 

customs/border enforcement

Summary of Submissions by the US in the Context of the Third TRM

Notification; semiconductors; copper; 

subsidies to SOEs running at a loss; nonperforming loans; price controls 

Notifications; changes in China's 

standardization and regulatory system; 

international standards; conformity 

assessment procedures; scrap recycling 

regulations; distilled spirits; chemicals; radio 

frequency identification; cosmetics

Sectoral Guidelines Catalogue for Foreign 

Investment; new auto industry policy 

Export restrictions; TRQs on fertilizers; VAT 

applied to diammonium phosphate; SPS 

measures; control, inspection and approval 

procedures; border control; transparency; 

government procurement

Notifications and related matters; 

transparency; judicial review; enquiry point

AQSIQ licensing for inspection of imports; 

entities responsible for authorization or 

approval of imports; buying, selling and 

transferring of import licenses

Export restrictions; new automobile 

industrial policy; TRQs on fertilizers

Transparency and oversight of regulatory 

bodies; absence of sound scientific evidence; 

assessment of risk and appropriate level of 

phytosanitary protection; control, inspection 

and approval procedures; 

Administration of agricultural TRQs; AQSIQ 

licensing for inspection of imports

Insurance; financial holding companies; 

banking; securities; pensions

Distribution services; express delivery 

services; transport services; 

telecommunications services; construction 

services
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B. Assessment of the Effectiveness of the TRM Process

When the Transitional Review Mechanism was established under Article 18 of 

China’s accession protocol, it was hoped and expected that the review process would be 

an important and effective tool to monitor China’s progress in meeting its WTO 

obligations and commitments as well as act as a stimulus to China’s trade regime 

transformation. Unfortunately, after the completion of three TRMs, these expectations 

have not been met. 

The U.S., the EU, Japan and other countries initially believed that the Article 18 

obligation, like normal WTO practice in all of the Committees for other reporting obligations, 

would be a robust enquiring exercise. That is, it was expected that WTO members would be able 

to forward initial and follow-up questions to China in advance of TRM meetings, and that China 

would similarly respond prior to the TRM meeting. 

In the first TRM, other members (including the U.S.) tried to establish a schedule early in 

China’s membership to ensure the process would be meaningful and would permit a thorough 

evaluation. However, China’s initial attitude to the TRM process was hostile in tenor, refusing 

to permit the Article 18 process to go beyond the literal language of the protocol. Since Article 

18 did not establish a timeline, China would not agree to early meetings and, in fact, blocked 

agendas being issued or meetings being held where the topic of the Article 18 TRM was 

included. 

China asserted that, as Article 18 did not refer to written answers, it was not required to 

provide them. China thus frustrated other Members’ expectation of a spirited and transparent 

exchange of information. And, because the WTO works on consensus, China did not agree to 
China in the WTO – Year 3: A Research Report Prepared for 

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have the reports from the various standing committees or the councils go beyond merely a 

review of the topics identified. As a result, none of the reviewing bodies made any conclusions 

or recommendations regarding China’s compliance. 

As a result of China’s behavior in TRM-1 (2002), the expectations of WTO members for 

succeeding TRMs were effectively lowered, as can be seen by viewing the various committee 

reports and notes from TRM-2 (2003) and the most recent TRM-3 (2004). Thus, the TRM 

process has not proved to be the effective monitoring and compliance enforcement tool that was 

envisioned in the protocol. 

These conclusions are reflected in a report by the Government Accountability Office, 

which observes: 

{T}he initial TRM did not result in the thorough and detailed 

review of China’s compliance that U.S. officials had envisioned. 

15 Chinese officials told us that while they will abide by their 

TRM commitments, they view the TRM as a discriminatory 

mechanism that was imposed on China during their WTO 

membership negotiations. With this as the prevailing sentiment 

from China, the 2002 review was marked by contention between 

China and some of the other WTO members regarding the form, 

timing, and specific procedures for the TRM. The United States 

and some other members were disappointed that China refused to 

provide written answers to members’ written questions in advance 

of TRM meetings. Additionally, some members were disappointed 

that the review did not result in any conclusions or 

recommendations regarding China’s implementation. 

* * * 

However, as in 2002, China did not respond in writing to member 

questions during the 2003 review, nor did the TRM result in a 

WTO report with conclusions or recommendations. U.S., WTO, 

and other foreign officials told us that they expected future TRM 
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reviews to operate similar to the 2003 review, with no substantive 

changes in procedures or outputs.216

As noted by a recent article, the most recent review, TRM-3, followed the pattern 

established in the first two reviews, leaving interested members frustrated by the process: 

As in past years, China’s studied vagueness in response to detailed 

questions frustrated participants in this year’s TRM. China 

continued to respond in an unclear, often defensive manner, 

refusing in some cases to answer questions that it claimed were 

irrelevant to the committee topic (such as questions related to the 

Foreign Trade law). . . . Members explicitly stated that China’s 

participation in the TRM was “rather disappointing,” noting that 

China frequently did not provide written answers and that oral 

answers to detailed questions were too vague. Members 

highlighted China’s lack of transparency in virtually every 

committee session.217

 Based on background discussions with various close observers of the TRM process, a 

number of observations can be made about the operation of the TRM: 

• The trend in Year 2 of lowered expectations continued in Year 3. TRM-3 was largely 

a mirror of the TRM-2. That is, China would provide written statements at the end of 

the process but not at the beginning. 

• China appeared less confrontational in Year 3 and more forthcoming than in previous 

TRMs. 

• WTO members appear to have accommodated themselves to the TRM’s reduced 

scope. In other words, they now tend to view the TRM as simply one of a number of 

avenues for obtaining information on China’s compliance performance. 

 

216 U.S. Government Accountability Office, U.S.-CHINA TRADE: Opportunities to Improve U.S. Government 

Efforts to Ensure China’s Compliance with World Trade Organization Commitments, GAO-05-53 (October 

2004) at 17-18; http://www.gao.gov/new.items/d0553.pdf. 

217 Julie Walton, WTO: Year Four; Progress in the past year signals China is on its way to becoming a normal 

business environment, The China Business Review (January-February 2005) at 34. 
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• The TRM has become essentially a transparency and accountability exercise, but not 

a forum to clearly identify problems and obtain an action program. Nonetheless, the 

experience of a number of members has been that there has been reasonable success 

in resolving problems with China’s compliance through bilateral consultations. 

• China takes the modified TRM process more seriously, and appears more prepared at 

the Committee meetings and in at least many cases provides responsive information. 

Still, some members would like more information. 

• The TRM process is not as important a tool for monitoring and enforcement of 

China’s commitments as was hoped but it does provide a regularity of focus on the 

China compliance question. 

• Members seem to have accepted that although they may receive factual information 

from China, the TRM is not likely to put pressure on China to change practices. 

• China seems to respond bilaterally reasonably well. Where problems persist, a WTO 

complaint is viewed as the necessary avenue to pursue to obtain compliance. 

Notwithstanding the diminished effectiveness and disappointing results of the TRM 

process, the U.S. and other Members still view it as a useful forum for airing problems directly to 

China. The GAO report presents the reasons that the U.S. believes that TRM has continuing 

utility: 

U.S. officials acknowledged the continuing limitations of the TRM 

in 2003, but cited three major benefits of the review: (1) the TRM 

increased China’s transparency on trade issues, (2) the TRM 

resulted in a useful exchange of information and fostered better 

coordination among key Chinese ministries, and most importantly, 

(3) the TRM provided the United States with a formal multilateral 

forum for raising compliance problems. 

First, U.S. officials stated that the TRM was an effective way to 

urge China to disclose information about its implementation in a 

formal, public multilateral forum. Officials said it was important to 

demonstrate to China that the United States and other concerned 

members would be actively seeking information about China’s 

implementation on an annual basis. 

Second, several U.S., WTO Secretariat, and other member 

government officials said that China sent more experts from the 

relevant ministries to attend the TRM in 2003, and many officials 
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stated that this had resulted in a more effective exchange of 

information during the reviews. Further, U.S. and foreign officials, 

including China’s ambassador to the WTO, indicated that the TRM 

process was effective in helping China’s main trade ministry, the 

Ministry of Commerce, gain cooperation and coordination from 

other Chinese ministries that might not have understood the 

problems or might have been reluctant to cooperate otherwise. 

Third, U.S. officials said that the TRM provided the United States 

with an opportunity to highlight specific areas of concern about 

China’s implementation and obtain an official, public position 

from China on key issues. U.S. officials further noted that, 

although the TRM was never intended to supplant the dispute 

settlement process, the TRM could help lay the groundwork for 

any potential areas where the United States would initiate a WTO 

dispute settlement case with China.218

Thus, while it must be acknowledged that the TRM process has not been the important 

and useful multilateral forum for monitoring China's WTO compliance that was hoped, still it is 

useful as a forum for clarifying China's implementation efforts, as an information exchange, and 

as a means to convey Members' expectations about the fulfillment of China commitments.219

 

218 U.S. Government Accountability Office, U.S.-CHINA TRADE: Opportunities to Improve U.S. Government 

Efforts to Ensure China’s Compliance with World Trade Organization Commitments, GAO-05-53 (October 

2004) at 19-20; http://www.gao.gov/new.items/d0553.pdf. 

219 See, e.g., Report of the Meeting Held on 23 November 2004, Committee on Trade in Financial Services, 

S/FIN/M/47 (26 November 2004), at para. 37.