Trade Lawyers Advisory Group

Terence P. Stewart, Esq.

Amy S. Dwyer, Esq.

Elizabeth A. Argenti, Esq.

Philip A. Butler, Esq.

Stewart and Stewart

September 2007

CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE

AREAS OF TECHNOLOGY TRANSFER, TRADE-RELATED

INVESTMENT MEASURES, SUBSIDIES AND

INTELLECTUAL PROPERTY PROTECTION WHICH

RAISE WTO COMPLIANCE CONCERNS
Acknowledgements:

Exhibit 19 - (Selected Trade Statistics) was prepared by Carl Moyer and

Catherine Chen of Stewart and Stewart.

Additional research and assistance provided by Patrick J. McDonough,

Esq., of Stewart and Stewart

Copyright © 2007 by The Trade Lawyers Advisory Group LLC

This project is funded by a grant from the U.S. Small Business Administration

(SBA). SBA’s funding should not be construed as an endorsement of any

products, opinions or services. All SBA-funded projects are extended to the public

on a nondiscriminatory basis.
i

CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY 

TRANSFER, TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL 

PROPERTY PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS

TABLE OF CONTENTS

PAGE

EXECUTIVE SUMMARY.............................................................................................. 1 

PART 1:

TRADE-RELATED INVESTMENT MEASURES (TRIMS) AND SUBSIDIES

I. INTRODUCTION ....................................................................................................... 5 

II. CHINA’S ACCESSION TO THE WTO........................................................................ 12 

III. POLICIES AND SUBSIDY PROGRAMS THAT POTENTIALLY VIOLATE 

CHINA’S COMMITMENTS ........................................................................................ 15 

A. Enforcing Technology Transfer Agreements ........................................ 17 

B. 11th Five-Year Plan for Utilizing Foreign Investment ........................ 21 

C. 2004 - Revised Automobile Policy ............................................................ 23 

D. Steel and Iron Industry Development Policy........................................ 29 

E. Programs Appearing in China’s Notification of 

Government Subsidies ............................................................................... 32 

IV. WTO PROVISIONS THAT ARE POTENTIALLY VIOLATED BY CHINESE 

POLICIES AND PROGRAMS..................................................................................... 35 

A. Agreement on Trade-Related Investment Measures............................ 36 

1. Interpreting TRIMs Under GATT ................................................. 42 

2. Interpreting TRIMs at the WTO.................................................... 44 

B. Article III:4 of the General Agreement on Tariffs and 

Trade 1994.................................................................................................... 46 

C. Article XI:1 of the General Agreement on Tariffs and Trade 

1994................................................................................................................ 49 

D. Article 3.1 of the Agreement on Subsidies and 

Countervailing Measures.......................................................................... 53 
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CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY 

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TABLE OF CONTENTS

PAGE

E. Relationships and Conflicts Between the TRIMs 

Agreement, the SCM Agreement and Article III of GATT .................. 55 

1. Article III of GATT 1994 and the SCM Agreement.................... 55 

2. The SCM Agreement and the TRIMs Agreement ...................... 56 

3. The TRIMs Agreement and Article III of the GATT 

1994 ...................................................................................................... 58 

F. Addressing Allegations Made Under Several Provisions .................. 59 

V. U.S. ACTION AT THE WTO ..................................................................................... 61 

A. Measures Affecting Imports of Automobile Parts................................ 62 

B. Certain Measures Granting Refunds, Reductions or 

Exemptions from Taxes and Other Payments ...................................... 70 

VI. FURTHER ACTION AGAINST CHINA AT THE WTO FOR POTENTIAL 

VIOLATIONS ............................................................................................................ 84 

A. Technology Transfer .................................................................................. 84 

1. China Continues to Require Technology Transfer 

Provisions in Contracts Contrary to Paragraph 7.3 of 

its Accession Protocol...................................................................... 86 

2. China Continues to Enforce Technology Transfer 

Provisions Made Effective Through Law, 

Regulations or Other Measures that are Contrary to 

Paragraph 7.3 of its Accession Protocol...................................... 89 

3. Article 3.8 of the Dispute Settlement Understanding.............. 91 

B. Additional VAT Programs ........................................................................ 92 
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CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY 

TRANSFER, TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL 

PROPERTY PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS

TABLE OF CONTENTS

PAGE

1. China’s Circular about VAT Exemption Policy for 

Certain Farming Materials (No. 113/2001), jointly 

issued by the Ministry of Finance and the State 

Administration of Taxation on July 20, 2001 ............................. 92 

a. Article III:2 Violation ........................................................... 93 

i. Article III: First Sentence ............................................ 94 

(a) Likeness of products; products’ 

properties, nature and quality; 

products’ end-uses......................................... 95 

(b) Consumers’ tastes and habits........................ 97 

(c) Tariff classification.......................................... 97 

ii. Article III: Second Sentence........................................ 101 

b. Article XXIII........................................................................... 103 

2. Consumption Taxes on Various Products .................................. 106 

PART 2:

TRADE-RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS (TRIPS)

I. INTRODUCTION ....................................................................................................... 110 

II. CHINA’S WTO OBLIGATIONS WITH RESPECT TO INTELLECTUAL 

PROPERTY RIGHTS................................................................................................. 112 

A. China’s Accession to the WTO.................................................................. 112 

B. Chinese IPR Laws Post-WTO Accession................................................. 116 

III. CHINA’S TRADING PARTNERS UTILIZE WTO PROVISIONS TO SEEK 

ADDITIONAL PROGRESS IN CHINA’S INTELLECTUAL PROPERTY 

REGIME.................................................................................................................... 117 
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PAGE

A. United States Requests Information Pursuant to TRIPS 

Article 63.3 ................................................................................................... 118 

B. U.S. Requests Formal Consultations With China Through 

WTO to Address Intellectual Property Laws and Protection............ 121 

IV. OTHER PROBLEMS WITH CHINA’S INTELLECTUAL PROPERTY LAWS 

AND REGULATIONS: THE CASE FOR ADDITIONAL WTO CHALLENGES............. 129 

A. Key Enforcement Provisions in TRIPS Agreement: General 

Obligations and Civil Procedures .......................................................... 131 

B. Low Damage Awards in Civil IPR Disputes ......................................... 137 

1. Low Damages Do Not Act as a Deterrent to Future 

Infringements .................................................................................... 138 

2. Effective Enforcement of Intellectual Property 

Rights Requires Adequate Compensation When 

Those Rights Are Infringed............................................................ 147 

C. China’s Evidentiary Requirements May Be Applied in a 

Way That is Overly Burdensome and Limits the Right 

Holder’s Ability to Effectively Enforce Their Rights........................... 152 

D. Destruction of Infringing Goods and Materials .................................. 160 
CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, 

TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY

PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS

EXECUTIVE SUMMARY 

1

When China joined the World Trade Organization (“WTO”), the Chinese government 

committed to far-reaching reforms to bring its laws and regulations into conformity with the 

WTO Agreements. China’s final “accession package” also included specific commitments made 

during the Working Party to address particular concerns of negotiating Members. The 

commitments addressed the market access of goods and services and included commitments 

related to investment, intellectual property, and subsidies. While China has made extensive 

revisions to its laws and regulations since joining the WTO, many of its laws, regulations, and 

practices appear to be inconsistent with certain WTO provisions and specific commitments made 

by China. This paper reviews some of the problems China has had with respect to technology 

transfer, investment measures, subsidies, and intellectual property protection, which raise WTO 

compliance concerns. 

As China has gradually reformed its laws and economic policies over the last two and a 

half decades, the extent of the central government’s control over development and the economy 

has gradually diminished. The commitments made by China during its WTO accession required 

that the government further relinquish such control. Amendments to China’s laws and 

regulations to make them WTO-compliant and consistent with specific commitments have 

decreased the level of direct government involvement in the economy. However, many 

interventionist policies, that the reforms were intended to alleviate, continue to be used. 

Primarily, these policies have the effect of restricting foreign investment and promoting 

domestic companies. The Chinese government continues to use import substitution policies to 

direct and stimulate the economic development of certain sectors and to move the economy into 
CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, 

TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY

PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS

EXECUTIVE SUMMARY 

2

more technologically-advanced sectors. Specifically, these policies encourage technology 

transfer, export performance, and the use of local content requirements. China has also 

maintained indirect policy tools such as subsidies to guide resources into activities the 

government favors. Industrial policies maintain government involvement by “encouraging” 

practices that the government deems beneficial to economic development. This is true for new 

policies as well as those policies that were amended to remove WTO-inconsistent requirements. 

While “encouraging” economic development is not a WTO violation, many U.S. businesses have 

complained that, often, “encouraged” policies are, in effect, “requirements” for access to the 

Chinese market. 

Since China’s accession, the U.S. has worked with China at the bilateral and multilateral 

levels to address U.S. industry concerns over China’s policies. Recently, the U.S. filed two 

requests for the establishment of panels under the WTO’s dispute settlement mechanism to 

review allegations concerning China’s automobile policies and certain subsidies that are not 

consistent with China’s WTO commitments. However, there remain other Chinese programs 

and industrial policies that the Chinese government uses to restrict foreign investment and 

provide more favorable treatment to domestic businesses. 

Additionally, with respect to intellectual property (“IP”), China committed to bring all of 

its laws and regulations into compliance with the obligations laid out in the Agreement on TradeRelated Aspect of Intellectual Property Rights (TRIPS). In the years following accession, China 

has made many substantive reforms to its IP laws, and there is now general agreement that such 

laws are not substantively inconsistent with the WTO obligations. However, the TRIPS 
CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, 

TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY

PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS

EXECUTIVE SUMMARY 

3

Agreement also contains specific provisions with respect to enforcement of IP rights, which lay 

out, inter alia, the general obligation that a Member must provide enforcement measures that 

allow for effective action against acts of IP infringement. This general obligation further 

provides that such enforcement measures must include remedies that are sufficient to deter future 

infringements. 

There have been persistent concerns voiced by China’s trading partners since the time of 

its accession that enforcement of China’s IP laws is lacking and overall protection of IP rights is 

inadequate. Members have provided technical assistance to China and continue to engage in 

dialogues in efforts to decrease the high levels of IP theft. However, despite China’s efforts to 

bolster its enforcement mechanisms, Members continue to be concerned with the lack of criminal 

prosecutions, low administrative fines and civil damages, and inadequate disposal of infringing 

goods and tools. 

While the United States recently initiated a case at the WTO regarding certain aspects of 

China’s laws relating to protection and enforcement of intellectual property rights, there are 

additional enforcement challenges that could be addressed through this venue. Multiple aspects 

of China’s civil enforcement system appear to frustrate a right holder’s ability to enforce its 

rights and, thus, do not actually permit effective action against any act of infringement. Chinese 

judicial authorities regularly award low damages in civil IP disputes, which fails to deter future 

infringements and generally fails to adequately compensate the right holders for their injury as a 

result of IP infringement. Additionally, Chinese judges rarely order that the infringing goods and 

production tools to be destroyed, which leaves the means for additional infringement in the 
CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, 

TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY

PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS

EXECUTIVE SUMMARY 

4

control of the infringer, and severely hampers the goal of deterring future infringements. All of 

these deficiencies are inconsistent with China’s enforcement obligations under the TRIPS 

Agreement. 

Given that certain aspects of China’s laws, regulations and procedures remain 

inconsistent with various provisions of the WTO agreements, the United States should consider 

pursuing additional action through the WTO dispute settlement process in the following areas: 

Deficiency in Law or Practice WTO Articles Involved 

China has failed to “eliminate and cease to enforce” 

technology transfer provisions in laws and industrial 

policies. 

Paragraphs 1.2 and 7.3 of Part I 

of China’s Accession Protocol 

China has failed to abide by the terms agreed to in its 

Accession Protocol. 

Article XII:1 of the Marrakesh 

Agreement Establishing the 

World Trade Organization 

Differential tax policy discourages the use of foreignproduced products over domestically-produced products. Article III:2 of GATT 1994 

Differential tax policy nullifies or impairs benefits accrued 

to the United States. Article XXIII of GATT 1994 

China’s Consumption Tax favors domestically-produced 

consumer goods over foreign-produced goods. Article III:2 of GATT 1994 

Low damages in civil disputes do not constitute a deterrent 

to future infringements, nor do they adequately compensate 

the right holder for the infringement. 

TRIPS Articles 41.1, 42 and 

45.1 

China’s evidentiary requirements in civil procedures 

effectively frustrate, rather than ensure, a right holder’s 

ability to take action against infringement. 

TRIPS Articles 41.1, 41.2, 42, 

and 43.1 

Limited destruction of infringing goods and production 

tools in civil disputes fails to constitute a remedy that deters 

future infringements. 

TRIPS Articles 41.1 and 46 
CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, TRADERELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY PROTECTION

WHICH RAISE WTO COMPLIANCE CONCERNS

TRADE LAWYERS ADVISORY GROUP

SEPTEMBER 2007

5

PART 1:

TRADE-RELATED INVESTMENT MEASURES (TRIMS) AND SUBSIDIES

I. INTRODUCTION

When China emerged from the Cultural Revolution, the government introduced 

fundamental economic changes to help modernize the existing command economy. In 

implementing policies of reform and openness, China realized the importance of attracting 

foreign capital and advanced technology and the need for greater participation in international 

trade.1 China also began using various policy instruments to promote exports and restrain 

imports, not to gain foreign exchange, “but strictly limited to realize the ultimate goal of import 

substitution.”2

 In the mid-1980s, China’s reforms spread to the manufacturing sector through the 

establishment of Special Economic Zones (SEZs) aimed at attracting foreign investment and 

technology, and oriented towards export processing. The SEZs offered foreign investors large 

subsidies in the form of land and preferential tax treatment.3

 However, foreign investors were 

then subject to laws and regulations that required technology transfer, use of local content, 

foreign exchange balancing, and minimum export performance. An important element of the 

SEZs, and an important step in decentralization of power in China, was that local authorities 

 

1

 Thomas Yunlong Man, National Legal Restructuring in Accordance with International Norms: GATT/WTO 

and China’s Foreign Trade Reform, 4 Ind. J. Global Legal Stud. 471, 476 (1996-1997). 

2

 Id. See also Terence P. Stewart et al., The Crisis in Intellectual Property Protection and China’s Role in that 

Crisis, The Trade Lawyers Advisory Group LLC (May 2007) at 27 [hereinafter The Crisis in Intellectual 

Property Protection]. 

3

 For a more complete discussion on the development of Special Economic Zones and other “Special Areas”, 

see, e.g. Elson Pow & Michael J. Moser, Law and Investment in China’s Special Investment Areas, in 

Foreign Trade, Investment, and the Law in the People’s Republic of China 199 (Michael J. Moser ed., Oxford 

University Press 2nd ed. 1987). 
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were given greater decision-making powers in approving investments and for providing tax 

benefits.4

When China reapplied for GATT membership in 1987, the government began the process 

of reforming China’s laws and regulations to bring them into compliance with GATT Articles 

and Codes and with the demands of trading partners in the Working Party. In 1992, China and 

the United States completed a Memorandum of Understanding on Market Access, which 

included a commitment by China to eliminate all import substitution policies. 5 Despite China’s 

commitment, two years later China introduced a new Automobile Policy with import substitution 

measures.6

 Similarly, while China claimed that direct financial subsidies on exports had ended 

in 1991, USTR reported in 1997 that China was continuing to use a variety of methods to support 

and promote exports, including preferential loan policies and preferential tax policies. 7

 

Additionally, China continued to promote exports using foreign exchange earnings requirements 

on foreign trade corporations and export requirements on foreign-invested enterprises.8

 Soon 

 

4

 George O. White III, Foreigners at the Gate: Sweeping Revolutionary Changes on the Central Kingdom’s 

Landscape – Foreign Direct Investment Regulations & Dispute Resolution Mechanisms in the People’s 

Republic of China, 3 Rich. J. Global L. & Bus 95, 120 (2003). 

5

 In the 1998 National Trade Estimate Report on Foreign Trade Barriers, USTR reported that in a 1992 

Memorandum of Understanding, China confirmed that it had eliminated all import substitution measures and 

in the future would no longer use such methods. See United States Trade Representative, 1998 National 

Trade Estimate Report on Foreign Trade Barriers, at 49 [hereinafter National Trade Estimate 1998].

6

 “This policy, designed to foster development of a modern automobile industry in China, explicitly calls for 

production of domestic automobiles and automobile parts as substitutes for imports, and establishes local 

content requirements, which would force the use of domestic products, whether comparable or not in quality 

and price.” See Id. 

7

 United States Trade Representative, 1997 National Trade Estimate Report on Foreign Trade Barriers, at 52 

[hereinafter National Trade Estimate 1997].

8

 Id. 
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after the United States concluded its bilateral accession agreement with China in 1999, USTR 

commented that since the 1992 MOU there had been improvements but that “apparent import 

substitution policies by the Chinese government continue to occur” and that China continued to 

use export subsidies and export requirements.9

Since joining the World Trade Organization (“WTO”) in December 2001, the Chinese 

government has continued to pass laws and regulations to bring China into conformity with its 

WTO commitments. A year after China’s accession, China reported to the Committee on TradeRelated Investment Measures that China had revised the three Chinese laws that are most 

relevant to foreign investment “and their respective implementing regulations, including the 

elimination and cessation of enforcement or requirements on trade and foreign exchange 

balancing, local content, export performance, compulsory technology transfer, and etc.” 10 

However, there are concerns that reform efforts in China have stalled. 

Members complain that some of the legislation revised during this period continues to 

provide export subsidies and to promote import substitution policies. Specifically, many of the 

policies encourage technology transfer, and are keyed to export performance and the use of local 

 

9

 United States Trade Representative, 2000 National Trade Estimate Report on Foreign Trade Barriers, at 47 

and 49 [hereinafter National Trade Estimate 2000]. 

10 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/586 (12 November 2002) 

at Annex ¶6; The “Law of the People’s Republic of China on Chinese-Foreign Equity Joint Venture; Law on 

Chinese-Foreign Contractual Joint Venture; and Law on Wholly Foreign Owned Enterprises are the three 

laws of fundamental importance concerning foreign investment administration.” Id. at Annex ¶ 7. 
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WHICH RAISE WTO COMPLIANCE CONCERNS

TRADE LAWYERS ADVISORY GROUP

SEPTEMBER 2007

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content.11 Direct intervention by the government has shifted toward the use of various indirect 

policy tools, including subsidies, to guide resources into certain activities. Of particular concern 

to USTR are China’s subsidy practices in steel, petrochemicals, high technology sectors, forestry 

and paper products, textiles, wood, machinery and copper and other non-ferrous metals 

industries. 12 However, as China’s subsidy programs are often the result of non-public 

administrative measures, the lack of transparency has made it difficult for China’s trading 

partners to “identify and quantify possible export subsidies.”13 It is also difficult to know 

“whether particular provisions of the TRIMs Agreement may be implicated or not.”14

Recently implemented industrial policies, such as the 2004 Automobile Policy and the 

2005 Steel and Iron Industry Development Policy, have caused concern among China’s trading 

partners, as they appear to provide some reforms, but do not live up to the obligations China took 

on in joining the WTO. In 2007, USTR reported that China continues to “resort to industrial 

policies that limit market access for non-Chinese-origin goods ...., and that provide substantial 

government resources to support Chinese industries and increase exports.” 15 The U.S. 

representative made a similar claim to the Committee on Trade-Related Investment Measures in 

2006, characterizing “China’s increasing use of policies that restrict foreign investment while 

 

11 United States Trade Representative, 2007 National Trade Estimate Report on Foreign Trade Barriers, at 134 

[hereinafter National Trade Estimate 2007]. 

12 Id. at 104-105. 

13 Id. at 105. 

14 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/792 (27 October 2006) at 

Annex I ¶ 55. 

15 National Trade Estimate 2007 at 80. 
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promoting domestic companies as a step backwards.”16 In a September 2006 report assessing the 

implementation of China’s WTO commitments, the U.S. Chamber of Commerce stated that, in 

the previous 12 months, it had witnessed an “upsurge in industrial planning measures as tools of 

economic development by central government authorities.”17

As might be expected, the primary purpose of these policies is to enhance the long-term 

economic growth of the country by stimulating development in certain strategic sectors favored 

by the Chinese government. The policies allow the government to intervene and promote sectors 

that are supported and encouraged by the State by limiting the market access of foreign goods, 

giving preferential treatment to domestic goods, and extracting technology from foreign 

investors.18

In China’s first Trade Policy Review (“TPR”) in 2006, the WTO Secretariat reported that 

China’s “industrial policy remains an important feature of government policy and various 

measures are used to encourage investment in certain sectors and discourage investment in 

 

16 Report of the Chairman, Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of 

Accession of the People’s Republic of China to the World Trade Organization, G/L/792 (27 October 2006) at 

¶ 12. 

17 China’s WTO Implementation and Other Issues of Importance to American Business in the U.S.-China 

Commercial Relationship, U.S. Chamber of Commerce Report (September 2006) at 7. 

18 Id. at 23. The Chamber states that China’s use of “industrial policies to foster the development of strategic 

sectors is of mounting concern to the Chamber and a broad cross-section of U.S. industry...A key aim of 

many such policies is to enable Chinese firms to obtain low- or no-cost access to patented technologies and 

other innovations owned by foreign rights holders.” The Chamber continues that it believes that “the use of 

such reforms to advance a single industrial policy goal – namely to gain advantages for Chinese domestic 

companies at the expense of overseas economic interests – undermines the U.S.-China” trading relationship. 

Id. at 24. 
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others.”19 In 2005, then Assistant U.S. Trade Representative Charles Freeman stated that the 

“objective of these policies seems to be to support the development of Chinese industries that are 

higher up the economic value food chain than the industries that make up China’s current laborintensive base, or simply to protect less-competitive domestic industries.”20 Similarly, the WTO 

reports that to “encourage domestically owned firms to move up the value-added chain, China is 

currently encouraging investment in high technology based manufacturing and uses ‘guidance’ 

as well as trade policy instruments for this purpose.”21

While the majority of these policies provide specific industries and enterprises with 

preferential tax benefits to promote the exportation or use of local products, no longer mandated 

policies such as technology transfer remain in the text of China’s laws, regulations, and, 

industrial policies as an “encouraged” policy.22 However, U.S. companies have complained 

“that this ‘encouragement’ in practice can amount to a ‘requirement’ in many cases, particularly 

in light of the high degree of discretion provided to Chinese government officials when 

reviewing investment applications.”23 Some critics complain that Chinese officials are able to 

make “encouraged” policies mandatory by using access to the burgeoning Chinese market as the 

 

19 Trade Policy Review: China, Report by the Secretariat, WT/TPR/S161/Rev.1 (26 June 2006) at p. xii. 

20 Statement of Charles W. Freeman III, Assistant U.S. Trade Representative of China Affairs, Office of the U.S. 

Trade Representative, Testimony Before the Full Committee of the House Committee on Ways and Means 

(April 14, 2005). 

21 Trade Policy Review: China, Report by the Secretariat, WT/TPR/S161/Rev.1 (26 June 2006) at p. xiii. 

22 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/586 (12 November 2002) 

at ¶ 69. 

23 National Trade Estimate 2007 at 134. 
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stick to obtain agreement.24 Specifically, U.S. businesses have alleged that Chinese government 

officials consider factors such as local content and export performance in the investment 

approval process and for recommending the approval of loans from Chinese banks, “which is 

often essential to the success of an investment project.”25 Similarly, there are allegations that 

“various Chinese officials” continue to pressure foreign investors to transfer technology.26

When China joined the WTO, the Chinese government committed itself to far-reaching 

reforms that required it to lower trade barriers, provide national treatment, improve market 

access, and, in light of the government’s large role in the economy, to adopt special rules 

regarding the operation of state-owned enterprises.27 However, six years after joining the WTO, 

many of China’s industrial policies and subsidy programs appear to be inconsistent with China’s 

WTO commitments contained in the WTO Agreement and/or China’s Protocol of Accession 

(including specific Commitments made by China in the Working Party which are incorporated in 

its Protocol of Accession). 

This report begins with a discussion of the general and specific commitments made 

during China’s accession to the WTO that pertain to industrial policies and subsidy programs 

 

24 Written Statement of Anthony Rock, Principal Deputy Assistant Secretary of State Bureau of Oceans and 

International Environmental and Scientific Affairs, Hearing on China’s High Technology Development 

Before U.S. – China Economic and Security Review Commission, April 21-22, 2005. 

25 National Trade Estimate 2007 at 134. 

26 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/586 (12 November 2002) 

at Annex ¶ 59. 

27 Statement of Charles W. Freeman III, Assistant U.S. Trade Representative of China Affairs, Office of the U.S. 

Trade Representative, Testimony Before the Full Committee of the House Committee on Ways and Means 

(April 14, 2005). 
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discussed herein. The report then contains a summary of the concerns expressed by China’s 

trading partners regarding these policies and programs. This is followed by an explanation of the 

specific provisions from Article III of GATT 1994, the TRIMs Agreement, and the SCM 

Agreement that are potentially violated by Chinese policies, how these provisions are interrelated, 

and how they have been interpreted by the WTO’s dispute settlement system of panel and 

Appellate Body decisions. The report then looks at two recent WTO requests by the United 

States for the establishment of panels in disputes involving Article III, the TRIMs Agreement, 

and the SCM Agreement. Finally, the report examines other policies and programs that 

potentially violate these same provisions and which could be challenged by the U.S. at the WTO. 

II. CHINA’S ACCESSION TO THE WTO 

The final “accession package” for an acceding WTO Member consists of the schedule of 

market access commitments in goods and services, the Protocol of Accession and the 

commitments identified in the Working Party Report which are then incorporated in the Protocol. 

Generally speaking, commitments made by an acceding country during the Working Party are 

responses to concerns expressed by Member countries. During the Working Party, China made 

many specific commitments, including a number of commitments pertaining to investment 

measures, subsidies, and “national treatment.”28

 

28 Certain commitment paragraphs from the Working Part Report are incorporated in China’s Protocol of 

Accession and are an integral part of China’s obligations. See Accession of the People’s Republic of China, 

Protocol on Accession, WT/L/432 (10 November 2001) at Part I, ¶ 2 [hereinafter Accession Protocol]. 
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With respect to “national treatment,” China agreed to abide by the rules in Article III of 

GATT 1994 and confirmed to the Working Party that in the implementation of laws, regulations, 

and administrative requirements that the “principle of non-discrimination between domestically 

produced and imported products would be ensured...[and], by accession, China would repeal and 

cease to apply all such existing laws, regulations and other measures whose effect was 

inconsistent with WTO rules on national treatment.”29 Additionally, China confirmed that in 

order to provide full national treatment, all measures would be taken at the “national and subnational level.”30

Foreign individuals and enterprises and foreign-funded enterprises would be accorded 

“treatment no less favorable” than that accorded domestic companies in the “procurement of 

inputs and goods and services necessary for production and the conditions under which their 

goods are produced, marketed or sold, in the domestic market and for export.”31 Specifically, 

laws and regulations relating to the assessment of fees, charges, or taxes on imports and exports 

would conform with China’s obligations under Articles III:2 and III:4, and XI:1 of GATT 1994. 

In addition to the general commitment to comply with the TRIMs Agreement, China gave 

specific commitments for implementing the Agreement and for amending its laws. Paragraph 

 

29 Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) [hereinafter 

Working Party Report] at ¶ 22. 

30 Id. at ¶ 23 “China’s local regulations, rules and other measures of local governments at the sub-national level 

shall conform to the obligations undertaken in the WTO Agreement and this Protocol.” See also Accession 

Protocol at Part I, ¶ 1.3 

31 Id. at Part I, ¶ 2(D)3. 
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7.3 of China’s Protocol of Accession incorporates commitments made by China to the Working 

Party. The paragraph states that: 

China shall, upon accession, comply with the TRIMs Agreement, 

without recourse to the provisions of Article 5 of the TRIMs 

Agreement. China shall eliminate and cease to enforce trade and 

foreign exchange balancing requirements, local content and export 

or performance requirements made effective through laws, 

regulations or other measures. Moreover, China will not enforce 

provisions of contracts imposing such requirements. Without 

prejudice to the relevant provisions of this Protocol, China shall 

ensure that the distribution of import licenses, quotas, tariff-rate 

quotas, or any other means of approval for importation, the right of 

importation or investment by national and sub-national authorities, 

is not conditioned on: whether competing domestic suppliers of 

such products exist; or performance requirements of any kind, such 

as local content, offsets, the transfer of technology, export 

performance or the conduct of research and development in 

China.32

Although China assumed a commitment to abolish its TRIMs, effective the date of 

joining the WTO, “China never made any formal notification of its TRIMS to the relevant WTO 

bodies.” 33 However, on June 16, 2000, China did provide the working party with a draft table of 

Chinese legislation that it planned to amend to ensure conformity with the TRIMs Agreement.34 

 

32 Id. at Part I, ¶ 7.3, See also Working Party Report at ¶¶ 49, 83(a). 

33 Committee on Trade-Related Investment Measures: Communication from the European Community and its 

Member States, G/TRIMS/W/21 (24 September 2002) at 1. 

34 See Tables in Exhibits 1 and 2. Table 1 lists the laws and regulations that were contained in the draft table and 

their dates of amendments. In this same draft document, China submitted two tables labeled Local Content 

Requirement and Foreign Exchange Balance Requirement. These tables are purportedly notifications, 

pursuant to Article 5 of TRIMS, of Chinese investment measures that were not in conformity with the TRIMs 

Agreement. See Working Party on the Accession of China, Communication from China, WT/ACC/CHN/20 

(16 June 2000) at 22-25, Table AII.2; see also Agreement on Trade-Related Investment Measures, April 15, 

1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, The Legal Texts: The 

Results of the Uruguay Round of Multilateral Trade Negotiations 143 (1999), 1868 U.N.T.S. 186 [hereinafter 

TRIMS Agreement]. 
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China made additional commitments to the Working Party with respect to amendments to 

China’s Industrial Policy for the Automotive Sector to ensure consistency with WTO rules and 

principles.35 Specifically, China stated that it would “unify its laws, regulations and standards 

applied to domestic and imported automobiles and parts...[and] establish a transparent system 

under which all the laws and regulations would be applied so as to accord imported products 

treatment no less favorable than that accorded to like products of national origin.”36

With respect to subsidies, China promised to “eliminate all export subsidies, within the 

meaning of Article 3.1 (a) of the SCM Agreement, by the time of accession.”37 Upon accession, 

China would “cease to maintain all pre-existing export subsidy programmes and, upon accession, 

make no further payments or disbursements, nor forego revenue or confer any other benefit, 

under such programmes.”38 China’s commitment covered subsidy programs at all levels of the 

Chinese government.39 Additionally, China made a specific commitment to eliminate subsidies 

that are contingent upon the use of domestic goods over imported goods.40

III. POLICIES AND SUBSIDY PROGRAMS THAT POTENTIALLY VIOLATE 

CHINA’S COMMITMENTS

Since China’s accession to the WTO, China’s trading partners have used several 

multilateral and bilateral mechanisms to monitor the implementation of China’s accession 

 

35 Working Party Report at ¶ 204. 

36 Id. at ¶ 196. 

37 Id. at ¶ 167. 

38 Id. 

39 Id.

40 Id. at ¶ 168. 
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commitments. 41 At the multilateral level, the primary mechanism for monitoring China’s 

progress has been the Transitional Review Mechanism (“TRM”). Pursuant to Paragraph 18 of 

China’s Accession Protocol, “subsidiary bodies of the WTO” must review annually, within their 

mandate, the implementation by China of the WTO Agreement and the related provisions of 

China’s Accession Protocol.42 Specifically, in the Committee for Trade-Related Investment 

Measures, China’s trading partners monitor the changes and implementation of China’s 

investment laws, regulations, and policies.43 In the Committee on Subsidies and Countervailing 

Measures, trading partners are given the opportunity to question China’s subsidy practices and 

monitor China’s commitment to phase-out certain subsidy programs.44 

 

41 The Joint Commission on Commerce and Trade was established in 1983 and is the primary bilateral forum 

for the United States and China to discuss trade issues and to promote bilateral commercial opportunities. 

See The Crisis in Intellectual Property Protection at 136-150. 

42 Pursuant to Article 18.4, China agreed to annual reviews for eight years, beginning in the first year and with a 

final review in year ten or at an earlier date decided by the General Council. See Accession Protocol at Part I, 

¶¶ 18.1-18.4. 

43 Under Article 18 of China’s Accession Protocol members are allowed to ask China questions and China is 

required to provide relevant information. Under Annex 1A of the Protocol, China must notify the Committee 

of Trade-Related Investment Members of: 

(a) elimination and cessation of enforcement of trade and foreign exchange 

balancing requirements, local content and export performance offsets and 

technology transfer requirements made effective through laws, regulations or 

other measures 

(b) amendments to ensure lifting of all measures applicable to motor vehicle 

producers restricting the categories, types or models of vehicles permitted for 

production (to be completely removed two years after accession) 

(c) increased limits within which investments in motor vehicle manufacturing 

could be approved at the provincial government at the levels outlined in the 

Report 

See Accession Protocol, Information to be Provided by China in the Context of the Transitional Review 

Mechanism, Annex 1A. 

44 Pursuant to Article 25 of the Agreement on Subsidies and Countervailing Duties, Members are required to 

provide an annual notification of subsidy programs. 
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This section reviews Chinese industrial policies and specific subsidy programs that 

appear to be inconsistent with China’s WTO commitments and the issues presented by China’s 

trading partners within the TRM. 

A. Enforcing Technology Transfer Agreements 

During China’s accession, Working Party members expressed concern about Chinese 

laws, regulations, and measures affecting technology transfer.45 The Members were concerned 

that investment decisions were being made with government interference – conditioning 

investment approval upon technology transfer.46 The Members requested that China ensure that 

there would be no government interference in developing the terms and conditions for 

technology transfer and any such agreement would be between only the investment parties.47 

Chinese officials confirmed that China “would only impose, apply or enforce laws, regulations 

or measures relating to the transfer of technology, production processes, or other proprietary 

knowledge” if it were not inconsistent with TRIPS and TRIMs.48 The “terms and conditions of 

technology transfer, production processes or other proprietary knowledge, particularly in the 

context of an investment, would only require agreement between the parties to the investment.”49 

Thus, the government would not condition investment approval upon technology transfer and the 

 

45 Working Party Report at ¶ 48; Exhibit 19 contains selected trade statistics, including certain high-tech 

products. 

46 Id.

47 Id.

48 Id. at ¶ 49. 

49 Id. at ¶ 49. 
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“Chinese authorities would not enforce the terms of contracts containing such requirements.”50 

Nonetheless, the Chinese representative stipulated that China would respect the freedom of 

contract.51

The conditioning of investment approval on technology transfer and the Chinese 

government’s role in such an agreement has consistently been an issue throughout the TRM 

process. Members have continued to question China’s enforcement of contracts, signed before 

China became a member of the WTO, which contain technology transfer clauses and revised 

laws, regulations, and investment policies which continue to encourage the practice. 

Just prior to joining the WTO, China amended its laws and regulations concerning SinoForeign Equity Joint Ventures.52 These amendments removed exchange balancing requirements 

and local content requirements. The laws also removed mandatory technology transfer, but they 

appear to still encourage the practice. Specifically, Article 5 of the Sino-Foreign Equity Joint 

Ventures Law states that equipment provided in a joint venture “must be advanced technology 

and equipment that suit” China’s needs.53 In Chapter IV of the Regulations, Articles 41 and 43, 

respectively, require that the technology acquired be “appropriate and advanced” and that 

“technology transfer agreements signed by a joint venture shall be submitted for approval to the 

 

50 Id. at ¶ 203. 

51 Id. 

52 Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures, Order of the President of the 

People’s Republic of China No. 48 (entered into force March 15, 2001); Regulations for the Implementation 

of the Law of the People’s Republic of China on Joint Ventures Using Chinese and Foreign Investment 

(entered into force July 22, 2001), available at: www.fdi.gov.cn, attached as Exhibits 3 and 4. 

53 Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures, Order of the President of the 

People’s Republic of China No. 48 (entered into force March 15, 2001). 
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examination and approval authority.”54 Thus the EC has noted that these Articles still “impose[] 

requirements on technology transfer agreements concluded by Joint Ventures.”55 Additionally, 

the agreement must comply with seven stipulations, including limiting the agreement to ten years 

and giving the importing party continuous use of the technology after the expiration of the 

agreement.56

China’s trading partners have also expressed concern about the enforcement of contracts 

entered into before China’s accession to the WTO, when China’s laws contained mandatory 

technology transfer provisions. 57 The parties questioned whether the technology transfer 

provisions would be enforced and if that enforcement was “mandated by legislation, guidelines 

or other measures.”58 Specifically, the EC delegation wanted to know if such contracts are now 

considered null and void and if there were measures in place to protect foreign investors from a 

lawsuit or administrative action for refusing to follow contracts made under previous laws that 

require technology transfer. 59 The EC has consistently held the view that the enforcement of 

 

54 Regulations for the Implementation of the Law of the People’s Republic of China on Joint Ventures Using 

Chinese and Foreign Investment (entered into force July 22, 2001). 

55 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/792 (27 October 2006) at 

Annex 1, ¶ 16. 

56 Regulations for the Implementation of the Law of the People’s Republic of China on Joint Ventures Using 

Chinese and Foreign Investment (entered into force July 22, 2001). 

57 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/586, (12 November 2002) 

at Annex ¶ 57. 

58 Id. 

59 Id.
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such contracts violates China’s commitment “to ensure that contracts which contain TRIMsincompatible commitments and obligations are no longer enforced.”60

China has responded that previous laws contained mandatory technology transfers and 

the current laws only encourage technology transfer. Parties to contracts made under the 

previous law are welcome to renegotiate, but any amendment must be approved by a “competent 

authority.” Otherwise, the foreign investor should continue to honor the contract.61 In 2004 

China stated further that: 

all existing commercial contracts on joint venture operation and 

technology transfer, since they had been signed by the relevant 

parties in consideration of their own business interests, the parties 

involved should negotiate about the amendment of those contracts 

themselves on the basis of fairness, justice and equality. The 

contracts should not be regarded as invalid automatically or be 

annulled through or by government actions or interference.62

In 2005, China elaborated on this statement, but confirmed that “without the consensus 

reached through consultation between the consenting parties on any terms of an existing contract, 

 

60 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Communication from the European Community and its 

Member States, G/TRIMS/W/36 (13 September 2004) at ¶ 8. 

61 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/586 (12 November 2002) 

at Annex ¶ 25. 

62 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/708 (8 November 2004) at 

¶ 20. 
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the contract itself or some of its articles could not be altered or invalidated by a Chinese court or 

any other administrative body through a mandatory order.”63

However, the EC has continued to push China on this issue, reminding China that 

“Paragraph 3 of the Protocol of accession lays out a clear obligation for China to not only abolish 

or amend TRIMs-incompatible legislation, but also to ensure that any contracts containing 

TRIMs-incompatible commitments and obligations would not be enforced.”64 Additionally, if 

contracts are not considered invalid and must be renegotiated, how is China able to “ensure that 

the ‘approval for investment by national and sub-national authorities’ is not conditioned on 

performance requirements of any kind?” In the most recent TRM, the representative of China 

refused to address this issue and referred the EC to previous responses.65

B. 11th Five-Year Plan for Utilizing Foreign Investment 

In November 2006, China published the 11th five-year plan for utilizing foreign 

investment. 66 The plan gives priority to quality investments rather than the quantity of 

investments, focusing less on bringing large amounts of money into the Chinese economy and 

 

63 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/751 (24 October 2005) at ¶ 

22. 

64 Committee on Trade-Related Investment Measures, Communication from the European Union, 

G/TRIMS/W/41 (1 August 2005) at ¶¶ 5-6. 

65 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/792 (25 October 2006) at ¶ 

33. 

66 New Policy Stresses Quality of Foreign Investment (November 9, 2006), available at: 

http://english.gov.cn/2006-11/09/content_437842.htm. 
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more on investments that bring with them valuable skills and technology.67 At the same time, 

the policy criticizes foreign investors for abusing intellectual property laws, which allegedly 

stymies “Chinese enterprises’ capacity for independent innovation.”68 To increase value-added 

production, the policy “stresses the need for more foreign investment in areas such as research 

and development as well as sophisticated design.”69 Additionally, “[p]riority shall be given to 

the introduction of advanced technologies, management expertise and high-quality talents, rather 

than the use of foreign capital.”70

China’s trading partners have questioned how China will be able to promote foreign 

investment in higher value-added activity and encourage greater technology transfer in a manner 

that is consistent with China’s WTO commitments.71 “While the foreign investment plan states 

that foreign investment will continue to be welcome in China, it enunciates policy tools that may 

be used to halt foreign investment that is inconsistent with China’s stated investment goals.”72

 

67 Andrew Batson, Beijing Redraws Road Map on Foreign Investment, Wall St. J., November 10, 2006. 

68 New Policy Stresses Quality of Foreign Investment (November 9, 2006), available at: 

http://english.gov.cn/2006-11/09/content_437842.htm. 

69 Id. 

70 Id.

71 Constants and Variables: The Evolving Context for Foreign Investors in China, remarks of Sharon J. Mann, 

Global Business Dialogue, Washington D.C., (May 11 2007), (copy on file with author). 

72 Id. citing Art 4(7). 
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C. 2004 - Revised Automobile Policy 

Before China’s accession to the WTO, “China’s automobile industrial policy offered 

significant advantages for foreign-invested factories using high levels of local content.” 73 

During its WTO accession, China committed to issuing, within two years of accession, a revised 

automotive policy that was compatible with WTO rules and principles.74 Pursuant to Article of 5 

of the TRIMs Agreement, China notified the Working Party of the Articles within the 1994 

Automotive Policy that would be amended to make them compliant with the TRIMs Agreement, 

which forbids foreign exchange requirements and local content requirements.75 Just before 

acceding to the WTO, China issued Bulletin No. 13 which provided that local content 

requirements would be abolished upon China’s accession.76

Additional commitments made during the Working Party included China’s commitment, 

within two years of accession, to lift measures that restrict the categories, types or models of 

vehicles permitted for production. 77 However, China retained the right to “continue to 

distinguish between trucks and buses, light commercial vehicles, and passenger cars (including 

multi-purpose vehicles and sport utility vehicles).”78 The level of investment, where only local 

government approval is necessary, would be incrementally raised after one-year, two-years and 

 

73 National Trade Estimate 2007 at 83. 

74 Working Party Report at ¶ 204. 

75 Id. at 22-25. 

76 National Trade Estimate 2007 at 83. 

77 Working Party Report at ¶ 205.

78 Id. 
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four-years after accession from $30 million to $60 million, $90 million, and $150 million, 

respectively.79 Finally, China also agreed to remove, on the date of accession, the 50 percent 

foreign equity limit for joint-ventures.80

Two years after China’s accession, a new Automobile Policy had not been issued and, 

notwithstanding the issuance of Bulletin No. 13, U.S. automobile manufacturers reported that 

“local government officials continued to require local content and cited the old automobile 

industrial policy’s standards.”81 In May of 2004 the Chinese government issued a new Policy on 

the Development of the Automotive Industry.82 According to the Chinese government, the new 

policy contains major improvements over the old Policy by removing inconsistent provisions, 

such as the “requirements on foreign exchange balance, local content and export performance” 

and deregulating administrative approvals.83

However, China’s trading partners have questioned certain provisions in the new 

policy. 84 Specifically, the U.S. has questioned Article 47, which requires a “minimum 

investment of RMB 2 million, of which owned capital should not be less than RMB 800 

 

79 Id. at ¶ 206. 

80 Id. at ¶ 207. 

81 National Trade Estimate 2007 at 83. 

82 Policy on Development of Automotive Industry, State Development and Reform Commission, Order No. 8 

(May 21, 2004), attached as Exhibit 5. 

83 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/708 (8 November 2004) at 

¶ 19. 

84 Exhibit 19 contains selected trade statistics, including statistics on auto parts. 
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million”85 The article also requires the establishment of an R&D facility with an investment of 

no less that RMB 500 million.86 Article 3 states that auto production “enterprises shall be 

encouraged to improve the research and development ability and technological innovation ability, 

and positively develop products with self-owned intellectual property rights and pursue the 

strategy of famous-brand operation. In 2010, the auto production enterprises shall form some 

famous-brand products of automobiles, motorcycles and components and parts.”87 Additionally, 

in Annex II of the new Automobile Policy is a requirement that technology transfer agreements 

be filed by parties seeking approvals for new production plants.88 The U.S. has specifically 

questioned China on how these Articles are consistent with China’s commitments in paragraph 

7.3 of China’s Protocol of Accession and paragraph 203 of China’s Working Party Report.89

Article 48 of the new Policy requires that foreigners not gain majority ownership in joint 

ventures and allows for a foreign investor to establish no more than two joint ventures producing 

the same class of vehicle (passenger car, commercial cars, and motorcycles).90 The EC has 

argued that no such caps exist in the export processing zones, and thus “in order to obtain 

 

85 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Questions from the United States to China Concerning 

Trade-Related Investment Measures, G/TRIMS/W/47 (26 September 2006) at ¶ 1. 

86 Id. 

87 Policy on Development of Automotive Industry, State Development and Reform Commission, Order No. 8 

(May 21, 2004), attached as Exhibit 5. 

88 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Additional Questions from the United States to China 

Concerning Trade-Related Investment Measures, G/TRIMS/W/37 (23 September 2004) at ¶ 4. 

89 Id. at ¶ 3. 

90 Policy on Development of Automotive Industry, State Development and Reform Commission, Order No. 8 

(May 21, 2004), attached as Exhibit 5. 
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approval of investment beyond 50% foreign ownership, foreign producers will have to locate 

their production in an export processing zone...[where] the approval or actual right could be 

conditional upon acceptance and fulfilment of an export performance requirement.”91

With respect to local content requirements, Articles 55, 56, and 57 of the new 

Automobile Policy give a “strict definition and scope of complete vehicle features.” Members 

have requested that China “confirm that these stipulations did not aim at increasing the rate of 

localization of automobile products, and that they would not constitute new trade barriers on 

vehicle imports.”92 Additionally, Article 58 requires that imported complete automobiles enter 

from one of only four ports.93 Questions were raised as to why these four ports were picked and 

their significance.94

In 2005, the National Development and Reform Commission (“NDRC”) began issuing 

measures to implement the new automobile policy. The measures require auto manufacturers 

that use imported parts to register with China’s Customs Administration and provide a list of 

both the imported and domestic parts used in production, the value of those parts, and the 

supplier.95 A 25 percent tariff rate is assessed on the imported auto parts when the completed car 

 

91 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China, Communication from the European Community and its Member States, G/TRIMS/W/36 

(13 September 2004) at ¶¶ 10-12. 

92 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/708 (8 November 2004) at 

¶ 18. 

93 Id.

94 Id.

95 National Trade Estimate 2007 at 83. 
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exceeds a threshold amount of imported parts.96 Typically auto parts entering the country are 

assessed at 10 percent.97 The U.S. has complained that these measures “impose charges that 

unfairly discriminate against imported automotive parts and discourage automobile 

manufacturers in China from using imported automotive parts in the assembly of vehicles.”98

China has responded to the criticisms of its new Automobile Policy by arguing that its 

auto industry is in its initial stage of development and is well behind developed countries in 

terms of technology and competitiveness.99 China claims that, since its WTO accession, the auto 

industry has been under extreme competition and shareholding requirements were implemented 

merely to help the development of the industry. 100 The limitation on the number of joint 

ventures is to “prevent investors from over-stretching their investment, opening multiple 

production sites and competing viciously with one another.” 101 The Policy allows for an 

exemption on this limitation for “investors which, in association with their Chinese joint-equity 

partners, acquire or merge with other auto production companies in China.”102 Finally, China 

has argued that it is legitimate for the government “to provide guidance on the development of 

 

96 Id.

97 Id.

98 Id. 

99 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/751 (24 October 2005) at ¶ 

26. 

100 Id.

101 Id. at ¶ 27. 

102 Id.
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the industry based on its independent judgement of the maturity of the industry” and that this was 

in no “way related to WTO rules or China’s accession commitment.”103

Starting with Article 3, China has responded that the Article is merely a general outline of 

“China’s goals, strategy, and direction in automobile industry development, without touching 

upon any detailed measures or restrictions on the volume.”104 Regarding the requirement to setup an R&D facility, China has explained that this is necessary to “make sure that any new plant 

could meet the increasing technical and legal requirements on safety, environmental protection 

and energy saving....However, setting up an R&D facility itself did not constitute any mandatory 

requirement on transfer of technology.” 105 The representative of China has explained that 

industry development policies issued by the government “aim at providing macro development 

guidance for the industries” but that they are not compulsory.106 China also explains that Article 

47 refers to the “automobile manufacturing project, instead of the foreign investment or investor 

that may be involved in the project.”107 Since foreign investors may exceed 50 percent, “China 

 

103 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/792 (27 October 2006) at ¶ 

34. 

104 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/708 (8 November 2004) at 

¶ 21. 

105 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/751 (24 October 2005) at ¶ 

29. 

106 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/792 (27 October 2006) at ¶ 

31. 

107 Id. at ¶ 32. 
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did not see that this was a mandatory requirement on the foreign investor, or that the right of 

investment of foreign investors was conditioned upon the conduct of R&D.”108

In addressing complaints about the 2005 measures implementing the automotive policy, 

China has argued that, due to the tariff differences between complete cars and auto parts, it was 

necessary to devise a clear definition for a “whole vehicle.” 109 The measure contains no 

“mandatory requirement on domestic whole-car and auto part manufacturers” and, thus, does not 

violate China’s accession commitments.110 Furthermore, the measure’s definition of a “whole 

car” does not go against the principle of national treatment because it is applicable to both 

foreign-invested producers and domestic-funded producers.111

D. Steel and Iron Industry Development Policy 

In July, 2005 NDRC released the Steel and Iron Industry Development Policy. China’s 

trading partners have reacted harshly to this policy, arguing that the policy restricts foreign 

investment by requiring technology transfer, the use of domestic products, and discriminating 

against foreign investors. The U.S. has stated that Articles in the Policy “discriminate against 

 

108 Id. 

109 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/751 (24 October 2005) at ¶ 

28. 

110 Id. 

111 Id.
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foreign equipment and technology import by encouraging the use of domestic products when 

competing domestic suppliers exist.”112

Specifically, Article 16 provides that the Chinese government will support iron and steel 

projects that use “home-made equipment” by providing tax refunds, interest subsidies, and 

research and development funds.113 Article 18 encourages the use of domestic equipment and 

provides that if equipment or technology must be imported the “the introduced equipment or 

technology shall be advanced and practical.” 114 USTR has commented that this particular 

provision calls “into question China’s implementation of its WTO accession agreement 

commitment not to condition the right of investment or importation on whether domestic 

suppliers exist.”115

Questions have also been raised about Article 23 of the policy which appears to 

discriminate between domestic and foreign companies by mandating certain requirements as 

conditions for investments.116 Article 23 provides that for all investments into iron smelting, 

steel smelting, and steel rolling facilities, 40 percent of the capital must be self owned and the 

 

112 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Communication from the United States, G/TRIMS/W/42 

(14 September 2005) at ¶ 10. 

113 Policies for Development of Iron and Steel Industry, Order of the National Development and Reform 

Commission No. 35 (8 July 2005) [here in after Iron and Steel Policy], attached as Exhibit 6. 

114 See Iron and Steel Policy.

115 National Trade Estimate 2007 at 84. 

116 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/751 (24 October 2005) at ¶ 

18. 
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investor must meet minimum steel production levels for the previous year.117 Foreign investors 

are prohibited from investing in new business sites, and are limited to the “reform and relocation 

of domestic iron and steel enterprises” and to non-controlling stakes.” 118 A foreign steel 

company is required to have produced at least 10 million tons of common steel or 1 million tons 

of special high alloy steel and a domestic company is only required to produce 5 million tons or 

half a million tons, but only if the domestic company’s other production facilities are outside the 

area the company is trying to invest in.119

Article 23 also requires that a foreign investor have “intellectual property rights and 

techniques of its own.”120 As the policy requires that foreign investors possess proprietary 

technology, but does not allow for foreign investors to have controlling shares in iron and steel 

companies, the U.S. has characterized this requirement as a de facto technology transfer 

requirement.121 The U.S. has asked China to explain how this investment restriction is consistent 

with China’s commitments in paragraph 7.3 of its Protocol of Accession and paragraph 203 of its 

Working Party report.122

 

117 See Iron and Steel Policy.

118 See Iron and Steel Policy; See also Transitional Review Mechanism Pursuant to Paragraph 18 of the 

Protocol of Accession of the People’s Republic of China to the World Trade Organization, Communication 

from the United States, G/TRIMS/W/42 (14 September 2005) at ¶ 11. 

119 See Iron and Steel Policy. 

120 See Iron and Steel Policy.

121 National Trade Estimate 2007 at 84. 

122 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Communication from the United States, G/TRIMS/W/42 

(14 September 2005) at ¶ 12. 
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The United States has also questioned allegations that the Chinese steel industry receives 

direct and indirect subsidies from the Chinese government.123 Specifically, the U.S. reports that 

there are allegations that steel companies receive “direct cash grants, land grants, transfer of 

ownership interest on terms inconsistent with commercial considerations, conversion of debt to 

equity in steel companies on non-market terms, debt forgiveness, preferential loans, tax 

incentives, including a variety of income tax exemptions and reductions.”124 Such programs 

were not included in China’s Notification of subsidy programs and the U.S. has asked China to 

provide notification on such programs.125

E. Programs Appearing in China’s Notification of 

Government Subsidies 

Pursuant to Article 25 of the SCM Agreement, Members are required to annually give 

Notifications of government subsidy programs. For the first four years of China’s membership, 

China never submitted an Article 25 Notification. However, using the Trade Review Mechanism, 

China’s trading partners attempted to monitor China’s subsidy programs and the implementation 

of its commitments by submitting questions to the Committee on Subsidies and Countervailing 

Measures concerning the phase out of certain subsidy programs and for clarification on certain 

laws believed to violate the SCM Agreement. 

 

123 Committee on Subsidies and Countervailing Measures, Questions from the European Communities 

Regarding the New and Full Notification of China, G/SCM/Q2/CHN/16 (25 July 2006) at 4. 

124 Id. 

125 Id.
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Specifically, Members have requested that China confirm that the subsidies identified in 

Annex 5B of China’s Accession Protocol have been phased out.126 The subsidy programs in 

Annex 5B include: tax and grant benefits to certain state-owned enterprises that are running at a 

loss; priority in obtaining loans and foreign currencies to automotive enterprises that is 

contingent on the enterprise’s export performance; and preferential tax treatment to automotive 

enterprises that use local content.127 China committed to the phasing out of these specific 

programs by 2000.128 However, according to press reports at the time, some of these programs 

remained active, and there were indications that the programs would not be completely phased 

out before 2005. 129

Members have also complained that there are indications that subsidies are continuing to 

be provided by the central and provincial government that were “contingent upon export 

performance or upon the use of domestic over imported goods.”130 China was asked to clarify 

why some regional benefits were only given to “export oriented enterprises” which was defined 

as “enterprises whose product export volume accounts for over 50 per cent of its annual sales 

volume and who has a surplus of foreign exchange and has made a profit during the year.”131 In 

 

126 Committee on Subsidies and Countervailing Measures, Questions Posed by Japan to the People’s Republic of 

China, G/SCM/Q2/CHN/3 (23 October 2002). 

127 Working Party Report, Annex 5B, at pages 164-166. 

128 Transitional Review Mechanism Pursuant to Section 18 of the Protocol on the Accession of the People’s 

Republic of China, G/SCM/Q2/CHN/8 (6 October 2004) at 3. 

129 Id.

130 Transitional Review Mechanism Pursuant to Section 18 of the Protocol on the Accession of the People’s 

Republic of China, G/SCM/Q2/CHN/7 (23 September 2004) at 1. 

131 Committee on Subsidies and Countervailing Measures, Questions Posed by European Communities to the 

People’s Republic of China, G/SCM/Q2/CHN/5 (2 October 2003) at 2. 
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2004, the U.S. alleged that China was administering programs “that may provide subsidies 

contingent upon export performance, which are prohibited under Article 3.1(a) of the SCM 

Agreement” and programs that “are contingent upon the use of domestic over imported goods, 

which are prohibited under Article 3.1(b) of the SCM Agreement.”132 

In July 2006, pursuant to Article 25.7 of the SCM Agreement, China submitted its 

Notification of information on subsidy programs granted or maintained by the central 

government between 2001 and 2004.133 China’s notification contained seventy-eight programs. 

However, the Notification did not include any government programs at the sub-central level.134 

Immediately, the U.S. and other countries asked China to explain how certain programs that 

appeared to give export-oriented foreign enterprises preferential tax treatment were “consistent 

with China’s obligations under Article 3 of the SCM.” 

For several programs, the U.S. asked that China provide the Committee greater 

clarification. Although the U.S. did not allege a violation, the U.S. questioned whether 

numerous programs that gave preferential tax treatment to enterprises located in Special 

Economic or Technological Zones were “contingent upon export or the use of domestic over 

imported goods.” Additionally China was asked to clarify terms used in specific Circulars for 

 

132 Transitional Review Mechanism Pursuant to Section 18 of the Protocol on the Accession of the People’s 

Republic of China, European Communities,G/SCM/Q2/CHN/7 (6 October 2004) at ¶¶ 1, 13. 

133 Committee on Subsidies and Countervailing Measures, New and Full Notification Pursuant to Article XVI:1 

of the GATT 1994 and Article 25 of the SCM Agreement, People’s Republic of China, G/SCM/N/123/CHN 

(13 April 2006). 

134 Committee on Subsidies and Countervailing Measures, Questions from the United States Regarding the New 

and Full Notification of China, G/SCM/Q2/CHN/19 (26 July 2006) at ¶ 1. 
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expressing the program standards for the receipt of benefits. Terms found to be vague that 

China was asked to clarify included: “a production nature,” “high or new technology,” 

“recognized as high or new technology enterprises,” “encouraged,” and “consistent with the state 

industrial policies.” A large number of the programs appear to give no clear, objective standard 

for conditioning benefits. The U.S. Chamber of Commerce has suggested that China needs to 

provide a more detailed report to the WTO on its subsidy programs, particularly with respect to 

“subsidies of state-owned companies provided through its banking system, provincial 

government-level subsidization, and the amount of subsidies involved.”135

As many of the programs appear to be “contingent upon export or the use of domestic 

over imported goods” they potentially violate Article 3 of the SCM Agreement, Article 2.1 and 

2.2 of the TRIMs Agreement, paragraph 1 of Article XI of GATT 1994, and Article III:4 of 

GATT 1994. 

IV. WTO PROVISIONS THAT ARE POTENTIALLY VIOLATED BY CHINESE 

POLICIES AND PROGRAMS

As discussed above, when China acceded to the WTO, it committed to bring its 

legislation and policy into conformity with its WTO commitments. For the Chinese government, 

it committed to making a fundamental change in the level of government involvement and its 

role in the domestic economy. However, a trend has recently developed in China, where 

“[i]nstead of relying on the market to dictate outcomes, China increasingly was resorting to 

 

135 China’s WTO Implementation and Other Issues of Importance to American Business in the U.S.-China 

Commercial Relationship, U.S. Chamber of Commerce Report (September 2006) at 11. 
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industrial policies that restrict foreign investment while promoting domestic companies.” 136 

Many of these industrial policies and subsidy programs violate China’s basic WTO commitments 

and are inconsistent with commitments made by China during the Working Party. 

Commitments and Articles that China’s industrial policies and subsidy programs 

potentially violate include: Article 3 of the Agreement on Subsidies and Countervailing 

Measures; Article III:4 and III:5 of the GATT 1994; and Article 2 and Paragraph 1(a) of Annex 1 

of the TRIMs Agreement. The measures also appear not to comply with obligations made by 

China during its accession, including: Paragraphs 7.2-7.3 and 10.3 of Part I of the Accession 

Protocol, as well as paragraph 1.2 of Part I of the Accession Protocol, to the extent that it 

incorporates paragraphs 167 and 203 of the Report of the Working Party on the Accession of 

China. This section of the report summarizes these Articles, what they provide and how they 

have been interpreted by dispute settlement panels and the Appellate Body. 

A. Agreement on Trade-Related Investment Measures 

Before the Uruguay Round of Multilateral Trade Negotiations, the focus of the General 

Agreement on Tariffs and Trade (“GATT”), the precursor to the WTO, was the liberalization of 

the international trade in goods. While investment was not explicitly covered by the GATT 

agreement, GATT did forbid investment measures that restricted and distorted trade in goods. In 

addition to the TRIMs Agreement, during the Uruguay Round, Members negotiated two other 

 

136 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/792 (14 September 2005) 

at Annex ¶ 11. 
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agreements that contained specific investment provisions. 137 The TRIMs Agreement addresses 

measures that directly affect the trade in goods, reaffirming existing GATT obligations 

addressing investment measures which violate Article III (national treatment) or Article XI 

(general elimination of quantitative restrictions) of GATT 1994. 

Generally, investment measures are seen as a tool for promoting development by 

increasing technology transfer, industrialization, and export expansion. 138 Historically, they 

tended to be concentrated in specific industries, such as automotive, chemical and petrochemical, 

and computer/informatics, and were implemented for the purpose of compelling multinational 

enterprises to meet certain performance requirements, promote domestic components industries 

and/or restrain the volume of imports.139 However, the use of such investment measures has 

likely decreased over the past two decades as more liberal economic policies have been adopted 

and governments now seek to attract more foreign investment.140

 

137 Additional investment related components of the Uruguay Round Agreement include the following: the 

Agreement on Trade-Related Aspects of Intellectual Property Rights, April 15, 1994, Marrakesh Agreement 

Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round 

of Multilateral Trade Negotiations 320 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPS 

Agreement]; and General Agreement on Trade in Services, April 15, 1994, Marrakesh Agreement 

Establishing the World Trade Organization, Annex 1B, The Legal Texts: The Results of the Uruguay Round 

of Multilateral Trade Negotiations 284 (1999), 1869 U.N.T.S. 183, 33 I.L.M. 1167 (1994) [hereinafter 

GATS]. GATS recognizes the “commercial presence” of one Member in the territory of another, while 

TRIPS protects the investments of one Member in intellectual property from theft by another. 

138 Beyond TRIMSs: A Case for Multilateral Action on Investment Rules and Competition Policy, in W. Martin 

and A. Winters, eds., The Uruguay Round and the Developing Countries, Cambridge Press (1986) at 385, 

citing Maskus, K. E. and D. R. Eby, Developing New Rules and Disciplines on Trade-Related Investment 

Measures, The World Economy 13(4): 523-53 (1990). 

139 Id. at 380. 

140 Id. at 389. 
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Proposals for including investment measures within a multilateral trade agreement were 

first discussed in 1947-1948 during negotiations of the Havana Charter for the International 

Trade Organization. However, what was eventually agreed to as part of the draft Charter was 

quite limited in reach. The Members agreed that “international investment...can be of great 

value in promoting economic development and reconstruction.” 141 Even so, the Agreement gave 

countries the right to “take any appropriate safeguards necessary to ensure that foreign 

investment is not used as a basis for interference in its international affairs or national 

policies.”142 When the ITO was not accepted by the U.S., the Chapter on Commercial Policy 

was converted into the GATT. 

Further negotiations for an investment agreement within the trade arena would not begin 

until 1986 with the Uruguay Round Negotiations. However, during the Tokyo Round 

Negotiations, an important dispute between the United States and Canada arose on existing 

GATT obligations that would lead to an interest in exploring trade-related investment measures 

as a topic in the Uruguay Round negotiations.143

 

141 See, Article 12 of the Havana Charter, available at: http://www.wto.org/English/docs_e/legal_e/havana_e.pdf 

142 Id. 

143 Canada – Administration of the Foreign Investment Review Act, Report of the Panel, GATT Doc. No. L/5044 

(25 July 1983). 
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In the Preparatory Committee to create an agenda for a new round of negotiations, the 

United States introduced the subject of trade-related investment measures.144 The Punta del Este 

Declaration ratified the agenda giving the following TRIMs mandate: 

Following an examination of the operation of GATT articles 

related to the trade restrictive and distorting effects of investment 

measures, negotiations should elaborate, as appropriate, further 

provisions that may be necessary to avoid such adverse effects on 

trade.145

The Agreement that emerged from the Uruguay Round negotiations was modest in scope. 

The Agreement does not address investment policies generally and does not address “pure” 

investment issues such as the right of establishment, investment incentives, national treatment, 

and investor protection.146 As stated above, the Agreement reaffirms obligations found under the 

GATT that relate to national treatment (Article III) and the prohibition on quantitative 

restrictions (Article XI). Under GATT, there were two TRIMs identified as being inconsistent 

with Article III (local content and trade-balancing requirements) and three TRIMs identified as 

quantitative restrictions (trade-balancing restrictions, foreign-exchange-balancing restrictions, 

and domestic-sales requirements). 

The entire Agreement consists of nine Articles and an Annex, which contains an 

Illustrative List. Although the Agreement does not define what constitutes a trade-related 

 

144 The GATT Uruguay Round: A Negotiating History (1986-1992), Volume II: Commentary, Terence P. Stewart, 

ed. (Kluwer Law and Taxation Publishers, Boston, 1993) at 2068. 

145 Ministerial Declaration on the Uruguay Round, GATT Doc. No. MIN(86)/6 (Sept. 20, 1986) at 8. 

146 Beyond TRIMSs: A Case for Multilateral Action on Investment Rules and Competition Policy, in W. Martin 

and A. Winters, eds., The Uruguay Round and the Developing Countries, Cambridge Press (1996) at 380. 
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investment measure, the Illustrative List provides measures that are inconsistent with Article III 

and Article XI of GATT 1994. Measures considered inconsistent “with the obligations of 

national treatment provided for in paragraph 4 of Article III” or inconsistent with the “obligation 

of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of 

GATT” are those which are “mandatory or enforceable under domestic law or under 

administrative rulings, or compliance with which is necessary to obtain an advantage.” 

According to the Illustrative List, a violation of Article III requires: 

a. the purchase or use by an enterprise of products of domestic 

origin or from any domestic source, whether specified in terms 

of particular products, in terms of volume or value of products, 

or in terms of a proportion of volume or value of its local 

production (local content requirement); or 

b. that an enterprise's purchases or use of imported products be 

limited to an amount related to the volume or value of local 

products that it exports (trade balancing requirements).147

A violation of Article XI restricts: 

a. the importation by an enterprise of products used in or related 

to its local production, generally or to an amount related to the 

volume or value of local production that it exports (trade 

balancing restrictions); 

b. the importation by an enterprise of products used in or related 

to its local production by restricting its access to foreign 

exchange to an amount related to the foreign exchange inflows 

attributable to the enterprise (exchange balancing restrictions); 

or 

c. the exportation or sale for export by an enterprise of products, 

whether specified in terms of particular products, in terms of 

 

147 TRIMS Agreement Annex at ¶ 1. 
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volume or value of products, or in terms of a proportion of 

volume or value of its local production (domestic sales 

requirements).148

The Agreement requires that all countries notify the WTO of all inconsistent TRIMs in 

ninety days and provides a timetable for phasing out all specified TRIMs. Industrial, developing, 

and least-developed countries were required to phase out all GATT-inconsistent TRIMs in two, 

five, and seven years, respectively. During the transition period TRIMs could not be modified to 

increase their inconsistency and any TRIM introduced 180 days before the signing of the 

Agreement was not given a transition period. There is also a provision that permits countries to 

apply an equivalent TRIM to a new investment if there is an existing TRIM being applied to an 

established enterprise. This was done so as not to disadvantage established enterprises. 

The final four Articles of the Agreement address Transparency, establishing the 

Committee on Trade- Related Investment Measures, Consultation and Dispute Settlement, and 

finally Article 9 mandates that there be a review of the TRIMs Agreement by the Council for 

Trade in Goods, to be commenced within five years of date of entry into force of the WTO 

Agreement, and which was to include proposals for amendments and consideration of whether 

provisions on investment policy and competition policy should be added to the Agreement.149

 

148 Id. at Annex, ¶ 2. 

149 The Council for Trade in Goods met and reviewed the operation of the TRIMS Agreement, but according to 

the Council’s 2006 Report, the review appears to be ongoing. See Report (2006) of the Council for Trade in 

Goods, G/L/808 (4 December 2006). 
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1. Interpreting TRIMs Under GATT 

In early 1982, the United States requested consultations with Canada concerning the 

legality of Canada’s Foreign Investment Review Act (“FIRA”).150 FIRA provided that foreign 

investments would be subject to government approval on the basis of five factors and 

investments would be allowed to proceed only if it was likely to be of a “significant benefit to 

Canada.” 151 The government looked at, inter alia, the benefits to Canadian employment, 

satisfying content requirements, and benefits to Canadian technological development. 

Additionally, under FIRA, investors may be asked to submit “written undertakings” to satisfy 

local content requirements, including producing goods in Canada that may have otherwise been 

imported, or export performance requirements, which became legally binding after the 

government approved the investment. 152 The United States questioned the Canadian 

government’s practice of entering “into agreements with foreign investors according to which 

these are to give preference to the purchase of Canadian goods over imported goods and to meet 

certain export performance requirements.”153

 

150 The Foreign Investment Review Act was enacted by the Parliament of Canada. Under Section 2(1) the Act, 

the Canadian Parliament adopted the law “in recognition that the extent to which control of Canadian industry, 

trade and commerce has become acquired by persons other than Canadians and the effect thereof on the 

ability of Canadians to maintain effective control over their economic environment is a matter of national 

concern” and thus it was necessary that for Canadian businesses to come under the control of a foreign entity 

there must be a review and assessment to determine if the foreign acquisition would likely be a “significant 

benefit to Canada.” See Canada – Administration of the Foreign Investment Review Act, Report of the Panel, 

GATT Doc. No. L/5044 (25 July 1983) at ¶ 2.2. 

151 Id. at ¶¶ 2.2-2.12. 

152 Id. 

153 Id. at ¶ 1.1. 
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Before considering the issues, Delegates expressed their concern at the “terms of 

reference,” doubting whether this dispute was one “for which the GATT had competence since it 

involved investment legislation, a subject not covered by the GATT.”154 Delegates believed that 

the “matter dealt with Canadian laws and practices related to investment’...[and] that the 

General Agreement did not prevent a contracting party from prohibiting foreign investment, even 

if this resulted in trade distortion.”155 The United States assured the Delegates that it “was not 

attacking Canadian investment laws directly but was complaining about the two specific traderelated issues mentioned in the terms of reference.”156 Canada also assured the Delegates that 

“the terms of reference ensured that the examination would touch only on trade matters which 

were within the purview of GATT, and that there would be no opportunity or reason for the 

Panel to examine Canadian investment policies.”157

The United States argued before the Panel that the FIRA obligations requiring that 

foreign investors purchase domestic goods in preference to imported goods or to manufacture 

goods domestically which would otherwise be imported were inconsistent with Articles III:4, 

III:5, XI and XVII:1(c) of the General Agreement. Additionally, requirements to export 

specified quantities of production were inconsistent with Article XVII:i(c). In its findings, the 

Panel: (1) concluded that conditioning investment upon contracts for “investors to purchase 

 

154 Id. at ¶ 1.4. 

155 Minutes of Meeting Held in Centre William Rappard on 2 November 1982, GATT Doc. No. C/M/162, at 25 

(19 November 1982). 

156 Id. at 25-27. 

157 Id. 
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goods of Canadian origin” or Canadian sources was inconsistent with Article III:4; (2) found 

insufficient grounds to examine certain “written undertakings” under Article III:5, concluding 

that they fell under the purchase requirements found inconsistent with Article III:4; (3) rejected 

the U.S. contention that the “undertakings were contrary to Article XI,” stating that the 

“purchase undertakings” fell under Article III, which addresses measures affecting “imported 

products” and not Article XI, which addresses the “importation” of products; (4) did not find it 

necessary to make a finding with respect to Article XVII:1(c) since the purchase undertakings 

had already been found inconsistent with Article III:4; (5) did not agree with Canada that the 

purchase undertakings found to be inconsistent with Article III:4 “are necessary within the 

meaning of Article XX(d) for the effective administration” of FIRA.158 Simply put, the Panel 

agreed with the U.S. that the local content requirements mandated by a “written undertaking” 

contravened the national treatment obligation of GATT Article III:4, but found that FIRA’s 

export performance requirements were not inconsistent with GATT. 

2. Interpreting TRIMs at the WTO 

As mentioned, the TRIMs Agreement applies only to “investment measures” related to 

the trade in goods. Panels have interpreted “investment measures” broadly, and have not limited 

it to “measures taken specifically in regard to foreign investment.”159 “[N]othing in the TRIMS 

Agreement suggests that the nationality of the ownership of enterprises subject to a particular 

 

158 See Canada – Administration of the Foreign Investment Review Act, Report of the Panel, GATT Doc. No. 

L/5044 at ¶ 2.2 (25 July 1983). 

159 See Indonesia – Certain Measures Affecting the Automobile Industry, Report of the Panel, WT/DS54/R, 

WT/DS55/R, WT/DS59/R, WT/DS64/R (2 July 1998) at ¶ 14.73. 
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measure is an element in deciding whether that measure is covered by the Agreement.”160 To 

determine whether a measure is a TRIM, panels first consider whether the measure at issue is an 

“investment measure” and then consider whether the measure is “trade-related.”161

In Indonesia – Autos, the Panel found that measures relating to internal taxes or subsidies 

may be considered investment measures, as they are “only one of many types of advantages 

which may be tied to a local content requirement which is a principal focus of the TRIMS 

Agreement...The TRIMS Agreement is not concerned with subsidies and internal taxes as such 

but rather with local content requirements, compliance with which may be encouraged through 

providing any type of advantage.”162 In making a determination as to whether the measures in 

question were “investment measures” the Panel reviewed the legislation related to the measures 

and found it to include investment features and investment objectives, with aim of encouraging 

the development of local industries.163 Inherently, this objective and the resulting measures have 

a “significant impact on investment in these sectors.” 164 The Panel’s “characterization of 

measures as “‘investment measures,” [was] based on an examination of the manner in which the 

measures at issue in this case relate to investment.”165

 

160 Id.

161 Id. at ¶ 14.72. 

162 Id. at ¶ 14.73. 

163 Id. at ¶ 14.80. 

164 Id. 

165 Id. 
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In analyzing whether local content requirements are “trade-related” the Panel found that 

“such requirements, by definition, always favour the use of domestic products over imported 

products, and therefore affect trade.”166 Examining whether the measures are covered by the 

Illustrative List, which refers to “measures with local content requirements, will not only indicate 

whether they are trade-related but also whether they are inconsistent with Article III:4 and thus 

in violation of Article 2.1 of the TRIMs Agreement.”167 Tax and customs duty benefits that are 

tied to the purchase and use of domestic origin products “are clearly ‘advantages’ in the meaning 

of the chapeau of the Illustrative List to the TRIMs Agreement and as such,...fall within the 

scope of the Item 1 of the Illustrative List.”168 Although businesses are free to decide whether to 

buy the domestic parts or not, the Panel found that the Illustrative List “makes it clear that a 

simple advantage conditional on the use of domestic goods is considered to be a violation of 

Article 2 of the TRIMs Agreement even if the local content requirement is not binding as 

such.”169

B. Article III:4 of the General Agreement on Tariffs and 

Trade 1994 

Article III:4 of the GATT provides, inter alia that: 

The products of the territory of any contracting party imported into 

the territory of any other contracting party shall be accorded 

treatment no less favorable than that accorded to like products of 

 

166 Id. at ¶ 14.82. 

167 Id. at ¶ 14.83. 

168 Id. at ¶ 14.90. 

169 Id. at ¶ 14.90. 
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national origin in respect of all laws, regulations and requirements 

affecting their internal sale, offering for sale, purchase, 

transportation, distribution or use. 

A violation of Article III:4 requires that it be established that the domestic and foreign 

products are “like products,” that the measure affect the “internal sale, offering for sale, purchase, 

transportation, distribution, or use” of the imported products, and that the imported products be 

accorded “less favorable treatment.”170 The Article does not require that it be shown whether 

measures “afford protection to domestic production.” 171 When “asserting a fact, claim or 

defense” the burden of proof, is on the party making the assertion and “[o]nce that party has put 

forward sufficient evidence to raise a presumption that what is claimed is true, the burden of 

producing evidence shifts to the other party to rebut the presumption.”172

Using the “general principle” of “likeness” enunciated in Article III:1, the Appellate 

Body has found that the term “like products” in Article III:4 is “fundamentally, a determination 

about the nature and extent of a competitive relationship between and among products.”173 

 

170 See Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, Report of the Appellate Body, 

WT/DS161/AB/R, WT/DS169/AB/R (11 December 2000) at ¶ 133, “For a violation of Article III:4 to be 

established, three elements must be satisfied: that the imported and domestic products at issue are ‘like 

products’; that the measure at issue is a ‘law, regulation, or requirement affecting their internal sale, offering 

for sale, purchase, transportation, distribution, or use’; and that the imported products are accorded ‘less 

favorable’ treatment than that accorded to like domestic products.” 

171 European Communities – Regime for the Importation, Sale and Distribution of Bananas, Report of the 

Appellate Body, WT/DS27/AB/R (9 September 1997) at ¶ 216. 

172 Japan – Measures Affecting Consumer Photographic Film and Paper, Report of the Panel, WT/DS44/R (31 

March 1998) at ¶ 10.372, citing United States – Measures Affecting Imports of Woven Wool Shirts and 

Blouses from India, Report of the Appellate Body, WT/DS33/AB/R (25 April 1997) at p.14. 

173 European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, Report of the 

Appellate Body, WT/DS135/AB/R (12 March 2001) at ¶ 96. The Appellate Body has also analyzed the 

relationship with “like products” under Article III:2, which “extends not only to ‘like products’, but also to 

products which are directly ‘competitive or substitutable.’” Id. Without ruling on the precise product scope 
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Several Panels and the Appellate Body have adopted a framework for analyzing likeness on a 

case-by-case basis using four criteria: (1) the properties, nature and quality of the product (2) the 

end-uses of the products (3) consumers’ perceptions and behavior – in respect of the products, 

and (4) the tariff classification of the products.174 The types of evidence that may be examined 

in assessing the ‘likeness’ of products will “depend upon the particular products and the legal 

provisions...panels must determine whether that evidence, as a whole, indicates that the products 

in question are ‘like’ in terms of the legal provision at issue.”175 For a full examination of the 

evidence in making a determination of “likeness” all four of the criteria should be examined.176

Under Article III:4, laws, regulations, and requirements are interpreted as encompassing 

“a broad range of government action by private parties that may be assimilated to government 

action.”177 A requirement need not be mandatory, but may be merely a condition that must be 

 of Article III:4, the Panel “conclude[d] that the product scope of Article III:4, although broader than the first 

sentence of Article III:2, is certainly not broader than the combined product scope of the two sentences of 

Article III:2.” Id.

174 Id. at ¶ 101. The Appellate Body noted that “these four criteria comprise four categories of ‘characteristics’ 

that the products involved might share: (i) the physical properties of the products; (ii) the extent to which the 

products are capable of serving the same or similar end-uses; (iii) the extent to which consumers perceive and 

treat the products as alternative means of performing particular functions in order to satisfy a particular want 

or demand; and (iv) the international classification of the products for tariff purposes.” Id. 

175 Id. at ¶ 103. 

176 Id. at ¶ 109. In EC – Asbestos, the Appellate Body found certain factors were relevant factors in evaluating 

the four criteria. The physical properties of products must be examined fully, especially those that are “likely 

to influence the competitive relationship between products in the marketplace.” Id. at ¶ 114. [E]vidence 

about the extent to which products can serve the same end-uses, and the extent to which consumers are – or 

would be – willing to choose one product instead of another to perform those end-uses, is highly relevant 

evidence in assessing the “likeness”. Id. at ¶ 117. Consumers’ tastes and habits are also important, as a 

“manufacturer cannot...ignore the preferences of the ultimate consumer.” Id. at ¶ 122. 

177 Japan – Measures Affecting Consumer Photographic Film and Paper, Report of the Panel, WT/DS44/R (31 

March 1998) at ¶ 10.376. 
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met in order to obtain an advantage.178 Neither “legal enforceability or the existence of a link 

between a private action and an advantage conferred by a government is a necessary condition in 

order for an action by a private party to constitute a ‘requirement.’”179

How a “requirement” might affect imported goods has been broadly interpreted to “cover 

not only laws and regulations which directly govern the conditions of sale or purchase but also 

any laws or regulations which might adversely modify the conditions of competition between 

domestic and imported products.”180 To give imported goods “treatment no less favorable” in 

relation to domestic goods requires “effective equality of opportunities” for imported products, 

allowing for regulatory differences between domestic and imported products. 181 Thus a 

regulatory difference in and of itself is not conclusive in establishing inconsistency with Article 

III:4...[but] “should be assessed instead by examining whether a measure modifies the 

conditions of competition in the relevant market to the detriment of imported products.” 

C. Article XI:1 of the General Agreement on Tariffs and 

Trade 1994 

Article XI:1 provides that: 

 

178 Canada – Certain Measures Affecting the Automotive Industry, Report of the Panel, WT/DS139/R, 

WT/DS142/R (11 February 2000) at ¶ 10.73. 

179 Id. at ¶ 10.106. 

180 Id. at ¶ 10.80, citing Italian Discrimination Against Imported Agricultural Machinery, Report of the Panel, 

BISD 7S/60 (23 October 1958) at ¶ 12. 

181 See Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, Report of the Appellate Body, 

WT/DS161/AB/R, WT/DS169/AB/R (11 December 2000) at ¶¶ 135-137, citing United States – Section 337 

of the Tariff Act of 1930, Report by the Panel, BISD 36S/345 (7 November 1989) at ¶ 5.11.
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No prohibitions or restrictions other than duties, taxes, or other 

charges, whether made effective through quotas, import or export 

licenses or other measures, shall be instituted or maintained by any 

contracting party on the importation of any product of the territory 

of any other contracting party or on the exportation or sale for 

export of any product destined for the territory of any other 

contracting party. 

“The prohibition on the use of quantitative restrictions forms one of the cornerstones of 

the GATT system.”182 In showing a violation of Article XI the complainant must present a 

prima facie case that measures are inconsistent.183 In determining what constitutes a violation 

under Article XI Panels have found that a complete ban on imports of certain foreign products is 

inconsistent,184 and requiring certifications under certain policy conditions would be considered 

“prohibitions or restrictions” that are inconsistent.185 Article XI extends to de facto and de jure

“prohibitions or restrictions” and “the fact that an action is taken by private parties does not rule 

out the possibility that it may be deemed governmental if there is sufficient governmental 

involvement.”186 However, Members are not “under an obligation to exclude any possibility that 

 

182 Turkey – Restrictions on Imports of Textile and Clothing Products, Report of the Panel, WT/DS34/R (31 May 

1999) at ¶ 9.63. 

183 India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, Report of the 

Panel, WT/DS90/R (6 April 1999) at ¶ 5.119, citing Australia – Measures Affecting Importation of Salmon, 

Report of the Appellate Body, WT/DS18/AB/R (20 October 1998) at ¶¶ 257-259. 

184 Canada – Certain Measures Concerning Periodicals, Report of the Panel, WT/DS31/R (14 March 1997) at ¶ 

5.5. 

185 United States – Import Prohibition of Certain Shrimp and Shrimp Products, Report of the Panel, WT/DS58/R 

(15 May 1998) at ¶ 7.16. 

186 Japan – Measures Affecting Consumer Photographic Film and Paper, Report of the Panel, WT/DS44/R (31 

March 1998) at ¶ 10.56. 
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governmental measures may enable private parties, directly or indirectly, to restrict trade, where 

those measures themselves are not trade restrictive.”187

Like Articles I, II, and III of GATT 1994, Article XI “protects competitive opportunities 

of imported products, not trade flows...[thus parties] need not prove actual trade effects.188 

However, when a party alleges a “de facto rather than a de jure restriction... it is inevitable, as an 

evidentiary matter, that greater weight attaches to the actual trade impact of a measure.”189 

Showing low export statistics does not prove, in and of itself, that an alleged measure constitutes 

an export restriction, especially when the alleged measure is a de facto restriction and there are 

possibly multiple restrictions.190 It is “necessary for a complaining party to establish a causal 

link between the contested measure and the low level of exports.”191

Panels have addressed, inter alia, whether certain measures such as using state trading 

enterprises and licensing requirements create restrictions that violate Article XI.192 In reviewing 

whether the use of state trading enterprises resulted in a restriction, the Panel in India – 

 

187 Argentina – Measures Affecting the Export of Bovine Hides and the Import of Finished Leather, Report of the 

Panel, WT/DS155/R (19 December 2000) at ¶ 11.18. 

188 Japan - Taxes on Alcoholic Beverages, Report of the Appellate Body, WT/DS8/AB/R, WT/DS10/AB/R, 

WT/DS11/AB/R (4 October 1996) at p. 16. 

189 Argentina – Measures Affecting the Export of Bovine Hides and the Import of Finished Leather, Report of the 

Panel, WT/DS155/R (19 December 2000) at ¶ 11.20. 

190 Id. at ¶ 11.21. 

191 Id., citing European Communities – Measures Affecting the Importation of Certain Poultry Products, Report 

of the Appellate Body, WT/DS69/AB/R (13 July 1998) at ¶¶ 126-127. 

192 See United States – Import Measures on Certain Products from the European Communities, Report of the 

Panel, WT/DS165/R (17 July 2000) at ¶ 6.61. In this dispute, the measure at issue was a bonding 

requirement. The majority of the Panel found that the restriction fell under Article II, but one panelist found 

that the particular bonding requirement fell under Article XI. 
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Quantitative Restrictions found that the “mere fact that imports are effected through state trading 

enterprises would not in itself constitute a restriction,” but rather it should be shown that the 

“operation of this state trading entity is such as to result in a restriction.”193 When the state 

trading enterprise has a monopoly, controlling both importation and distribution channels, “the 

imposition of any restrictive measure, including internal measures, will have an adverse effect on 

the importation of the products concerned.”194

In India – Quantitative Restrictions, the panel interpreted Article XI as being 

comprehensive and broadly defined the term “restriction” as “a limitation on action, a limiting 

condition or regulation.” 195 As such, the panel found that “discretionary or non-automatic 

licensing systems by their very nature operate as limitations on action since certain imports may 

not be permitted. Thus,...a discretionary or non-automatic import licensing requirement is a 

restriction prohibited by Article XI:1.”196 However, the Panel in Korea – Various Measures on 

Beef found that a “discretionary licensing system, used in conjunction with a quantitative 

restriction, [does not] necessarily provide[] some additional level of restriction over and above 

the inherent restriction on access created through the imposition of a quantitative restriction.”197

 

193 India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, Report of the 

Panel, WT/DS90/R (6 April 1999) at ¶ 5.134, citing Korea – Measures Affecting Imports of Fresh, Chilled 

and Frozen Beef, Report of the Panel, WT/DS161/R, WT/DS169/R (31 July 2000) at ¶ 115. 

194 Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, Report of the Panel, WT/DS161/R, 

WT/DS169/R (31 July 2000) at ¶ 751. 

195 India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, Report of the 

Panel, WT/DS90/R (6 April 1999) at ¶¶ 5.129-5.130. 

196 Id. at ¶ 5.130. 

197 Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, Report of the Panel, WT/DS161/R, 

WT/DS169/R (31 July 2000) at ¶ 782. 
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D. Article 3.1 of the Agreement on Subsidies and 

Countervailing Measures 

Article 3.1 of the Agreement on Subsidies and Countervailing Measures provides that 

prohibited subsidies include: 

(a) subsidies contingent, in law or in fact,198 whether solely or as 

one of several other conditions, upon export performance, 

including those illustrated in Annex I; 

(b) subsidies contingent, whether solely or as one of several 

other conditions, upon the use of domestic over imported 

goods.199

Article 3.1(a) has been interpreted by the Appellate Body to mean that the subsidy must 

be “contingent,” meaning “conditional” or “dependent on something else.”200 Thus, the “grant of 

a subsidy must be ‘tied to’ export performance.”201 The Article “prohibits any subsidy that is 

contingent upon export performance, whether that subsidy is contingent ‘in law or in fact.’”202 

While the “legal standard expressed by the word ‘contingent’ is the same for both de jure or de 

 

198 “This standard is met when the facts demonstrate that the granting of a subsidy, without having been made 

legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export 

earnings. The mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be 

considered to be an export subsidy within the meaning of this provision.” Agreement on Subsidies and 

Countervailing Measures, April 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, 

Annex 1A, The Legal Texts: The Results of the Uruguay Round of Multilateral Trade Negotiations 275 

(1999), 1867 U.N.T.S. 14. [hereinafter SCM Agreement], fn. 4. 

199 SCM Agreement Art. III ¶ 1. 

200 United States – Tax Treatment for “Foreign Sales Corporations,” Report of the Appellate Body, 

WT/DS108/AB/R (24 February 2000) at ¶ 111, citing Canada – Measures Affecting the Export of Civilian 

Aircraft, Report of the Appellate Body, WT/DS70/AB/R (20 August 1999) at ¶ 166. 

201 United States – Tax Treatment for “Foreign Sales Corporations,” Report of the Appellate Body, 

WT/DS108/AB/R (24 February 2000) at ¶ 111. 

202 Canada – Measures Affecting the Export of Civilian Aircraft, Report of the Appellate Body, WT/DS70/AB/R 

(20 August 1999) at ¶ 167. 
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facto contingency...there is a difference, however, in what evidence may be employed to prove 

that a subsidy is export contingent.”203

“De jure export contingency is demonstrated on the basis of the words of the relevant 

legislation, regulation or other legal instrument.”204 [D]e facto export contingency must be 

demonstrated by the facts...[but] what fact should be taken into account in a particular case will 

depend on the circumstances of that case ...[and] there can be no general rule as to what fact or 

what kinds of facts must be taken into account.”205 The standard for determining de facto export 

contingency “requires proof of three different substantive elements: first, the ‘granting of a 

subsidy’; second, ‘is ... tied to ...’; and, third, ‘actual or anticipated exportation or export 

earnings.’”206

 

203 Id. 

204 Id. 

205 Id. at ¶ 169. The Panel on Australia – Automotive Leather II held that “the fact of expectation [of a subsidy] 

cannot be the sole determinative fact on the evaluation. Australia – Subsidies Provided to Producers and 

Exporters of Automotive Leather, Report of the Panel, WT/DS126/R (25 May 1999) at ¶ 9.66. While finding 

that no one factual consideration should prevail over others, the Panel on Canada – Measures Affecting the 

Export of Civilian Aircraft held that “the closer a subsidy brings a product to sale on the export market, the 

greater the possibility that the facts may demonstrate that the subsidy would not have been granted but for 

anticipated exportation or export earnings.” Canada – Measures Affecting the Export of Civilian Aircraft, 

Report of the Appellate Body, WT/DS70/AB/R (20 August 1999) at ¶ 174. However, this “should [not] be 

regarded as a legal presumption” and to take this factor into account requires “considerable caution.” Id. at ¶ 

174. Finally, a “Member’s awareness that its domestic market is too small to absorb domestic production of a 

subsidized product may indicate that the subsidy is granted on the condition that it be exported.” See Canada 

– Export Credits and Loan Guarantees for Regional Aircraft, Report of the Panel, WT/DS222/R (28 January 

2002) at ¶ 7.372, citing Australia – Subsidies Provided to Producers and Exporters of Automotive Leather, 

supra, at ¶ 9.67. 

206 See Canada – Measures Affecting the Export of Civilian Aircraft, Report of the Appellate Body, 

WT/DS70/AB/R (20 August 1999) at ¶ 169. 
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E. Relationships and Conflicts Between the TRIMs 

Agreement, the SCM Agreement and Article III of GATT 

The Indonesia – Autos dispute concerned measures that gave special tariff and tax 

treatment to certain automobile parts for the purpose of encouraging domestic production.207 

The parties alleged that India’s measures violated, inter alia, Article III of GATT 1994, the SCM 

Agreement, and the TRIMs Agreement. India argued that Article III and the TRIMs Agreement 

did not apply, as their application would reduce the SCM Agreement to “inutility.” The panel 

first reviewed the relationship and potential conflicts between the SCM Agreement and Article 

III of GATT 1994, and then between the SCM Agreement and the TRIMs Agreement.208 Since 

local content requirement complaints were raised under Article III:4 of GATT 1994 and the 

TRIMs Agreement, the Panel next reviewed the relationship between these two rules.209

1. Article III of GATT 1994 and the SCM Agreement 

In analyzing the relationship between Article III and the SCM Agreement, the Panel 

reviewed the development of the provisions and determined that while Article III prohibits 

discrimination between domestic and imported products with respect to internal regulations, 

including local content requirements, it does not prohibit the provision of a subsidy per se.

210 By 

contrast, the SCM Agreement prohibits subsidies that are conditioned on export performance and 

 

207 See Indonesia – Certain Measures Affecting the Automobile Industry, Report of the Panel, WT/DS54/R, 

WT/DS55/R, WT/DS59/R, WT/DS64/R (2 July 1998) at ¶¶ 14.29 – 14.93. 

208 Id. at ¶¶ 14.28-14.56. 

209 Id. at ¶¶ 14.60 – 14.63. 

210 Id. at ¶ 14.33. 
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on meeting local content requirements it provides remedies for subsidies that cause adverse 

effects to another Member’s interests, and exempts certain subsidies.211

“In short, Article III prohibits discrimination between domestic and imported products 

while the SCM Agreement regulates the provision of subsidies to enterprises.”212 Accordingly, 

the Panel determined that Article III and the SCM Agreement have different coverage and 

obligations and thus there is no general conflict between the two sets of provisions.213 With 

respect to certain measures, there may be overlap, but the “only subsidies that would be affected 

by the provisions of Article III are those that would involve discrimination between domestic and 

imported products.”214

2. The SCM Agreement and the TRIMs Agreement 

Next, the Panel reviewed the relationship and possible conflicts between the TRIMs 

Agreement and the SCM Agreement.215 With respect to obligations, the Panel determined that 

“with regard to local content requirements, the SCM Agreement and the TRIMs Agreement are 

concerned with different types of obligations and cover different subject matters.”216 The SCM 

 

211 Id. 

212 Id. 

213 Id. at ¶ 14.36. 

214 Id. at ¶ 14.39. 

215 In this dispute, the Panel reviewed tax benefits and tariff concessions that benefit the production of cars that 

use a certain percentage value of domestic parts and components, which are alleged to violate the TRIMs 

Agreement, the SCM Agreement, and Article III. See generally Indonesia – Certain Measures Affecting the 

Automobile Industry, Report of the Panel, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R (2 July 

1998). 

216 Id. at ¶ 14.50. 
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Agreement prohibits granting subsidies contingent on the “use of domestic goods, not the 

requirement to use domestic goods as such” and TRIMs prohibits measures “in the form of local 

content requirements, not the grant of an advantage, such as a subsidy.”217

To demonstrate that there is not a conflict between the Agreements, the Panel pointed out 

that a finding of inconsistency with the SCM Agreement may be remedied by removing the 

subsidy, but without removing the local content violation.218 By contrast, an inconsistency with 

the TRIMs Agreement can be remedied by removal of the TRIM, even if the subsidy continues 

to be granted.219 Conversely, if a TRIM conditions a subsidy on a local content requirement, the 

measure remains a violation of TRIMs if the subsidy element is replaced with some other form 

of incentive.220 By contrast, if the local content requirements are removed, the subsidy remains 

subject to the SCM Agreement. “Clearly, the two agreements prohibit different measures.”221 

The Panel concluded that the Agreements do not conflict, “as they cover different subject matters 

and do not impose mutually exclusive obligations.”222 While there may be overlapping coverage 

and both Agreements may apply to a measure or a single legislative act, the focuses of the 

agreements are different and they impose different obligations.223

 

217 Id. at ¶ 14.50. 

218 Id. at ¶ 14.51. 

219 Id. 

220 Id. 

221 Id. 

222 Id. at ¶ 14.52. 

223 Id. 
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3. The TRIMs Agreement and Article III of the GATT 

1994 

In examining the relationship between TRIMs and Article III of the GATT 1994, the 

Panel recalled EC – Bananas III, which noted that “with the exception of its transition provisions 

the TRIMs Agreement essentially interprets and clarifies the provisions of Article III (and also 

Article XI) where trade-related investment measures are concerned. 224 Thus the TRIMs 

Agreement does not add to or subtract from those GATT obligations.” 

The Panel first determined that the TRIMs Agreement, on its face, is a fully fledged 

agreement. 225 While both the TRIMs Agreement and Article III:4 prohibit local content 

requirements, “when the TRIMs Agreement refers to ‘the provisions of Article III’, it refers to 

the substantive aspects of Article III; that is to say, conceptually, it is the ten paragraphs of 

Article III that are referred to in Article 2.1 of the TRIMs Agreement, and not the application of 

Article III in the WTO context as such.”226 Thus, when Article III is considered not applicable 

for reasons “not related to the disciplines of Article III itself, the provisions of Article III remain 

applicable for the purpose of the TRIMs Agreement.”227

While agreeing with the Panel in EC – Bananas III that the TRIMs Agreement helps to 

interpret and clarify the provisions of Article III, the Panel in Indonesia – Autos found that the 

 

224 See European Communities – Regime for the Importation, Sale and Distribution of Bananas, Complaint by 

Mexico, Report of the Panel, WT/DS27/R/MEX (22 May 1997) at ¶ 7.185. 

225 See Indonesia – Certain Measures Affecting the Automobile Industry, Report of the Panel, WT/DS54/R, 

WT/DS55/R, WT/DS59/R, WT/DS64/R (2 July 1998) at ¶ 14.61. 

226 Id. at ¶ 14.61. 

227 Id. at ¶ 14.62. 
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autonomous legal existence of the TRIMs Agreement, independent from Article III, is bolstered 

by the inclusion of a special transitional provision with notification requirements.228 As Article 

III and TRIMs are “legally distinct and independent” provisions, if either were not applicable the 

other one would remain applicable.229 “[T]o the extent that complaints have raised separate and 

distinct claims under Article III:4 of GATT and the TRIMS Agreement, each claim must be 

addressed separately.”230

F. Addressing Allegations Made Under Several Provisions 

As TRIMs articles refer to other Articles of GATT 1994, disputes alleging violations of 

TRIMs typically include allegations of inconsistencies with other Articles and Agreements. In 

disputes alleging inconsistencies with TRIMs and Article III:4, panels have taken different 

approaches as to whether their analysis should first begin under TRIMs or under Article III. The 

Panel in EC – Bananas III reviewed the claims made under Article 2 of the TRIMs Agreement 

together with the claims under Article III:4.231 Finding the measures to be inconsistent with 

Article III:4, the Panel did not find it necessary to make a “specific ruling” with respect to the 

TRIMs Agreement.232 The Panel reasoned that “a finding that the measure in question would not 

be considered a trade-related investment measure for the purposes of the TRIMs Agreement 

would not affect our findings in respect of Article III:4 since the scope of that provision is not 

 

228 Id. 

229 Id. 

230 Id. 

231 See European Communities – Regime for the Importation, Sale and Distribution of Bananas, Complaint by 

Mexico, Report of the Panel, WT/DS27/R/MEX (22 May 1997) at ¶ 7.168. 

232 Id. at ¶ 7.187. 
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limited to TRIMs and, on the other hand, steps taken to bring...[the measure] into conformity 

with Article III:4 would also eliminate the alleged non-conformity with obligations under the 

TRIMs Agreement.”233

However, the Panel in Indonesia – Autos found the TRIMs Agreement to be more 

specific than Article III:4 and thus began its analysis with claims made under TRIMs.234 After 

finding the measures inconsistent with TRIMs, the Panel did not review the allegations under 

Article III:4.235 More recently, the Panels in Canada – Autos and India – Autos first examined 

the complaints under Article III:4. The Panel in Canada – Autos reasoned that it would be more 

efficient to begin its analysis with Article III:4, as either analysis would likely require an analysis 

of Article III:4 and was “not persuaded that the TRIMs Agreement can be properly characterized 

as being more specific than Article III:4.” 236 In India – Autos the Panel recognized that the 

TRIMs Agreement introduces rights and obligations that are specific to it but similarly was not 

convinced that the “TRIMs Agreement could inherently be characterized as more specific than 

the relevant GATT provisions.”237

 

233 Id. at ¶ 7.186. 

234 See Indonesia – Certain Measures Affecting the Automobile Industry, Report of the Panel, WT/DS54/R, 

WT/DS55/R, WT/DS59/R, WT/DS64/R (2 July 1998) at ¶ 14.63. 

235 Under the principle of judicial economy, the Panel is only required to “address the claims that must be 

addressed to resolve a dispute or which may help a losing party in bringing its measures into conformity with 

the WTO Agreement.” See Indonesia – Certain Measures Affecting the Automobile Industry, Report of the 

Panel, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R (2 July 1998) at ¶ 14.93. 

236 See Canada – Certain Measures Affecting the Automotive Industry, Report of the Panel, WT/DS139/R, 

WT/DS142/R (11 February 2000) at ¶¶ 10.61-10.64. 

237 See India – Measures Affecting the Automotive Sector, Report of the Panel, WT/DS146/R, WT/DS175/R (21 

December 2001) at ¶ 7.157. 
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V. U.S. ACTION AT THE WTO 

In the WTO, where a Member believes another Member is not in compliance with WTO 

obligations, Members will often work informally to seek a rectification of the problem. If a 

solution cannot be found or the Member who is not in compliance is unable to address the matter 

for internal reasons, the Member concerned with the law, regulation, administrative practice or 

government action can formally request consultations with the other Member in the WTO under 

the Dispute Settlement Understanding and pursue formal dispute settlement if resolution is not 

achieved in a relatively short period of time.238 To date, the United States has filed requests for 

consultation with China on two occasions on matters that deal directly with the TRIMs 

Agreement. 239 The first is in relation to China’s 2004 Automobile Policy and the second 

concerns Chinese legislation that allows refunds, reduction or exemptions from taxes to 

enterprises on the condition that those enterprises purchase domestic over imported goods or 

meet certain performance requirements. 

 

238 See Understanding on Rules and Procedures Governing the Settlement of Disputes, April 15, 1994, 

Marrakesh Agreement Establishing the World Trade Organization, Annex 2 [hereinafter Dispute Settlement 

Understanding]. 

239 In 2004, the United States filed a Request for Consultations regarding value added taxes on integrated circuits. 

The U.S. alleged that China provided enterprises in China a partial refund of the VAT on integrated circuits 

they have produced and on domestically-designed integrated circuits that, because of technological 

limitations, are manufactured outside of China. The U.S. believed that these measures were inconsistent with 

China’s obligations under Articles I and II of GATT 1994, China’s Protocol of Accession, and Article XVII 

of GATS. See China – Value-Added Tax on Integrated Circuits, Request for Consultation by the United 

States, WT/DS309/1 (23 March 2004). Following consultations in April 2004 and a series of bilateral 

meetings, the U.S. and China signed a Memorandum of Understanding and following its successful 

implementation, the U.S. and China agreed that a “mutually satisfactory solution has been reached to the 

matter raised by the United States.” See, China – Value-Added Tax on Integrated Circuits, Notification of 

Mutually Agreed Solution, WT/DS309/8 (6 October 2005). 
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A. Measures Affecting Imports of Automobile Parts 

On March 30, 2006 the U.S. requested consultations with China regarding measures that 

provide preferential treatment to domestic auto parts over imported auto parts by assessing an 

internal charge on vehicles manufactured using imported auto parts that is not assessed on 

vehicles manufactured using domestic auto parts.240 On the same day, the EC also requested 

consultations, followed by Canada on April 13, 2006.241 After joint consultations in May failed 

to resolve the dispute, requests were filed by the EC, the U.S. and Canada for the establishment 

of a panel.242 On January 29, 2007, the Dispute Settlement Body established a single Panel to 

examine the complaints by the U.S., Canada, and the EC.243

As discussed above, in 2004 China issued the Automotive Policy Order, followed by a 

series of implementing measures that affect imported auto parts.244 The measures provide for an 

 

240 See China—Measures Affecting Imports of Automobile Parts, Request for Consultations by the United States, 

WT/DS340/1, G/L/771, G/TRIMS/D/23, G/SCM/D68/1 (3 April 2006), attached as Exhibit 7. 

241 See China – Measures Affecting Imports of Automobile Parts, Request for Consultations by the European 

Communities, WT/DS339/1, G/L/770, G/TRIMS/D/22, G/SCM/D67/1 (3 April 2006); see also China – 

Measures Affecting Imports of Automobile Parts, Request for Consultations by Canada, WT/DS340/6 (19 

April 2006). 

242 See China – Measures Affecting Imports of Automobile Parts, Request for the Establishment of a Panel by the 

European Communities, WT/DS339/8 (18 September 2006); China – Measures Affecting Imports of 

Automobile Parts, Request for the Establishment of a Panel by the United States, WT/DS340/8 (18 

September 2006); China – Measures Affecting Imports of Automobile Parts, Request for the Establishment of 

a Panel by Canada, WT/DS342/8 (18 September 2006). 

243 Note by the Secretariat: Constitution of the Panel Established at the Request of the European Communities, 

United States, and Canada, WT/DS339/9, WT/DS340/9, WT/DS342/9, circulated 30 January 2007. 

244 The Policy on Development of the Automotive Industry, issued on May 21, 2004, by China’s National 

Development and Reform Commission (“NDRC”) as Order No. 8; Administrative Measures on Importation 

of Automotive Parts Deemed Whole Vehicles, Issued as Decree 125 on February 28, 2005 by China’s General 

Administration of Customs, NDRC, Ministry of Finance, and Ministry of Commerce in accordance with the 

Automotive Policy Order; Rules for Verifying whether Imported Automotive Parts are Deemed Whole 
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internal charge of 25 percent on imported auto parts, with no comparable charge on domestic 

auto parts, which is applied to imported auto parts only when those parts are used to make a 

domestically-produced auto that exceeds a specified threshold (in volume or value) of imported 

auto parts. Additionally, the legislation requires burdensome procedures that are applied only to 

imported goods by requiring automobile manufacturers that use imported auto parts to keep 

records and report and verify their use of imported auto parts. 

In its First Written Submission, the United States alleged that the additional charges on 

imported auto parts is inconsistent with Article III: 2, first sentence, Article III:4 and Article III:5 

of the GATT 1994.245 Additionally, the measures are inconsistent with Article 2 of the TRIMs 

Agreement and Paragraph 1(a) of Annex 1 of the TRIMs Agreement. Finally, the measures 

violate China’s accession commitments as they are inconsistent with Part I.7.2 and I.7.3 of the 

Accession Protocol and Paragraph 203 of the Working Party Report.246

Article III provides that “internal taxes and other internal charges ... affecting the internal 

sale, offering for sale, purchase, transportation, distribution or use of products, and internal 

quantitative regulations requiring the ...use of products in specified amounts or proportions, 

should not be applied ... so as to afford protection to domestic production.”247 The U.S. has 

 Vehicles, issued as Public Announcement No. 4 by Customs on March 28, 2005 in accordance with Decree 

125. Infra Section III:C– Discussing the 2004 Automotive Policy. 

245 See China – Measures Affecting Imports of Automobile Parts (WT/DS340), First Written Submission of the 

United States of America, March 13, 2007, available at: ustr.gov [hereinafter First Written Submission]. 

246 First Written Submission 

247 Marrakesh Agreement Establishing the World Trade Organization, April 15, 1994, The Legal Texts: The 

Results of the Uruguay Round of Multilateral Trade Negotiations 4 (1999), 1867 U.N.T.S. 154, 33 I.L.M. 

1144 (1994) [hereinafter WTO Agreement], Art. III. 
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alleged that the measures “result in internal charges on imported parts in excess of those applied 

to domestic parts,” “accord treatment less favorable to imported parts with respect to 

requirements affecting internal sale, purchase, distribution and use,” [and] “directly or indirectly 

require that specified amounts or proportions of auto parts used in vehicle manufacturing must be 

supplied from domestic sources.” 248 As such, the measures violate the national treatment 

provisions contained in Article III and, respectively, Articles III:2, III:4, and III:5.249

In the second allegation, the United States alleged that the Chinese measures are 

inconsistent with Articles 2.1 and 2.2 of the TRIMs Agreement.250 Article 2.1 provides that “no 

Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI 

of GATT 1994.”251 Since, as alleged, the measures violate Articles III:3, III:4, and III:5, the 

measures must also violate Article 2.1 of TRIMs. Article 2.2 refers to the “illustrative list of 

TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 

of Article III of GATT 1994.”252 The U.S. argues that China’s measures fall within the types of 

measures covered by the Illustrative List of the Annex of the TRIMs Agreement. Illustrative List 

1(a) provides: 

1. TRIMS that are inconsistent with the obligation of national 

treatment provided for in paragraph 4 of Article III of GATT 

 

248 First Written Submission at 1. 

249 For a complete discussion on the Article III allegations made by the United States see the First Written 

Submission at pp. 30-44. 

250 First Written Submission at 42. 

251 TRIMS Agreement Article 2.1. 

252 TRIMS Agreement Article 2.2. 
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1994 include those which are mandatory or enforceable 

under domestic law or under administrative rulings, or 

compliance with which is necessary to obtain an advantage, 

and which require: 

a. the purchase or use by an enterprise of products of 

domestic origin or from any domestic source, whether 

specified in terms of particular products, in terms of 

volume or value of products, or in terms of a proportion 

of volume or value of its local production.253

Since the measures give manufacturers that produce automobiles using domestic parts an 

exemption from internal charges, an advantage is given over manufacturers that choose to 

produce automobiles using foreign parts. The U.S. argues that the measures fall within the 

Illustrative List because the “measures require ‘the purchase or use by an enterprise of products 

of domestic origin or from any domestic source’ so as ‘to obtain an advantage.’”254 Thus, the 

measures fall within the Illustrative List and are considered investment measures that are 

inconsistent with Article 2 of the TRIMs Agreement. 

Finally, the U.S. alleged that the measures are inconsistent with Part I.7.2 and I.7.3 of the 

Accession Protocol and Paragraph 203 of the Working Party Report.255 Paragraph I.7.2 of the 

Accession Protocol provides that “China shall eliminate and shall not re-introduce or apply nontariff measures that cannot be justified under the provisions of the WTO Agreement.”256 By 

introducing measures that are inconsistent with Article III:2, Article III:4, and Article III:5 of the 

 

253 TRIMS Agreement, Annex, Illustrative List. 

254 First Written Submission at 42. 

255 First Written Submission at 44. 

256 Accession Protocol at ¶ I.7.2. 
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GATT 1994, China has acted in a manner that is inconsistent with what was agreed to in 

paragraph I.7.3 of the Accession Protocol.257

Paragraph I.7.3 of China’s Accession Protocol reiterates paragraph 203 of the Working 

Party Report.258 As discussed above, these provisions require China, “upon accession, [to] 

comply with the TRIMs Agreement... eliminate and cease to enforce... local content ... 

requirements made effective through laws, regulations or other measures.”259 The U.S. alleged 

that the measures violate Article 2 of TRIMs and “in light of the fact that the measures 

effectively maintain the local content requirement initially set forth in China’s Automotive 

Industry Policy” of 2004, the measures are inconsistent with both paragraph 203 of the Working 

Party Report and Part I.7.3 of China’s Accession Protocol.260

China has argued that the measures are not inconsistent with its commitments. First, the 

measures involve customs duties and those customs duties are consistent with Article II.261 

Second, if the Panel finds that the measures violate Article III and the TRIMs Agreement, China 

relies on Article XX(d), which allows for measures that are “necessary to secure compliance 

with laws or regulations which are not inconsistent with the provisions of this Agreement.”262

 

257 First Written Submission at 45. 

258 Accession Protocol at ¶ I.7.3; Working Party Report at ¶ 203. 

259 Accession Protocol at ¶ I.7.3. 

260 First Written Submission at 45. 

261 China – Measures Affecting Imports of Automobile Parts, Rebuttal Submission of the United States of 

America, WT/DS340 at ¶ 3 (22 June 2007). 

262 Id. 
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As automobile parts and whole automobiles have different import tariffs, China argues 

that the measures are necessary to prevent the “circumvention” of China’s tariff system by 

importers separating automobiles into split systems. China equates separate automobile parts 

entering China with the splitting of a kit (either an SKD or CKD), which contain all of the parts 

of an automobile and, in the tariff schedule, are treated as complete automobiles.263 China 

believes that imported parts – “even if sourced from different places at different times – are 

conceptually the same as a kit. After all, in both cases, at some point, the parts will be used to 

make an automobile.”264

The United States argues that the measure – “although purportedly adopted to prevent 

importers from splitting kits to circumvent duties on whole cars – is vastly broader than that.”265 

Not only does the measure include kits broken into several boxes, it “sweeps together all 

imported parts from different suppliers, from different countries, purchased at different times, 

and even parts produced within China if such parts have insufficient local content.”266 The U.S. 

goes to lengths to show the difference between a kit and streams of parts used in manufacturing 

operations, concluding that China has no basis for comparing the streams of parts used by a 

manufacturing plant to the conduct of purported “circumvention” involved in splitting a kit 

before import.”267 The commercial reality is such that parts used by a manufacturing plant 

 

263 Id. 

264 Id. at ¶ 8. 

265 Id. at ¶ 7. 

266 Id.. 

267 Id. at ¶¶ 10-11. 
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cannot be put in kits and thus China’s purported goal of stopping “circumvention” “in the form 

of splitting pre-organized kits – is in no way consistent with [the] actual scope and operation of 

China’s measures.”268 Accordingly, the purpose of the measures is to “impose a local content 

requirement on all automobile manufacturers in China, and ...encourage the growth of the 

domestic parts industry by discriminating against imported auto parts.”269

China also relies on GRI 2(a), an interpretative rule of the Harmonized System. GRI 2(a) 

states that: 

Any reference in a heading to an article shall be taken to include a 

reference to that article incomplete or unfinished, provided that, as 

presented, the incomplete or unfinished article has the essential 

character of the complete or finished article. It shall also include a 

reference to that article complete or finished (or failing to be 

classified as complete or finished by virtue of this rule), presented 

unassembled or disassembled.270

The United States argues that China cannot rely on GRI 2(a) because the interpretative 

rule only relates to China’s schedule of tariff commitments and is “not relevant to the 

consideration of China’s obligations under GATT Article III, or to the question of whether 

China’s additional charges on imported parts are to be considered either as ‘ordinary customs 

duties’ under Article II:1(b), or as internal charges under Article III:2.”271 As none of the 

dispositive issues in the dispute turn on issues of tariff classification, GRI 2(a) provides China 

 

268 Id. at ¶ 12. 

269 Id. 

270 Id. at ¶ 32. 

271 Id. at ¶ 13. 
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with no defense. In Sum, the U.S. argues that it has “established breaches of Articles III:2, III:4, 

and III:5 of the GATT 1994, of the TRIMs Agreement, and of the SCM Agreement. China’s 

only defense – that its classification of imported parts as whole vehicles is correct under the 

principles set out in GRI 2(a) – is not even relevant to analysis under those provisions of the 

WTO Agreement.”272

The U.S. argues that GRI 2(a) is not applicable to China’s Article II:1(a) defense because 

these are not “ordinary customs duties” but are rather internal charges and thus subject to 

obligations under Article III:2.273 The U.S. points out that China has based its case entirely on 

“circumvention” and yet GRI 2(a) does not mention “circumvention.”274 Additionally, GRI 2(a) 

“uses the language ‘as presented’ and ‘presented’ indicating that customs authorities should 

classify the goods in the condition as presented to customs upon importation.”275 It seems 

implausible that “a customs authority should seek out all entries of diverse parts, by different 

importers, from different suppliers, at different times, and even of different national origin, and 

then proceed to collect them into some fictitious unassembled product, to then be classified as 

the assembled product.”276

 

272 Id. at ¶ 26. 

273 Id. at ¶ 27. 

274 Id. at ¶ 33. 

275 Id. 

276 Id. 
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B. Certain Measures Granting Refunds, Reductions or 

Exemptions from Taxes and Other Payments 

After receiving China’s first “long-overdue” subsidies notification to the WTO Subsidies 

Committee in 2006, the U.S. pressed China to withdraw subsidies that appeared to be prohibited 

by the WTO.277 After China was unwilling to commit to the immediate withdrawal of these 

subsidies, the U.S. initiated a challenge to these subsidies under the WTO’s dispute settlement 

procedures.278

On February 7 2007 the United States filed with the Dispute Settlement Body a request 

for consultation with China over various subsidy programs.279 In March 2007, the United States 

held consultations with China and learned that China had repealed one of the subsidy programs 

listed in the U.S. request for consultation and had recently adopted a new Enterprise Income Tax 

Law.280 Although the changes to the Enterprise Income Tax Law included many improvements 

over the former law, the new law does not go into effect until January 1, 2008 and Article 57 of 

the new law allows established enterprises to receive preferential tax treatment for five additional 

years beginning from the date the law goes into effect.281 The U.S. and China held consultations 

 

277 See National Trade Estimate 2007 at 105. 

278 China – Certain Measures Granting Refunds, Reductions or Exemptions from Taxes and Other Payments, 

Request for Consultation by the United States, WT/DS358/1 (7 February 2007). 

279 Id. 

280 China – Certain Measures Granting Refunds, Reductions or Exemptions from Taxes and Other Payments, 

Request for Further Consultations by the United States, WT/DS358/1/Add.1 (2 May 2007). 

281 Enterprise Income Tax Law of the People's Republic of China, Order No. 63 [2007] of the President of the 

People's Republic of China (16 March 2007). 
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again in June 2007, but, after those consultations did not resolve the dispute, the United States 

filed a request for the establishment of a panel on the following programs.282 

(1) Circular of the State Administration of Taxation Concerning 

Transmitting the Interim Measure for the Administration of 

Tax Refunds to Enterprises with Foreign Investment for Their 

Domestic Equipment Purchases, Order No. 171 GuoShiFa 

[1999] No. 171 (20 August 1999)283 read in conjunction with 

the Circular of the State Administration of Taxation and the 

National Development and Reform Commission of the 

People's Republic of China, on Printing and Issuing the Trial 

Measures for the Administration of Tax Rebate for the 

Purchase of Domestically-Produced Equipment in Foreign 

Investment Projects GuoShuiFa [2006] No. 111 (24 July 

2006).284

The purpose of the measure is to “encourage enterprises with foreign investment to use 

domestic equipment.” Under Article 3 of Circular No. 171, enterprises with foreign-investment 

accounting for more than 25 percent of total investment are eligible to receive value-added-tax 

refunds on certain equipment purchased. For a company to get a VAT rebate, the company must 

have documents showing that it is in fact a foreign invested enterprise.285 Article 4 provides that 

the equipment eligible for the VAT exemption must fall under the Encouraged and Restricted B 

categories listed in the Notice of the State Council Concerning the Adjustment of Taxation 

 

282 China – Certain Measures Granting Refunds, Reductions or Exemptions from Taxes and Other Payments, 

Request for the Establishment of a Panel by the United States, WT/DS358/13 (13 July 2007), attached as 

Exhibit 8. 

283 Attached as Exhibit 9. 

284 Attached as Exhibit 10. 

285 Department of Commerce, International Trade Administration, Coated Free Sheet Paper from the People’s 

Republic of China: Preliminary Affirmative Countervailing Duty Determination, 72 Fed. Reg. 17484 (April 9, 

2007). 
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Policies for Imported Equipment (No. 37(1997)). Additionally, under Article 4, the measure 

applies only to unused “domestic equipment” purchased after September 1999. The Article 

defines domestic equipment as “those manufactured by the enterprises within the territory 

boundaries of the PRC.” 

Similarly, Circular No. 111 encourages the use of domestic equipment in foreign 

projects.286 The measure gives local governments some responsibility in approving tax refunds 

to “encouraged foreign-funded projects” that purchase certain domestic equipment. Foreign 

funded projects of less than $30 million must receive a project confirmation letter and an 

attached list of approved equipment from local governments, while those projects greater than 

$30 million receive a confirmation letter and an equipment list from the National Development 

and Reform Commission. 

The Department of Commerce examined Circular No. 171 in its preliminary 

determination in Coated Free Sheet Paper from the PRC. The Department found that the VAT 

rebate in this program did in fact confer a countervailable subsidy.287 Although the Chinese 

Government claimed that the goal of the program was to “equalize the tax burden on the 

purchase of domestically produced and imported equipment” by foreign-invested enterprises, 

since under another program foreign enterprises are exempt from paying VAT on imported 

 

286 Circular of the State Administration of Taxation and the National Development and Reform Commission of 

the People's Republic of China, on Printing and Issuing the Trial Measures for the Administration of Tax 

Rebate for the Purchase of Domestically-Produced Equipment in Foreign Investment Projects GuoShuiFa 

[2006] No. 111 (24 July 2006). 

287 Department of Commerce, International Trade Administration, Coated Free Sheet Paper from the People’s 

Republic of China: Preliminary Affirmative Countervailing Duty Determination, 72 Fed. Reg. 17484, 17496 

(April 9, 2007). 
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equipment, the Department found that the Chinese Government was unable to show that the 

programs were linked. 288 In its analysis, the Department determined that the VAT rebates were 

a financial contribution in the form of revenue foregone, providing a benefit to the recipients in 

the amount of the tax savings, and that the rebates were specific in that they were contingent 

upon use of domestic equipment and benefited a specific group.289

This program gives preferential treatment that is conditioned on an enterprise purchasing 

domestic goods over imported goods. Thus it appears to be inconsistent with Articles 3.1(b) and 

3.2 of the SCM Agreement. As advantages are given to enterprises that purchase domestic 

equipment over imported equipment, the measures accord imported products treatment less 

favorable than that accorded “like” domestic products, which is inconsistent with Article III:4 of 

GATT 1994 and Article 2.1 and Annex 1, paragraph 1(a), of the TRIMs Agreement. Similarly, 

the measures are not consistent with China’s obligations under paragraphs 7.2-7.3 and 10.3 of 

Part I of its Protocol of Accession and paragraph 1.2 of Part I of the Protocol, to the extent that it 

incorporates paragraph 203 of the Report of the Working Party. 

(2) Circular of the Ministry of Finance and the State 

Administration of Taxation Concerning the Issue of Tax 

Credit for Business Income Tax for Homemade Equipment 

Purchased by Enterprises with Foreign Investment and 

Foreign Enterprises, CaiShuiZi [2000] No. 49 (14 January 

2000) 290 read in conjunction with Circular of the State 

Administration of Taxation on Printing and Distributing the 

Measures Concerning Business Income Tax Credit on the 

 

288 Id. 

289 Id. 

290 Attached as Exhibit 11. 
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Investment of Enterprises with Foreign Investment and 

Foreign Enterprises by Way of Purchasing Homemade 

Equipment, GuoShuiFa [2000] No. 90 (18 May 2000) 291

Subsidies under this program will continue to be granted 

under the Enterprise Income Tax Law of the People's 

Republic of China, of the President of the People's Republic 

of China [2007] No. 63 (16 March 2007)292, by virtue of 

Article 57 of that Law. 

The Measure allows for foreign-owned enterprises to receive a tax credit for purchasing 

“homemade equipment.” The Chinese government has claimed that the purpose of the program 

is to attract foreign investment.293 Production equipment covered by the measure includes: 

machines, transportation vehicles, appliances and tools referred to in Circular 49 “and which are 

maintained as fixed assets for production or business purposes.” Under Circular 49 the 

enterprise must fall under the Encouraged or Restricted B categories of the Catalog of Industrial 

Guidance for Foreign Investment, but must not be listed in the Catalog of Non-Duty Exemptible 

Articles of Importation. 294 The measure provides that 40 percent of the investment for 

“homemade equipment” purchases is refundable, but may not exceed the incremental increase in 

income tax from the previous year. The credit may be deducted over a maximum seven year 

period if taxes paid do not exceed the amount of the deduction. To receive the income tax credit, 

eligible enterprises must submit an application to local tax authorities within two months of 

purchasing the equipment. 

 

291 Attached as Exhibit 12. 

292 Attached as Exhibit 13. 

293 Id.; Program LVIII. 

294 Circular of the State Council Concerning the Adjustment in the Taxation Policy of Imported Equipment, 

GuoFa [1997] No. 37 (29 December 1997). 
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In its preliminary determination in Coated Free Sheet Paper from the PRC, the 

Commerce Department determined that the income tax credits were a countervailable subsidy.295 

Furthermore the tax credits were found to be a financial contribution as revenue foregone by the 

local governments that provide a benefit to the recipients in the amount of the tax savings.296 

Finally, the tax credits were found to be “contingent upon use of domestic over imported 

goods.”297

As the income tax credits give preferential treatment to enterprises on the condition that 

domestic machinery is purchased over foreign machinery, they appear to be inconsistent with 

Articles 3.1(b) and 3.2 of the SCM Agreement. As advantages are given to enterprises that 

purchase domestic equipment over imported equipment, the measures accord imported products 

treatment less favorable than that accorded “like” domestic products, which is inconsistent with 

Article III:4 of GATT 1994 and Article 2.1 and Annex 1, paragraph 1(a), of the TRIMs 

Agreement. Similarly, the measures are not consistent with China’s obligations under 

paragraphs 7.2-7.3 and 10.3 of Part I of its Protocol of Accession and paragraph 1.2 of Part I of 

the Protocol, to the extent that it incorporates paragraph 203 of the Report of the Working Party. 

(3) Circular on Distribution of Interim Measures Concerning 

Reduction and Exemption of Enterprise Income Tax for 

Investment in Domestically Made Equipment for 

Technological Renovation; CaiShui [1999] No. 290 (8 

 

295 Department of Commerce, International Trade Administration, Coated Free Sheet Paper from the People’s 

Republic of China: Preliminary Affirmative Countervailing Duty Determination, 72 Fed. Reg. 17484, 17495 

(April 9, 2007). 

296 Id. 

297 Id. 
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December 1999). 298 Subsidies under this program will 

continue to be granted under the Enterprise Income Tax Law 

of the People's Republic of China, Order No. 63 [2007] of the 

President of the People's Republic of China (16 March 2007) 

by virtue of Article 57 of that Law. 

The purpose of the program is to encourage and support investment in domestic 

technology and machinery. The measure provides for income tax refunds on domestic 

equipment purchased to upgrade equipment and technology. It is available to all enterprises with 

investment in technological transformation projects that conform to the state industrial policy. 

Under the measure 40 percent of the investment in domestic equipment may be offset in the year 

of investment from the increase in income tax from the previous year. The measure does not 

apply to foreign enterprises or foreign-invested enterprises. The Canadian Border Services 

Agency has found this income tax refund to be a prohibited subsidy for being contingent, in 

whole or part, on the use of domestic goods.299

This tax refund program conditions preferential tax treatment on the purchase of domestic 

equipment over foreign equipment, thus according imported products treatment less favorable 

than that accorded “like” domestic products. Thus, the program appears to be inconsistent with 

Articles 3.1(b) and 3.2 of the SCM Agreement, with Article III:4 of GATT 1994, and Article 2.1 

and Annex 1, paragraph 1(a), of the TRIMs Agreement. Similarly, the measures are not 

 

298 Attached as Exhibit 14 {Chinese original and English summary}. 

299 Statement of Reasons Concerning the making of a final determination with respect to the dumping of Certain 

Copper Pipe Fittings Originating in or exported from the United States of America, the Republic of Korea 

and the People’s Republic of China and the making of a final determination with respect to the subsidizing of 

Certain Copper Pipe Fittings Originating in or exported from the People’s Republic of China, February 2, 

2007, available at http://www.cbsa-asfc.gc.ca/sima/anti-dumping/ad1358-fd-de-eng.html. 
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consistent with China’s obligations under paragraphs 7.2-7.3 and 10.3 of Part I of its Protocol of 

Accession and paragraph 1.2 of Part I of the Protocol, to the extent that it incorporates paragraph 

203 of the Report of the Working Party. 

(4) Articles 75(7) and 75(8) of the Rules for Implementation of 

the Income Tax Law of the People’s Republic of China on 

Enterprises with Foreign Investment and Foreign Enterprises, 

Order No. [1991] 85 Decree of the State Council (30 June 

1991)300

; read in conjunction with Articles 8 and 9 of the

Provisions of the State Council on the Encouragement of 

Foreign Investment, Order No. [1986] 95 GuoFa (11 October 

1986) 301 ; and Articles 6 of the Income Tax Law of the 

People’s Republic of China on Enterprises with Foreign 

Investment and Foreign Enterprises, Order [1991] No. 45 of 

the President of the People’s Republic of China (9 April 

1991).302 Subsidies under this program will continue to be 

granted under the Enterprise Income Tax Law of the People's 

Republic of China, Order No. [2007] 63 of the President of 

the People's Republic of China (16 March 2007) by virtue of 

Article 57 of that Law. 

This measure gives preferential tax treatment to enterprises that are export-oriented or 

those that are in technological and economic development zones. Under Article 75(7) of Order 

No. 85 and Article 8 of Order No. 95, export-oriented enterprises that export 70 percent or more, 

according to value, of their output may, after the period of other exemptions or reductions has 

expired, pay a tax rate 50 percent lower than what is mandated under the tax law. Enterprises in 

economic and technological development zones are able to reduce their tax liability from 15 

percent to 10 percent. Article 75(8) of Order No. 95 and Article 8 of Order No. 85 provides that 

 

300 Attached as Exhibit 15. 

301 Attached as Exhibit 16. 

302 Attached as Exhibit 17. 
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foreign advanced technology enterprises that remain advance technology enterprises after other 

tax exemptions and reductions have expired, may, for an additional three years, pay at fifty 

percent of the enterprise income tax rate, as specified in the Income Tax Law. 

Article 6 of the Income Tax Law states that the State shall “guide the orientation of 

foreign investment and encourage the establishment of enterprises with foreign investment which 

adopt advanced technology and equipment and export all or greater part of their products.”303

As these tax preferences are conditioned on export performance they violate Articles 

3.1(a) and 3.2 of the SCM Agreement, and consequently paragraph 10.3 of Part I of China’s 

Protocol of Accession, and paragraph 1.2 of Part I of its Protocol, to the extent that it 

incorporates paragraph 167 of the Report of the Working Party.

(5) Article 73(6) of the Rules for Implementation of the Income 

Tax Law of the People’s Republic of China on Enterprises 

with Foreign Investment and Foreign Enterprises, Decree 

[1991] No. 85 of the State Council (30 June 1991); read in 

conjunction with Articles 7 of the Income Tax Law of the 

People’s Republic of China on Enterprises with Foreign 

Investment and Foreign Enterprises, Order [1991] No. 45 of 

the President of the People’s Republic of China (9 April 

1991); and Section XIII of the Catalogue for the Guidance of 

Foreign Investment Industries, Order [2004] No. 24 of the 

State Development and Reform Commission, the Ministry of 

Commerce of the People’s Republic of China (30 November 

2004).304 Subsidies under this program will continue to be 

granted under the Enterprise Income Tax Law of the People's 

Republic of China, Order No. [2007] 63 of the President of 

 

303 Article 6, Income Tax Law of the People’s Republic of China on Enterprises with Foreign Investment and 

Foreign Enterprises; Order No. 45. 

304 Attached as Exhibit 18. 
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the People's Republic of China (16 March 2007) by virtue of 

Article 57 of that Law.

This measure gives preferential tax treatment to certain foreign enterprises and 

enterprises with foreign investment that are established in Special Economic Zones.305 The 

measure reduces the tax rate for such enterprises to the reduced income tax rate of fifteen 

percent.306 Special Economic Zones include: coastal economic open zones, special economic 

zones, and economic and development zones in old urban districts of municipalities that are 

involved in projects encouraged by the State. Under Article XIII of the Catalogue, permitted 

projects are those “whose products are to be wholly exported directly.” 

As this tax benefit is conditioned on products being “wholly exported” and thus 

conditioned on export performance, it violates Articles 3.1(a) and 3.2 of the SCM Agreement, 

and consequently paragraph 10.3 of Part I of China’s Protocol of Accession, and paragraph 1.2 

of Part I of its Protocol, to the extent that it incorporates paragraph 167 of the Report of the 

Working Party.

(6) Article 81 of the Rules for Implementation of the Income Tax 

Law of the People’s Republic of China on Enterprises with 

Foreign Investment and Foreign Enterprises Order No. 85 

[1991] Decree of the State Council (30 June 1991); read in 

conjunction with Articles 10 of the Income Tax Law of the 

People’s Republic of China on Enterprises with Foreign 

Investment and Foreign Enterprises, Order [1991] No. 45 of 

 

305 Article 7, Income Tax Law of the People’s Republic of China on Enterprises with Foreign Investment and 

Foreign Enterprises; Order No. 45. 

306 Article 73(6) of the Rules for Implementation of the Income Tax Law of the People’s Republic of China on 

Enterprises with Foreign Investment and Foreign Enterprises, Decree [1991] No. 85 of the State Council (30 

June 1991). 
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the President of the People’s Republic of China (9 April 

1991). Subsidies under this program will continue to be 

granted under the Enterprise Income Tax Law of the People's 

Republic of China, Order No. [2007] 63 of the President of 

the People's Republic of China (16 March 2007) by virtue of 

Article 57 of that Law.

The measure gives preferential treatment to encourage foreign investors to reinvest 

profits made from the enterprise to create more investment in enterprises that are export-oriented, 

technologically-advanced, or operating in certain special economic zones.307 The measure 

reduces the income tax levied on such enterprises by forty percent of paid income tax on the 

amount that is reinvested for five years.308 Under Article 81 of the Income Tax Rules for 

Implementation, reinvested enterprises must, within three years, have “achieved the standards 

with respect to export-oriented enterprises or have not continued to be confirmed as advanced 

technology enterprise” or they must repay sixty percent of the taxes refunded. 

The measure also gives tax preferences to infrastructure projects in certain economic 

zones. Infrastructure projects in certain economic zones where the period of operation is fifteen 

years or more are exempt for the first five years that the enterprise is profit making and then pay 

at fifty percent of the applicable enterprise income tax rate from the sixth through the tenth year. 

As the benefit of this subsidy is contingent on enterprises being export-oriented, it 

violates Articles 3.1(a) and 3.2 of the SCM Agreement, and consequently paragraph 10.3 of Part 

 

307 Article 81 of the Rules for Implementation of the Income Tax Law of the People’s Republic of China on 

Enterprises with Foreign Investment and Foreign Enterprises,

 Decree [1991] of the State Council (30 June 

1991). 

308 Article 10, Income Tax Law of the People’s Republic of China on Enterprises with Foreign Investment and 

Foreign Enterprises; Order No. 45. 
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I of China’s Protocol of Accession, and paragraph 1.2 of Part I of its Protocol, to the extent that it 

incorporates paragraph 167 of the Report of the Working Party. 

(7) Article 3 of the Provisions of the State Council on the 

Encouragement of Foreign Investment. GuoFa [1986] No. 95 

(11 October 1986)

Article 3 provides that export enterprises and technologically-advanced enterprises “shall 

be exempt from payment to the State of all subsidies to staff and workers, except for the payment 

or allocation of funds for labor insurance, welfare expenses and housing subsidies for Chinese 

staff and workers in accordance with the provisions of the State.” 

As this benefit exempts enterprises from paying certain subsidies to workers, conditioned 

on the enterprise being an export enterprise or technologically advanced enterprise, it violates 

Article 3.1(a) of the SCM Agreement, Article 2 of the TRIMs Agreement, and paragraph 1 of 

Article XI of GATT 1994. The measure also appears not to comply with China’s obligations 

under paragraphs 7.3 of Part I of its Accession Protocol, as well as paragraph 1.2 of Part I of its 

Accession Protocol, to the extent that it incorporates paragraph 203 of the Report of the Working 

Party. 

(8) Circular of the State Council Concerning the Adjustment in 

the Taxation Policy of Imported Equipment, GuoFa [1997] 

No. 37 (29 December 1997) read in conjunction with Section 

XIII of the Catalogue for the Guidance of Foreign 

Investment Industries, Order [2004] No. 24 of the State 

Development and Reform Commission, the Ministry of 

Commerce of the People’s Republic of China (30 November 

2004).
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The measure gives preferential tax treatment by exempting both foreign-invested 

enterprises and certain domestic enterprises from VAT and tariffs on imported equipments used 

in the development of investment projects encouraged by the State in the “Catalogue for the 

Guidance of the Foreign Investment Industries” and those that are funded by loans granted by 

foreign governments and international financial organizations. The purpose of the program is to 

encourage foreign investment in technical advancement and to introduce foreign advanced 

technology equipment that promotes the development of the economy. To be eligible, the 

foreign business investment project must transfer technology and be consistent with the category 

of encouragement and the restricted B category under the Catalogue of Industries Guidance for 

Foreign Business. The measure also allows for technologies and matching components and parts 

imported for the project to be exempt from tariffs and import-linked VAT. Under Article XIII of 

the Catalogue, encouraged foreign investments are “Permitted foreign invested projects whose 

products are to be wholly exported directly.”309

As this benefit is conditioned on the project being export-oriented and transferring 

technology, it violates Article 3.1(a) of the SCM Agreement, Article 2 of the TRIMs Agreement, 

and paragraph 1 of Article XI of GATT 1994. The measure also appears not to comply with 

China’s obligations under paragraphs 7.3 of Part I of its Accession Protocol, as well as paragraph 

1.2 of Part I of its Accession Protocol, to the extent that it incorporates paragraph 203 of the 

Report of the Working Party. 

 

309 Section XIII of the Catalogue for the Guidance of Foreign Investment Industries, Order [2004] No. 24 of the 

State Development and Reform Commission, the Ministry of Commerce of the People's Republic of China 

(30 November 2004). 
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(9) Article 25, 28, and 31 of the Enterprise Income Tax Law of 

the People's Republic of China, Order [2007] No. 63 of the 

President of the People's Republic of China (16 March 2007); 

read in conjunction with Section XIII of the Catalogue for 

the Guidance of Foreign Investment Industries, Order [2004] 

No. 24 of the State Development and Reform Commission, 

the Ministry of Commerce of the People's Republic of China 

(30 November 2004) 

As mentioned above, Section XIII of the Catalogue for the Guidance of Foreign 

Investment Industries lists, for encouraged foreign investment industries, “Permitted foreign 

invested projects whose products are to be wholly exported directly.” 310 Article 25 of the 

Enterprise Income Tax Law states that the “important industries and projects whose development 

is supported and encouraged by the state shall enjoy the preferential treatments in enterprise 

income tax.” Article 28 provides that enterprises with a meager profit pay a reduced rate of 20 

percent and “important high-tech enterprises necessary to be supported by the state” have a 

reduced rate of 15 percent.311 Article 31 gives startup investment enterprises that engage in 

“important startup investments necessary to be supported and encouraged by the state” a 

deduction of a certain proportion of the investment amount from taxable income. 

As these programs give benefits conditioned on the projects being export oriented, they 

violate Article 3.1(a) of the SCM Agreement, Article 2 of the TRIMs Agreement, and paragraph 

1 of the Article XI of GATT 1994. The measures also appears not to comply with China’s 

 

310 Section XIII of the Catalogue for the Guidance of Foreign Investment Industries, Order [2004] No. 24 of the 

State Development and Reform Commission, the Ministry of Commerce of the People's Republic of China 

(30 November 2004). 

311 Article 28 of the Enterprise Income Tax Law of the People's Republic of China, Order [2007] No. 63 of the 

President of the People's Republic of China (16 March 2007). 
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obligations under paragraphs 7.3 of Part I of its Accession Protocol, as well as paragraph 1.2 of 

Part I of its Accession Protocol, to the extent that it incorporates paragraph 203 of the Report of 

the Working Party. 

VI. FURTHER ACTION AGAINST CHINA AT THE WTO FOR POTENTIAL 

VIOLATIONS

A. Technology Transfer 

As discussed above, many of China’s trading partners have complained about continuing 

policies of mandatory technology transfer. When China acceded to the WTO, it agreed to (1) 

“eliminate and cease to enforce ... performance requirements... made effective through laws, 

regulations, or other measures”; (2) “not enforce provisions of contracts imposing such 

requirements;” and (3) “ensure that ... the right of importation or investment by national and 

sub-national authorities, is not conditioned on ... performance requirements of any kind, such 

as...the transfer of technology”: 

China shall, upon accession, comply with the TRIMs Agreement, 

without recourse to the provisions of Article 5 of the TRIMs 

Agreement. China shall eliminate and cease to enforce trade and 

foreign exchange balancing requirements, local content and export 

or performance requirements made effective through laws, 

regulations or other measures. Moreover, China will not enforce 

provisions of contracts imposing such requirements. Without 

prejudice to the relevant provisions of this Protocol, China shall 

ensure that the distribution of import licences, quotas, tariff rate 

quotas, or any other means of approval for importation, the right of 

importation or investment by national and sub national authorities, 

is not conditioned on: whether competing domestic suppliers of 

such products exist; or performance requirements of any kind, 

such as local content, offsets, the transfer of technology, export 

performance or the conduct of research and development in 
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China.312 

In other words, China’s Accession Protocol at paragraph 7.3 identifies the transfer of 

technology as a type of “performance requirement.” According to paragraph 7.3, China agreed 

to eliminate all performance requirements made effective through laws, regulations, or other 

measures, and to not enforce performance requirements in contracts made under those laws, 

regulations, or other measures. To the extent that China does not eliminate or cease to enforce 

technology transfer requirements, China is in violation of its Accession Protocol and, thus, in 

violation of the WTO Agreement. 

Paragraph 1 of Article XII of the Agreement Establishing the World Trade Organization 

provides that “Any State or separate customs territory ....may accede to this Agreement, on 

terms to be agreed between it and the WTO.”313 In the past, WTO panels and the Appellate 

Body have found these terms and commitments to be an “integral part” of the Agreement.314 

The WTO Secretariat has stated that a Member’s accession protocol will “bind it to observe the 

rules contained in the Agreement establishing the WTO....[and] also bind the new Member in 

question to observe specified commitments.”315 The Secretariat continues: 

These special commitments are either set out in the text of the 

 

312 Accession Protocol at ¶ 5. 

313 WTO Agreement Art. XII. 

314 See European Communities – Customs Classification of Frozen Boneless Chicken Cuts, Complaint by Brazil,

Report of the Panel, WT/DS269/R (30 May 2005); Korea – Measures Affecting Government Procurement, 

Report of the Panel, WT/DS163/R (1 May 2000); European Communities – Customs Classification of 

Certain Computer Equipment, Report of the Appellate Body, WT/DS62/AB/R (5 June 1998). 

315 Technical Note on the Accession Process, Note by the Secretariat, Revision, WT/ACC/7/Rev.2, at 21 (1 

November 2000). 
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Protocol itself or, more frequently, in the relevant Working Party 

Report's commitment paragraphs (which are incorporated by 

reference in the Protocols). Both sets of rules are integral parts of 

the Protocol and have the same status and legal effect. They are 

enforceable through the Dispute Settlement Mechanism of the 

WTO. The entire package of Report, Protocol of Accession and 

Schedules of Concessions and Commitments in Goods and 

Services constitute the conditions under which the acceding 

government is permitted to join the WTO Agreement.316 

Section 1.2 of China’s Accession Protocol states that the “Protocol, which shall include 

the commitments referred to in paragraph 342 of the Working Party Report, shall be an integral 

part of the WTO Agreement.”317 However, China has backed away from specific commitments 

made to the Working Party and from commitments made in its Accession Protocol. As 

explained below, many of China’s policies and actions are inconsistent with China’s obligations 

under paragraph 7.3 of Part I of its Accession Protocol, as well as paragraph 1.2 of Part I of its 

Accession Protocol, to the extent that it incorporates paragraph 203 of the Report of the Working 

Party.318

1. China Continues to Require Technology Transfer 

Provisions in Contracts Contrary to Paragraph 7.3 

of its Accession Protocol 

China has not fulfilled its commitment to “eliminate and cease to enforce” all mandatory 

technology transfer provisions in its laws, regulations or other measures and “ensure” that 

 

316 Id. 

317 Paragraph 342 of the Working Party Report states that certain paragraphs of the Working Party Report 

containing specific commitments by China, including paragraph 203, “are incorporated in paragraph 1.2 of 

the Draft Protocol.” Working Party Report at ¶ 342. 

318 Accession Protocol Part I ¶¶ 1.2, 7.3; Working Party Report at ¶ 203. 
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investment approval is not conditioned on technology transfer. Article 43 of the Regulations for 

the Implementation of the Law on Sino-Foreign Equity Joint Ventures requires that “technology 

transfer agreements signed by a joint venture shall be submitted for approval to the examination 

and approval authority,”319 such as the provincial departments of MOFCOM or the NDRC.320 

The Article limits technology transfer agreements to ten years and states that “after the expiry of 

a technology transfer agreement, the technology importing party shall have the right to use the 

technology continuously.”321 Similarly, the 2004 Automobile Policy requires that technology 

transfer agreements be filed when seeking approvals for new production plants.322

China has repeatedly stated that such provisions or policies, as with other provisions and 

policies discussed in this report, are only encouraged and “that it was legitimate for China or any 

other Member to have this kind of policy to encourage technology transfer if it was not a 

mandatory requirement.”323

 

319 Attached as Exhibit 4. 

320 Trade Policy Review: China, Report by the Secretariat, WT/TPR/S161/Rev.1 (26 June 2006) at p. 201, ¶ 124. 

321 Regulations for the Implementation of the Law of the People’s Republic of China on Joint Ventures Using 

Chinese and Foreign Investment (entered into force July 22, 2001).

322 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Additional Questions from the United States to China 

Concerning Trade-Related Investment Measures, G/TRIMS/W/37 (23 September 2004) at ¶ 3. China’s 

representative argued at the TRIMs Committee that the “reason why China required ‘foreign technology 

transfer and contract on technical cooperation’ was 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. Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of 

Accession of the People’s Republic of China to the World Trade Organization, Report of the Chairman, 

G/L/708 (8 November 2004) at ¶ 21. 

323 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/586 (12 November 2002) 

at ¶ 69. 
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China’s WTO commitments, however, are not limited to its own imposition of mandatory 

technology transfer requirements but extend to the enforcement of such performance 

requirements contained in contracts between private parties. Thus, to the extent that China 

maintains regulations or other measures that recognize, impose requirements on, and permit the 

approval of technology transfer agreements, those measures are inconsistent with China’s 

commitments under Paragraph 7.3. 

Even assuming arguendo that China’s WTO obligations extend only to the imposition of 

mandatory requirements, however, GATT and WTO panels have adopted a broad definition of 

what might constitute a government requirement.324 For example, in Canada -- FIRA, the panel 

found that existing undertakings could be considered “requirements” since they “could be legally 

enforced,” regardless of how the undertaking may have been arrived at “(voluntary submission, 

encouragement, negotiation, etc).”325 In ECC – Parts and Components, the panel expanded 

“requirements” to include undertakings “which an enterprise voluntarily accepts in order to 

obtain an advantage from the government.” 326 Although the word “requirement” “clearly 

implies government action involving a demand, request or the imposition of a condition...to 

situations involving actions by private parties, it is necessary to take into account that there is a 

 

324 See Canada – Administration of the Foreign Investment Review Act, Report of the Panel, GATT Doc. No. 

L/5044 (25 July 1983); EEC – Regulation on Imports of Parts and Components, Report by the Panel (adopted 

16 May 1990); Canada – Certain Measures Affecting the Automotive Industry, Report of the Panel, 

WT/DS139/R, WT/DS142/R (11 February 2000). 

325 Canada – Administration of the Foreign Investment Review Act, Report of the Panel, GATT Doc. No. L/5044 

(25 July 1983) at ¶ 5.4. 

326 EEC – Regulation on Imports of Parts and Components, Report by the Panel (adopted 16 May 1990) at ¶ 5.21. 
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broad variety of forms of government action that can be effective in influencing the conduct of 

private parties.”327

As stated above, foreign investments must be approved by local authorities and these 

same authorities must also recommend investment projects for the approval of loans from 

Chinese banks.328 To the extent that local authorities are given such high discretion in approving 

foreign investment in their region, “encouraged” laws and policies are easily made 

“requirements.” U.S. businesses have consistently reported that the high level of discretion that 

local government officials have results in greater pressure on investors to transfer technology.329 

China’s current policies of “encouragement,” and high level of government involvement in 

investment decisions, combined with its past practices, make it difficult for China to “ensure” 

that investment decisions are not, in fact, based on performance requirements. 

2. China Continues to Enforce Technology Transfer 

Provisions Made Effective Through Law, 

Regulations or Other Measures that are Contrary 

to Paragraph 7.3 of its Accession Protocol 

As discussed before, with respect to existing contracts that contain technology transfer 

requirements, China has informed the TRIMs Committee that these contractual provisions would 

not be automatically void and would require a renegotiation. China has stated that the “contract 

 

327 Canada – Certain Measures Affecting the Automotive Industry, Report of the Panel, WT/DS139/R, 

WT/DS142/R (11 February 2000) at ¶ 10.107. 

328 See supra p. 6. 

329 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/586 (12 November 2002) 

at ¶ 59. 
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itself or some of its articles could not be altered or invalidated by a Chinese court or any other 

administrative body through a mandatory order.” China’s justification is that since these 

contracts have “been signed by the relevant parties in consideration of their own business 

interests, the parties involved should negotiate about the amendment of those contracts 

themselves on the basis of fairness, justice and equality.” 330 Once a contract has been 

renegotiated and an agreement reached, the new contract can only go into effect after the 

approval of the “competent authority.”331 Judging from the number of complaints from U.S. 

businesses, it would appear that foreign businesses are required to renegotiate existing contracts 

and offer favorable terms to obtain government “approval” for continued access to the Chinese 

market. 

In paragraph 7.3 of the Accession Protocol, however, China agreed not to enforce 

provisions of contracts imposing performance requirements. Thus, China’s position, that the 

existence of technology transfer provisions in preexisting contracts are not automatically invalid 

but, instead, provide a valid basis for parties to renegotiate those provisions, would appear to be 

in direct contradiction with China’s explicit undertaking in the Accession Protocol to “eliminate 

and cease to enforce trade and foreign exchange balancing requirements, local content and export 

 

330 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/708 (8 November 2004) at 

¶ 20. 

331 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of Accession of the People’s 

Republic of China to the World Trade Organization, Report of the Chairman, G/L/586 (12 November 2002) 

at p. 25. 
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or performance requirements made effective through laws, regulations or other measures.” 332 

The requirement that the revised contracts be approved by a “competent authority” requires 

government action and leaves open the possibility that, during renegotiations, businesses will 

“voluntarily accept [certain undertakings] in order to obtain an advantage from the 

government.”333

3. Article 3.8 of the Dispute Settlement Understanding 

China has likely violated its Protocol by failing to “eliminate and cease to enforce” 

technology transfer provisions and “ensure” that investment approval is not conditioned on 

technology transfer. As China’s actions do not appear to violate a specific provision of the WTO 

Agreements, but instead impact an “integral” part of the Agreement that is “enforceable through 

the Dispute Settlement Mechanism”, a case would likely be brought under Article 3.8 of the 

Dispute Settlement Understanding (“DSU”). Under Article 3.8, the failure of a member to carry 

out its obligations under a covered agreement is considered a prima facia case of nullification or 

impairment. Specifically, Article 3.8 of the DSU provides that: 

In cases where there is an infringement of the obligations assumed 

under a covered agreement, the action is considered prima facie to 

constitute a case of nullification or impairment. This means that 

there is normally a presumption that a breach of the rules has an 

adverse impact on other Members parties to that covered 

agreement, and in such cases, it shall be up to the Member against 

whom the complaint has been brought to rebut the charge.334

 

332 Accession Protocol at ¶ 5. 

333 EEC – Regulation on Imports of Parts and Components, Report by the Panel (adopted 16 May 1990) at ¶ 5.21. 

334 Dispute Settlement Understanding Article 3.8. 
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Thus, Article 3.8 of the DSU “provides that there is a presumption that benefits are 

nullified or impaired – i.e., there is a presumption of “harm” – where a provision of the 

Agreement has been violated.” 335 As demonstrated above, China has likely violated 

commitments made in its Accession Protocol and as such, has violated the WTO Agreement. 

Once the United States has made a prima facia case, it would be up to China to show that it has 

not violated its Accession commitments.336 

B. Additional VAT Programs 

1. China’s Circular about VAT Exemption Policy for 

Certain Farming Materials (No. 113/2001), jointly 

issued by the Ministry of Finance and the State 

Administration of Taxation on July 20, 2001 

In 2001, China began exempting phosphate fertilizers from VAT except for one type of 

fertilizer—diammonimum phosphate (DAP)—that was produced in and imported from the 

United States.337 The U.S. has noted that this Circular “exempts all phosphate fertilizers except 

diammonium phosphate (DAP) from China’s value-added tax (VAT),” but that “DAP, a product 

 

335 Argentina – Definitive Anti-Dumping Measures on Imports of Ceramic Floor Tiles from Italy, Report of the 

Panel, WT/DS189/R (28 September 2001), at ¶ 6.105. 

336 See European Communities – Regime for the Importation, Sale and Distribution of Bananas, Report of the 

Appellate Body, WT/DS27/AB/R (9 September 1997); United States – Taxes on Petroleum and Certain 

Imported Substances, Report of the Panel, BISD 34S/136 (adopted on 17 June 1987); Guatemala – Definitive 

Anti-Dumping Measures on Grey Portland Cement from Mexico, Report of the Panel, WT/DS156/R (24 

October 2000). 

337 Exhibit 19 contains selected trade statistics, including fertilizer. 
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produced in the United States, competes with similar phosphate fertilizers produced in China, 

such as monoammonium phosphate (MAP).” 338

China’s differential tax policy discourages the use of foreign-produced DAP in favor of 

domestically-produced MAP, with which DAP competes.339 The U.S. has “raised this issue with 

China on several occasions, both at the WTO and bilaterally.”340 The United States has asked 

China to explain why it applied different tax treatment to these products and how the differences 

in treatment were consistent with its national treatment obligations under Article III of the 

General Agreement on Tariffs and Trade 1994.341 Specifically, China’s differential tax policy 

potentially violates Article III:2 of GATT 1994. 

a. Article III:2 Violation 

Generally, Article III “seeks to prevent Members from applying internal taxes and 

regulations in a manner which affects the competitive relationship, in the marketplace, between 

the domestic and imported products involved, ‘so as to afford protection to domestic 

production.’”342 The Article obliges Members “to provide equality of competitive conditions for 

 

338 China’s Transitional Review Mechanism, Questions from the United States to China concerning Market 

Access, G/MA/W/35 (20 August 2002) at Item 19. 

339 China’s Transitional Review Mechanism, Questions from the United States to China concerning Market 

Access, G/MA/W/35 (20 August 2002) at Item 19. 

340 Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol on the Accession of the People's 

Republic of China, Questions from the United States to China concerning Market Access, G/MA/W/51 (13 

October 2003) at Item 3. 

341 China’s Transitional Review Mechanism, Questions from the United States to China concerning Market 

Access, G/MA/W/35 (20 August 2002) at Item 19. 

342 European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, Report of the 

Appellate Body, WT/DS135/AB/R (12 March 2001). 
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imported products in relation to domestic products.” 343 Article III:2 “provides for specific 

obligations regarding internal taxes and internal charges.”344 As there are two sentences in 

Article III:2, there are two distinct standards for finding a violation. The first sentence examines 

whether products of an exporting country are taxed “in excess of” the taxes on “like” domestic 

products while the second sentence examines “whether products of an exporting country are 

taxed similarly to domestic products which are ‘directly competitive or substitutable.’”345 As 

“like products” are a subset of products that are “directly competitive or substitutable product,” a 

violation of the first sentence would also violate the second sentence.346 Thus, “if the imported 

and domestic products are ‘like products,’ and if the taxes applied to the imported products are 

‘in excess of’ those applied to the like domestic products, then the measure is inconsistent with 

Article III:2, first sentence” and would thus violate both the first and second sentence of Article 

III.347 

i. Article III: First Sentence 

Determining whether imported and domestic products are “like products” should “be 

done on a case-by-case basis, by examining relevant factors.”348 The factors used to determine 

 

343 Japan - Taxes on Alcoholic Beverages, Report of the Appellate Body, WT/DS8/AB/R, WT/DS10/AB/R, 

WT/DS11/AB/R (4 October 1996) at 14. 

344 Id. at 16. 

345 Korea – Taxes on Alcoholic Beverages, Report of the Panel, WT/DS75/R (17 September 1998) at ¶ 10.35. 

346 Japan - Taxes on Alcoholic Beverages, Report of the Appellate Body, WT/DS8/AB/R, WT/DS10/AB/R, 

WT/DS11/AB/R (4 October 1996) at 22. 

347 Id. at 17. 

348 Mexico – Tax Measures on Soft Drinks and Other Beverages, Report of the Panel, WT/DS308/R (October 7, 

2005) at ¶ 8.28.
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whether a product is “similar” include “the product's end-uses in a given market; consumers' 

tastes and habits, which change from country to country; the product's properties, nature and 

quality.”349 Tariff classification may also be a relevant indicator of product similarity and has 

been used by several previous panels.350 “Uniform classification in tariff nomenclatures based 

on the Harmonized System (the “HS”) was recognized in GATT 1947 practice as providing a 

useful basis for confirming “likeness” in products.351 Similarly, tariff bindings can provide 

significant guidance as to the identification of “like products” as they can be extremely precise 

with regard to product description.352 In a recent panel report it was sufficient to find that the 

two products fell under the same four-digit HS number to suffice this part of the “like product” 

analysis.”353

(a) Likeness of products; products’ 

properties, nature and quality; 

products’ end-uses 

To analyze the two fertilizer products’ likeness, properties, nature and quality, and enduses, the following chart is provided. The information was obtained from a Chinese producer of 

phosphate located in Sichuan Province.354 

 

349 Report of the Working Party on Border Tax Adjustments, BISD 18s/19, at ¶ 18 (2 December 1970).

350 Japan - Taxes on Alcoholic Beverages, Report of the Appellate Body, WT/DS8/AB/R, WT/DS10/AB/R, 

WT/DS11/AB/R (4 October 1996) at 21. 

351 Id. at 22. 

352 Id. at 22. 

353 Mexico – Tax Measures on Soft Drinks and Other Beverages, Report of the Panel, WT/DS308/R (October 7, 

2005) at ¶ 8.28. 

354 http://www.ecvv.com/product/vp988443/China-Monoammonium-Phosphate-MAP.html. 
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Diammonium Phosphate (DAP) Monommonium Phosphate (MAP) 

Chemical formula: (NH4)2HPO4 Chemical formula: NH4H2PO4

Properties: 

White granular crystal, relative density is 1.619, 

melting point is 155 degree centigrade, soluble 

in water easily, insoluble in alcohol, turn into 

Monoammonium Phosphate by losing 

ammonium gradually when exposed in the air, 

pH value of 1% solution is 8.0. 

Properties: 

White granular crystal; relative density is 1.803(19 

degree centigrade), melting point is 190 degree 

centigrade, easily soluble in water, slightly soluble 

in alcohol, insoluble in acetone, pH value of 1% 

water solution is 4.5.

Technical Specification:

Industrial grade:

(1) Main content: 99.0% min. (2)P2O5: 

53.0% min. (3)Nitrogen, as N: 20.8% min. 

(4)pH of 1% water solution: 7.8-8.2 

(5)Water insoluble: 0.10% max. 

(6)Moisture: 0.15% max. 

Food grade:

(1) Main content: 99.0% min. (2)P2O5: 

53.0% min. (3)Nitrogen, as N: 20.8% min. 

(4)pH of 1% water solution: 7.8-8.2 

(5)Water insoluble: 0.05% max. 

(6)Arsenic, as As: 0.0003% max. 

(7)Fluoride, as F: 0.002% max. (8)Heavy 

metal, as Pb: 0.001% max. (9)Moisture: 

0.15% max. 

Technical Specification:

Industrial grade:

(1) Main content: 99.0% min. (2)P2O5: 61.0% 

min. (3)Nitrogen, as N: 11.8% min. (4)pH of 

1% water solution: 4.4-4.8 (5)Water 

insoluble: 0.10% max. (6)Moisture: 0.1% 

max. 

Food grade:

(1) Main content: 99.0% min. (2)P2O5: 61.0% 

min. (3)Nitrogen, as N: 11.8% min. (4)pH of 

1% water solution: 4.4-4.8 (5)Water 

insoluble: 0.05% max. (6)Arsenic, as As: 

0.0003% max. (7)Fluoride, as F: 0.002% 

max. (8)Heavy metal, as Pb: 0.001% max. 

(9)Moisture: 0.1% max. 

Uses: 

(1) As a fire-prevention agent for fabric, timber 

and paper. 

(2) For food grade, it is mainly used as a 

fermentation agent, nourishment, and so on. 

(3) Used as a high effective non-chloride N, P 

compound fertilizer in agriculture. 

(4) It contains totally 74% fertilizer elements 

(N+P2O5), used as a basic raw material for 

N, P and K compound fertilizer.

Uses: 

(1) As a fire-prevention agent for fabric, timber 

and paper, as well as a fire-prevention coating, 

and dry powder for fire extinguisher. 

(2) For food grade, it is mainly used as a 

fermentation agent, nourishment agent, and so 

on. 

(3) Used as a high effective non-chloride N, P 

compound fertilizer in agriculture. 

(4) It contains totally 73% fertilizer elements 

(N+P2O5), and may be used as a basic raw 

material for N, P and K compound fertilizer.
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(b) Consumers’ tastes and habits 

While the facts available make it difficult to gauge what consumers’ tastes and habits are, 

there are many studies on the internet that compare the differences between the two products. 

With respect to seeding, one farmer newsletter wrote: 

DAP or MAP? DAP is usually a little cheaper for the N & P it 

gives, but in no-till if you need to add a decent dose of P (eg 

>15P/ha), you start adding too much N with the seed. This is why 

it is better to use MAP based products in no-till. If you are only 

using 40-50kg DAP, then there are no problems with toxicity risks. 

MAP also handles better in moist conditions, something that is 

very important on the south coast. 

(c) Tariff classification 

Both DAP and MAP fall under the same 4-digit HS Heading,355 but under separate sixdigit HS subheadings. The 4-digit HS Heading containing MAP and DAP has eight 6-digit HS 

subheadings. Subheading, HS 31.05.30: Diammonium hydrogenorthophosphate (diammmonium 

phosphate), includes DAP and subheading HS 31.05.40: Ammonium dihydrogenorthophosphate 

(monoammonium phosphate) and mixtures thereof with diammmonium hydrogenorthophosphate 

(diammmonium phosphate)356 includes mixtures of MAP and DAP. China has bound its tariffs at 

the six- and eight-digit level. Within the 4-digit HS Heading containing MAP and DAP, China 

has bound all eight 6-digit HS subheadings. China’s bound rate for six of the eight subheadings, 

 

355 The 4- Digit HTS Heading is: Mineral or Chemical Fertilizers Containing Two or Three of the Fertilizing 

Elements Nitrogen, Phosphorus and Potassium; Other Fertilizers; Goods of this Chapter in Tablets or Similar 

Forms or in Packages of a Gross Weight Not Exceeding 10kg. 

356 Subheading HS 31.05.40 also includes “other mineral and chemical fertilizers containing the two fertilizing 

elements nitrogen and phosphorus.” 
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including MAP, is 4%. For the other two subheadings, including DAP, China has higher bound 

rates, but agreed to permit access for these products under tariff rate quotas, with a within-quota 

tariff rate of 4%.357 Essentially, China committed to allowing both products in at a bound 4% 

tariff, although DAP is subject to a tariff rate quota. 

In response to U.S. questions, China has claimed that its differential treatment of DAP 

and MAP is not in violation of national treatment obligations because DAP and MAP are not 

identical or similar goods, are not substitutable products, and are not competitive products.358 

Specifically, “[i]n China, DAP was directly applied in manufacturing, while MAP was mainly 

used to produce compound or special fertilizers.”359 However, the indications of use from a 

Chinese website reviewed above would appear to contradict those claims. 

The products appear to have similar chemical formulas, properties, technical 

specifications, and uses. There appear to be minor differences in properties, as DAP is a mixture 

of MAP and ammonium, but one of the properties for DAP is that it will “turn into 

Monoammonium Phosphate by losing ammonium gradually when exposed in the air.” Both 

products also seem to have both industrial and agricultural specifications, which seems to 

contradict China’s statement that, in China, DAP was used for manufacturing purposes while 

 

357 Committee on Market Access, Minutes of the Meeting Held on 12 June 2002, G/MA/M/32 (11 September 

2002) at ¶ 11.1. 

358 Committee on Market Access, Minutes of the Meeting Held on 20 October and 5 December 2003, 

G/MA/M/35 (10 December 2003) at ¶ 7.13. 

359 Committee on Market Access, Minutes of the Meeting Held on 20 October and 5 December 2003, 

G/MA/M/35 (10 December 2003) at ¶ 7.13. 
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MAP was used to produce fertilizers. While the tariff classifications for the two products are 

different at the six-digit level, that is not dispositive on the question of “like products.” 

The facts appear to indicate that, with respect to tariff schedule rates and the negotiated 

bound rates MAP and DAP are “like products.” As many Members have taken commitments 

that apply across a broad range of products and across several different HS Headings, the 

Appellate Body warns that when a tariff binding includes a wide range of products, it is “not a 

reliable criterion for determining or confirming product likeness.”360 However, China has taken 

specific tariff commitments for these products at the six-digit level. A review of the tariff 

schedules and tariff bindings for five other Members - Australia, the European Union, Korea, 

South Africa, and the United States – shows that in all five countries the products are bound at 

the same rate and both products have the same MFN rate. Taking into account China’s 

commitment for a within-quota tariff rate of 4% on DAP, China too has the same bound and 

MFN rates for both products. With respect to tariff classifications, it appears that China and five 

other countries treat these products similarly. In comparing the products’ likeness, properties, 

nature and quality, end-uses, consumer preferences, and tariff classification, it appears that the 

products are “like products.” 

 

360 Japan - Taxes on Alcoholic Beverages, Report of the Appellate Body, WT/DS8/AB/R, WT/DS10/AB/R, 

WT/DS11/AB/R (4 October 1996) at 22. 

“For example, Jamaica has bound tariffs on the majority of non-agricultural products at 50%. 

Trinidad and Tobago have bound tariffs on the majority of products falling within HS Chapters 

25-97 at 50%. Peru has bound all non-agricultural products at 30%, and Costa Rica, El 

Salvador, Guatemala, Morocco, Paraguay, Uruguay and Venezuela have broad uniform 

bindings on non-agricultural products, with a few exceptions.” 

Id. at note 49.
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The second part of a first sentence analysis looks to see whether the tax on foreign 

products is “in excess of” that on like domestic products. If the tax on imported products is 

found to be “in excess of” that on like domestic products, the tax would be inconsistent with 

Article III:2.361 In evaluating whether taxes on imported products are “in excess of” those on 

like domestic products, the Appellate Body has found that “[e]ven the smallest amount of 

‘excess’ is too much.”362 “The prohibition of discriminatory taxes in Article III:2, first sentence, 

is not conditional on a ‘trade effects test’ and nor is it qualified by a de minimis standard.”363 As 

discussed above, China’s Circular exempts all phosphate fertilizers except diammonium 

phosphate from a 13% VAT. Thus DAP, a foreign-produced fertilizer is assessed a 13% VAT, 

while MAP, its Chinese-produced competitor, is not. The taxes on the foreign product are thus 

“in excess of” of the taxes assessed on the domestic product and will likely disrupt the 

competitive relationship between domestic and foreign products.364 To the extent that the VAT 

on DAP is “in excess of” of the tax on MAP and, to the extent that MAP and DAP are “like 

products,” the VAT measure appears to violate the first sentence of Article III:2 of GATT 1994. 

 

361 Id. at 22. 

362 Id. at 23. 

363 United States – Measures Affecting Alcoholic and Malt Beverages, BISD 39S/206 (adopted on 19 June 1992) 

at ¶ 5.6. 

364 “A change in the competitive relationship contrary to [Article III:2] must consequently be 

regarded ‘ipso facto’ as a nullification or impairments of benefits accruing under the General 

Agreement. A demonstration that a measure inconsistent with Article III:2, first sentence, has 

no or insignificant effects would therefore in the view of the Panel not be a sufficient 

demonstration that the benefits accruing under that provision had not been nullified or 

impaired....” 

United States – Measures Affecting Alcoholic and Malt Beverages, Report by the Panel, DS23/R (19 June 

1992) at p. 71 ¶ 5.6, citing United States – Taxes on Petroleum and Certain Imported Substances, Report of 

the Panel, BISD 34S/136, (adopted on 17 June 1987) at pp. 158-59. 
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ii. Article III: Second Sentence 

Determining whether the tax violates sentence two of Article III:2, requires an analysis of 

whether the imported and domestic products are “directly competitive or substitutable products.” 

Three separate issues must be addressed in this analysis. These issues are whether: (1) the 

products are in competition with each other; (2) “not similarly taxed”; and (3) “the dissimilar 

taxation of the directly competitive or substitutable imported domestic product is ‘applied... so 

as to afford protection to domestic production.’”365 Panels have determined that domestic and 

imported products are directly competitive or substitutable products when they have similar 

physical characteristics, end-uses, channels of distribution, and prices.366 In order to find that 

domestic products and imported products are “not similarly taxed,” there must be a greater than 

de minimis tax burden on imported products than on “directly competitive or substitutable” 

domestic products.367 If the difference in taxation is large, it may be enough to show that the 

taxation was applied “so as to afford protection,” but other factors may be relevant, including an 

“objective analysis of the structure and application of the measure in question on domestic as 

compared to imported products.”368

China claims that DAP and MAP are not competitive or substitutable, but the facts 

presented above appear to demonstrate that these products are in competition with each other. 

 

365 Japan - Taxes on Alcoholic Beverages, Report of the Appellate Body, WT/DS8/AB/R, WT/DS10/AB/R, 

WT/DS11/AB/R (4 October 1996) at 24. 

366 Korea – Taxes on Alcoholic Beverages, Report of the Panel, WT/DS75/R (17 September 1998) at ¶ 109. 

367 Japan - Taxes on Alcoholic Beverages, Report of the Appellate Body, WT/DS8/AB/R, WT/DS10/AB/R, 

WT/DS11/AB/R (4 October 1996) at 27. 

368 Id. at 28-30. 
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Additionally, internet suppliers promote the products in a way that implies that they are “directly 

competitive or substitutable products.” In fact, the products are such close competitors that one 

study presents a graph detailing “World DAP/MAP Production and Excess Capacity – 2006” and 

“US vs World DAP/MAP Exports,” as if they were one and the same.369 From these facts, it 

appears that the marketplace considers MAP and DAP to be “directly competitive or 

substitutable products” in both the United States and in China. 

The differential in VAT assessed is enough to show that these two products are not 

similarly taxed. However, it may also be shown that the VAT rebate policy was applied in such 

a manner as to protect domestic products. As discussed above, the VAT exemption applies to all 

phosphate fertilizers, with the exception of DAP, which is primarily produced in and imported 

from the United States. The differential tax policy discourages the use of foreign-produced DAP 

in favor of domestically-produced MAP with which DAP competes. As such, the measure likely 

violates the second sentence of Article III:2 of GATT 1994 and, thus, violates China’s WTO 

obligations. 

Since the VAT policy was first put in place, the United States has repeatedly raised this 

issue and expressed its concern that China’s differential VAT treatment of DAP and MAP is 

discriminatory and inconsistent with the principles of national treatment.370 In return, China has 

 

369 www.potashcorp.com/media/pdf/investor_relations/industry_overview/2007/POT_Overview07_Phosphate. 

pdf. 

370 See China’s Transitional Review Mechanism, Questions from the United States to China concerning Market 

Access, G/MA/W/58 (31 August 2004) at ¶ 6; China’s Transitional Review Mechanism, Questions from the 

United States to China concerning Market Access, G/MA/W/71 (6 September 2005) at ¶ 13; China’s 
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continued to maintain that its differential VAT treatment of DAP and MAP is justified and that it 

“had currently no intention to change the system.”371The facts here, however, likely demonstrate 

that MAP and DAP are “like products,” that the tax on DAP is “in excess of” that on MAP, and 

that the products are “directly competitive or substitutable products.” As such, the VAT measure 

likely violates Article III:2 of GATT 1994. 

b. Article XXIII 

In the alternative, China’s differential VAT tax policy nullifies or impairs benefits the 

U.S. expected under China’s WTO Accession commitments, giving rise to a claim under Article 

XXIII of GATT 1994. Article XXIII provides: 

If any contracting party should consider that any benefit accruing 

to it directly or indirectly under this Agreement is being nullified 

or impaired or that the attainment of any objective of the 

Agreement is being impeded as the result of 

(a) the failure of another contracting party to carry out its 

obligations under this Agreement, or 

(b) the application by another contracting party of any measure, 

whether or not it conflicts with the provisions of this 

Agreement 

 Transitional Review Mechanism, Communication from the United States, G/MA/W/78 (18 September 2006) 

at ¶ 6. 

See also USTR, 2007 National Trade Estimate Report on Foreign Trade Barriers at 85: 

In 2001, China began exempting all phosphate fertilizers except 

diammonium phosphate (DAP) from the VAT. DAP, a product that the 

United States exports to China, competes with other phosphate 

fertilizers produced in China, particularly monoammonium phosphate. 

Both the United States Government and U.S. producers have 

complained that China has employed its VAT policies to benefit 

domestic fertilizer production. 

371 Committee on Market Access, Minutes of the Meeting Held on 4 October 2006, G/MA/M/42 (14 November 

2006) at ¶ 7.4. 
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In an early GATT dispute, the Working Party examined whether Australia’s removal of a 

subsidy on sodium nitrate fertilizer, while maintaining a subsidy on ammonium sulphate 

fertilizer, violated Australia’s obligations under the GATT and “nullified or impaired the tariff 

concessions granted by Australia to Chile on nitrate of soda.”372 The Working Party determined 

that an “impairment would exist if the action of the Australian Government which resulted in 

upsetting the competitive relationship between sodium nitrate and ammonium sulphate could not 

reasonably have been anticipated by the Chilean Government, taking into consideration all 

pertinent circumstances and the provisions of the General Agreement, at the time it negotiated 

for the duty-free binding on sodium nitrate.”373

The Working Party found that, during negotiations, the Government of Chile had reason 

to assume that “the war-time fertilizer subsidy would not be removed from sodium nitrate before 

it was removed from ammonium sulphate” and thus suffered a nullification of impairment of a 

benefit accruing. 374 The Working Party stated that it was influenced by the following 

circumstances: 

(a) The two types of fertilizer were closely related; (b) Both had 

been subsidized and distributed through the same agency and sold 

at the same price; (c) Neither had been subsidized before the war, 

and the war-time system of subsidization and distribution had been 

introduced in respect of both at the same time and under the same 

war powers of the Australian Government; (d) This system was 

 

372 The Australian Subsidy on Ammonium Sulphate, GATT/CP.4/39, (31 March 1950) at 1. 

373 The Australian Subsidy on Ammonium Sulphate, GATT/CP.4/39, (31 March 1950) at 4. 

374 The Australian Subsidy on Ammonium Sulphate, GATT/CP.4/39, (31 March 1950) at 4. 
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still maintained in respect of both fertilizers at the time of the 1947 

tariff negotiations.375

Similarly, China’s differential VAT treatment would likely be considered a nullification 

or impairment of a benefit under Article XXIII. Before determining that Australia’s actions 

violated its obligations under Article XXIII of the Agreement, the Working Party examined 

whether the two products were “like products.” 376 The Working Party found that the two 

fertilizers were not “like products” because the items were listed as separate items under the 

Australian tariff code, had different tariff rates, both domestically and in third countries, and one 

of the items was bound while the other was not.377 As discussed above, these factors are not 

applicable to MAP and DAP, and it is likely that the two products would be considered “like 

products,” a more narrow and higher standard than “closely related,” which is the standard under 

Article XXIII of GATT 1994. 

During the accession process, China committed to certain obligations with respect to 

tariff rate quotas on fertilizers. Specifically, China committed to permit access under tariff rate 

quotas for DAP within a quota tariff rate of 4%.378 The 4% binding would allow MAP and DAP, 

under the tariff rate quota, to enter China at the same rate. Although China committed to equal 

access, China appears to have “undermin[ed] the promised market access through tax policies 

 

375 The Australian Subsidy on Ammonium Sulphate, GATT/CP.4/39, (31 March 1950) at 4. 

376 The Australian Subsidy on Ammonium Sulphate, GATT/CP.4/39, (31 March 1950) at 3.

377 The Australian Subsidy on Ammonium Sulphate, GATT/CP.4/39, (31 March 1950) at 3.

378 Committee on Market Access, Minutes of the Meeting Held on 12 June 2002, G/MA/M/32 (11 September 

2002) at ¶ 11.1. 
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that discriminated between like and directly competitive fertilizer products.”379 During tariff 

negotiations for China’s accession, the United States “had reason to assume” that any change in 

VAT policies for MAP would also be changed DAP, so as to protect the competitive relationship 

between the products. Thus, China’s discriminatory policy likely nullifies or impairs a benefit 

accruing to the United States and would likely violate Article XXIII of GATT 1994. 

2. Consumption Taxes on Various Products 

China’s consumption tax “applies to a range of consumer products, including spirits and 

alcoholic beverages, tobacco, cosmetics and skin and hair care preparations, jewellery, fireworks, 

rubber, motorcycles and automobiles.”380 In the first TRM, the United States noted its concern 

that China used different methods for calculating consumption taxes on domestic and imported 

products which resulted in higher taxes being imposed on imported products.381 In particular, the 

United States noted that, under the 1993 Provisional Regulations on Consumption Tax, different 

tax bases are used to compute consumption taxes for domestic and imported products. 382 The 

 

379 Id. 

380 United States Trade Representative, 2002 Report to Congress on China’s WTO Compliance (December 11, 

2002) at 22. 

381 Exhibit 19 contains selected trade statistics, including certain consumer goods. 

382 For domestic products, the tax base for domestic products is the sales 

amount (apparently the ex factory price). (Provisional Regulations, 

Article 5.) This amount is multiplied by the consumption tax rate to 

derive the consumption tax due. In contrast, for imported products, 

Article 9 sets the tax base as the “composite assessable value,” which is 

defined as (dutiable value + customs duty), divided by (1 – 

consumption tax rate). The resulting amount is then multiplied by the 

consumption tax rate to derive the consumption tax due. 
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United States has asked China to explain how this different tax treatment is consistent with 

national treatment requirements under GATT 1994.383 In the second TRM, China answered that 

it used different tax formulas for imports and domestic products in order to equalize their tax 

treatment. China stated that the reason for the difference in consumption taxes for imported 

goods and domestic goods was due to how the selling prices between foreign and domestic 

goods were determined.384 China’s practice of having different consumption taxes for foreign 

and domestic products is inconsistent with China’s national treatment commitments and appears 

to be a violation of Article III:2 of GATT 1994. 

 China’s Transitional Review Mechanism, Questions from the United States to China concerning Market 

Access, G/MA/W/35 (20 August 2002) at Item 20. 

383 China’s Transitional Review Mechanism, Questions from the United States to China concerning Market 

Access, G/MA/W/35 (20 August 2002) at Item 20. 

384 In China, taxable value for the purpose of imposing consumption tax 

included a consumption tax factor, i.e.: taxable value = (cost + 

profit)/(1 - consumption tax rate). Such a calculation method applied to 

both imported goods and domestic goods. The consumption tax factor 

was put into the taxable value while calculating and levying 

consumption tax on either imported or domestic products. Due to such 

a method, the consumption tax factor was taken into account when the 

selling price of domestic products was being determined. Thus, since 

the taxable value of domestic products already included a consumption 

tax factor, the corresponding consumption tax was the taxable value 

multiplied by the tax rate. Since the import value of imported goods 

did not include a consumption tax factor, such a value was converted 

into a taxable value that contained a consumption tax factor. The 

consumption tax was then worked out based on the converted taxable 

value. Otherwise, the value of imported goods would not contain a 

consumption tax factor, while that of domestic goods would, which 

would lead to unfair treatment in relation to tax imposition on imported 

and domestic products. 

 Committee on Market Access, Minutes of the Meeting Held on 20 October and 5 December 2003, 

G/MA/M/35 (10 December 2003) at ¶ 7.14. 
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As discussed in the previous section, the purpose of Article III is to prevent Members 

from applying internal regulations and taxes that disrupt the competitive relationships between 

domestic and imported goods, so as to afford protection to domestic production. Again, the first 

sentence of Article III:2 examines whether product of an exporting country are taxed in excess of 

the taxes on the “like” domestic product, while the second sentence examines whether products 

of an exporting country are taxed similarly to domestic products which are “directly competitive 

or substitutable.”385 In following the like product analysis from above, it is likely that the 

consumption tax violates the first sentence of Article III:2. As the consumption tax applies to 

imported consumer goods “ranging from alcoholic beverages to cosmetics to automobiles,”386 a 

large number of the imported consumer goods are likely to be considered “like products” with 

domestic consumer goods. 

The next question is whether the tax on imported products is “in excess of” that on like 

domestic products. Again, even the smallest amount of excess is too much, and as discussed 

above, it need only disrupt the competitive relationships between the products.387 However, in 

2007, USTR commented that by using a “substantially different tax base to compute 

consumption taxes for domestic and imported products, the tax burden imposed on imported 

consumer goods ... is higher than for competing domestic products.”388 To the extent that the 

 

385 Korea – Taxes on Alcoholic Beverages, Report of the Panel, WT/DS75/R (17 September 1998). 

386 National Trade Estimate 2007 at 93. 

387 Japan - Taxes on Alcoholic Beverages, Report of the Appellate Body, WT/DS8/AB/R, WT/DS10/AB/R, 

WT/DS11/AB/R (4 October 1996) at 27. 

388 National Trade Estimate 2007 at 93. 
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consumption tax formula used on imported products creates a tax “in excess of” that on “like 

domestic products,” and to the extent that China’s consumption tax gives Chinese domestic 

products an advantage over imported products, the tax would violate Article III:2 of the GATT 

1994. 
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PART 2:

TRADE-RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS (TRIPS)

I. INTRODUCTION

When China joined the World Trade Organization (WTO), it committed to providing 

effective protection for intellectual property rights (IPR).389 However, more than five years later, 

China continues to be viewed as having unacceptably high levels of intellectual property theft 

and concerns remain that China, despite many changes to laws and regulations and attention at 

least at the central government level, still provides inadequate IPR enforcement.390 China’s 

trading partners continue to provide technical assistance and to regularly consult on the steps 

needed to reduce the level of intellectual property (IP) theft both within China and in products 

being exported from China. Concerns have been raised by the U.S. and others that China’s 

current legal regime suffers from too few criminal prosecutions, that IP owners are unable to 

obtain effective enforcement because of low damage awards that neither compensate IP owners 

for past losses nor constitute a deterrent to future infringements, and that courts and other 

government entities typically do not destroy infringing goods or equipment used to make 

infringing goods.391

 

389 See, e.g., Accession of the People’s Republic of China, WT/L/432 (23 November 2001) at Annex 1A, ¶ VI(a). 

390 For a detailed analysis of these issues and the global crisis facing intellectual property protection, see Terence 

P. Stewart et al., The Crisis in Intellectual Property Protection and China’s Role in that Crisis, The Trade 

Lawyers Advisory Group LLC (May 2007) [hereinafter “Crisis in IP Protection”]. 

391 See, e.g., China – Measures Affecting the Protection and Enforcement of Intellectual Property Rights, 

Request for Consultations by the United States, WT/DS362/1, IP/D/26, G/L/819 (16 April 2007), attached as 

Exhibit 20; Transitional Review Under Section 18 of the Protocol on the Accession of the People’s Republic 

of China, Report of the General Council by the Chair, IP/C/43 (21 November 2006) at ¶¶ 60, 63. 
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The United States has spent enormous efforts working with China to get them to correct 

problems in their legal structure and their enforcement efforts. While bilateral cooperation 

remains an important component to achieving an acceptable IP environment in China, the scale 

of the problem and the continued unwillingness of China to address certain problems in an 

aggressive manner justify the United States and other trading partners pursuing their rights 

through WTO consultations and, if necessary, dispute panels. The United States recently 

initiated a case at the WTO to address prominent concerns with China’s protection of 

copyrighted materials. In its request for consultations, the United States made specific 

allegations with respect to China’s threshold requirements for criminal penalties and certain 

administrative procedures that allow for infringing goods to re-enter the channels of 

commerce.392 The United States should similarly pursue consultations on China’s compliance 

with its obligations under the TRIPS Agreement for other pressing enforcement-related problems, 

such as inadequate damage awards in civil disputes and the frequent failure of judicial authorities 

to order the destruction of infringing goods and equipment used to make these goods. 

 

392 See China – Measures Affecting the Protection and Enforcement of Intellectual Property Rights, Request for 

Consultations by the United States, WT/DS362/1, IP/D/26, G/L/819 (16 April 2007), attached as Exhibit 20. 
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II. CHINA’S WTO OBLIGATIONS WITH RESPECT TO INTELLECTUAL 

PROPERTY RIGHTS

A. China’s Accession to the WTO 

When China joined the WTO, it ultimately agreed to bring all of its laws and regulations 

into compliance with its obligations under the TRIPS Agreement.393 This Agreement is broken 

up into several parts, with each section focusing on different commitments. The first part details 

the Agreement’s General Provisions and Basic Principles, and lays out, inter alia, the nature and 

scope of a Member’s obligations, the national treatment provision and the objectives of the 

Agreement.394 These articles provide that a Member “shall give effect to the provisions of this 

Agreement,” and that Members are allowed, but not obligated, to provide IP protection beyond 

what the Agreement requires. 395 In other words, the Agreement is intended to provide a 

minimum, but by no means a maximum, level of protection. With regard to the objectives of the 

Agreement, Article 7 states the following: 

The protection and enforcement of intellectual property rights 

should contribute to the promotion of technological innovation and 

to the transfer and dissemination of technology, to the mutual 

advantage of producers and users of technological knowledge and 

 

393 See Accession of the People’s Republic of China, WT/L/432 (23 November 2001) at Annex 1A, ¶ VI(a); 

Report of the Working Party on the Accession of China, WT/MIN(01)/3 (10 November 2001) at ¶ 305 

[hereinafter “Working Party Report”]. 

394 See Agreement on Trade-Related Aspects of Intellectual Property Rights, April 15, 1994, Marrakesh 

Agreement Establishing the World Trade Organization, Annex 1C, Articles 1, 3 and 7, The Legal Texts: The 

Results Of The Uruguay Round Of Multilateral Trade Negotiations 320 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 

1197 (1994) [hereinafter “TRIPS Agreement”]. 

395 See TRIPS Agreement, Article 1.1. 
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in a manner conducive to social and economic welfare, and to a 

balance of rights and obligations.396

The second part of the TRIPS Agreement provides the Standards Concerning the 

Availability, Scope and Use of Intellectual Property Rights, and details the terms of compliance 

for a Member’s intellectual property laws covering areas such as copyright, trademark, patent, 

and geographical indicators.397

The third part details a Member’s obligations with regard to Enforcement of Intellectual 

Property Rights.398 The first provision of this part states that: 

Members shall ensure that enforcement procedures as specified in 

this Part are available under their law so as to permit effective 

action against any act of infringement of intellectual property 

rights covered by this Agreement, including expeditious remedies 

to prevent infringements and remedies which constitute a deterrent 

to further infringements. These procedures shall be applied in such 

a manner as to avoid the creation of barriers to legitimate trade and 

to provide for safeguards against their abuse.399 

In addition to this general obligation to provide an effective system of intellectual property rights 

protection that deters future infringements, Part III of the TRIPS Agreement also provides 

guidelines for civil and administrative procedures and remedies, provisional measures, border 

measures for Customs authorities, and criminal procedures.400

 

396 TRIPS Agreement, Article 7. 

397 See TRIPS Agreement, Articles 9-40. 

398 See TRIPS Agreement, Articles 41-61. The entire TRIPS Agreement is broken up into a total of seven parts 

with the remaining four parts consisting of: Acquisition and Maintenance of Intellectual Property Rights and 

Related Inter-Partes Procedures; Dispute Prevention and Settlement; Transitional Arrangements; and 

Institutional Arrangements; Final Provisions. See TRIPS Agreement, Parts IV-VII. 

399 TRIPS Agreement, Article 41.1. 400 TRIPS Agreement, Articles 42-61. 
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Accordingly, when China acceded to the WTO, it had to ensure both that its laws were 

technically in compliance with the obligations stated in the TRIPS Agreement and also that its 

IPR regime provided effective protection to both foreign and domestic rights holders. This 

entailed making revisions to it existing laws regarding copyrights, patents and trademarks, as 

well as revisions to relevant implementing regulations and ensuring that its administrative, 

criminal and civil systems were prepared to effectively protect and enforce such rights.401

In addition to these commitments regarding intellectual property protection, China also 

addressed concerns of Members of the WTO regarding China’s ability to provide adequate 

remedies and effectively enforce intellectual property rights. Given China’s high rates of 

counterfeiting and piracy, Members wanted assurances that China would “vigorously” apply 

enforcement legislation.402 The table below summarizes major concerns Members had regarding 

China’s enforcement measures at the time of its accession. 

 

401 See generally Working Party Report at ¶¶ 259-284 (detailing specific commitments China made with respect 

to its intellectual property laws). 402 See id. at ¶ 288. 
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MEMBER CONCERNS REGARDING CHINA’S ENFORCEMENT MEASURES

Heavy Reliance on Administrative 

Procedures 

China’s heavy reliance on administrative actions, which only 

amounted to low fines and the loss of infringing goods.403 These 

inadequate sanctions, along with high criminal thresholds, made it 

difficult to effectively enforce IP rights in China.404 The Members 

wanted to see more administrative cases referred to criminal 

actions, particularly those involving repeat offenders and willful 

infringers.405

Civil Judicial Procedures The difficulty for right holders to pursue judicial relief because of 

the system’s structure of basing filing fees on the amount of 

damages requested, calculating damages according to the 

infringer’s profits, and requiring evidence of actual sales. This 

combination generally resulted in damage awards that did not 

adequately compensate the injured right holder.406

Criminal Procedures Monetary thresholds required for a criminal action were not often 

met and, therefore, the criminal procedures, as applied, were not 

effectively addressing IPR infringements.407 

Provisional Measures Chinese laws did not provide judicial authorities with strong 

provisional measures to stop the flow of infringing goods and to 

preserve the evidence of an alleged infringement.408

Special Border Measures China’s existing border regulations were not consistent with the 

border measures obligations contained in TRIPS Agreement 

articles 51 through 60. 409 These included: the suspension by the 

customs authorities of the release in free circulation of infringing 

goods, rules of evidence for initiating a suspension of release, and 

the right to destroy or stop the re-exportation of infringing 

goods.410 

 

403 See id. at ¶ 297. 404 See id. 405 See id. 406 See id. at ¶ 289. 407 See Working Party Report at ¶ 304. 408 See id. at ¶¶ 293-296. 

409 See id. at ¶¶ 300-301. 410 See id. at ¶¶ 300-301. 
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B. Chinese IPR Laws Post-WTO Accession 

Since joining the WTO, China has taken great steps to strengthen its IPR regime.411 The 

Government has implemented Annual Action Plans to address many concerns, including: 

legislative reform; law enforcement; training and education; international cooperation; 

promoting business self discipline; and services to right holders.412 However, despite these 

efforts and China’s contentions at the time of its accession that it would implement rules and 

regulations to adequately protect IP rights, many of the same concerns persist.413

In the years following accession, Members continued to express their concerns regarding 

China’s enforcement mechanisms.414 In its 2006 Trade Policy Review of China, the WTO 

Secretariat reported that “[i]t appears that enforcement remains weak and infringement of 

intellectual property rights widespread.” 415 In 2007, the USTR expounded on China’s 

enforcement problems by stating that “IPR enforcement is hampered by a lack of coordination 

among Chinese government ministries and agencies, a lack of training, the allocation of 

 

411 For a full discussion on China’s efforts, see Crisis in IP Protection, at Section III. 412 China’s Action Plan on IPR Protection 2006, People’s Daily Online, April 30, 2006. 413 For a review of enforcement concerns regarding China’s IPR system, see Crisis in IP Protection. 414 See, e.g., Transitional Review Under Section 18 on the Protocol on the Accession of the People’s Republic of 

China, Report to the General Council by the Chair, IP/C/31 (10 December 2003) at ¶¶ 57-58, 65; Transitional 

Review Under Section 18 on the Protocol on the Accession of the People’s Republic of China, Report to the 

General Council by the Chair, IP/C/34 (9 December 2004) at ¶¶ 81, 83, 88; Request for Information Pursuant 

to Article 63.3 of the TRIPS Agreement, Communication from the United States, IP/C/W/461 (14 November 

2005). 415 Trade Policy Review: China, Report by the Secretariat, WT/TPR/S161 (28 February 2006) at ¶ 313. 
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resources, a lack of transparency in the enforcement process and its outcomes, and local 

protectionism and corruption.”416

Inadequate deterrence within China’s administrative, civil, and criminal systems remains 

one of the biggest problems with China’s intellectual property system.417 High thresholds for 

criminal prosecution continue to constrain China’s enforcement authorities, while inadequate 

civil damages and “toothless” administrative penalties provide little deterrence against 

infringement.418 Additionally, infringing goods remain in the market due to the reluctance of 

courts to grant remedies allowing preliminary injunctions and the destruction of infringing 

goods.419 The lack of enforcement of intellectual property rights in China is illustrated in high 

levels of piracy and counterfeiting and an increase in China’s share of infringing goods at the 

U.S. border.420

III. CHINA’S TRADING PARTNERS UTILIZE WTO PROVISIONS TO SEEK 

ADDITIONAL PROGRESS IN CHINA’S INTELLECTUAL PROPERTY REGIME

Despite China’s efforts and acknowledged progress in bringing its intellectual property 

laws and regulations into compliance with its WTO obligations, its global trading partners 

 

416 2007 National Trade Estimate Report on Foreign Trade Barriers, United States Trade Representative, at 110 

[hereinafter “NTE 2007”]. 417 See Trade Policy Review: China, Report by the Secretariat, WT/TPR/S161 (28 February 2006) at ¶303; 

Transitional Review Under Section 18 of the Protocol on the Accession of the People’s Republic of China, 

Report of the General Council by the Chair, IP/C/43 (21 November 2006) at ¶ 63. 418 NTE 2007 at 112. 

419 See Transitional Review Under Section 18 of the Protocol on the Accession of the People’s Republic of China, 

Report of the General Council by the Chair, IP/C/43 (21 November 2006) at ¶ 63; Transitional Review Under 

Section 18 of the Protocol on the Accession of the People’s Republic of China, Communication from the 

United States, IP/C/W/453 (5 October 2005) at ¶ 17. 420 See NTE 2007 at 112; see also 2007 Special 301 Report, United States Trade Representative, at 18 (noting 

that U.S. industry reports that 85 to 93 percent of all copyrighted material sold in China is pirated). 
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remain dissatisfied. The United States, as well as other countries, has attempted to elicit further 

changes in China’s intellectual property regime by using various mechanisms outlined in the 

WTO agreements. First, the United States made a request in November 2005 for additional 

information and clarifications regarding certain of China’s IPR enforcement mechanisms, 

pursuant to TRIPS Article 63.3.421 The United States failed to receive an adequate response 

from China with regard to this request and as the counterfeiting and piracy problem continued to 

balloon, the United States submitted a request for consultations with China in April 2007, thus 

initiating the first step in a formal WTO dispute settlement process.422

A. United States Requests Information Pursuant to TRIPS 

Article 63.3 

The TRIPS Agreement contains its own provisions for Dispute Prevention and Settlement, 

located in Part V, with Article 63 devoted to Transparency and Article 64 devoted to Dispute 

Settlement. Paragraph 1 of Article 63 requires Members to publish or make publicly available 

all laws, regulations, judicial interpretations, and administrative rulings relating to the subject 

matter of the Agreement, i.e., intellectual property laws, regulations, and enforcement 

procedures.423 Article 63.3 provides that a Member “shall be prepared to supply,” in writing, any 

of the information listed in paragraph 1, upon request by another Member. Additionally, where a 

Member feels that its IP rights may be affected by a specific judicial decision, administrative 

 

421 See Request for Information Pursuant to Article 63.3 of the TRIPS Agreement, Communication from the 

United States, IP/C/W/461 (14 November 2005). 422 See China – Measures Affecting the Protection and Enforcement of Intellectual Property Rights, Request for 

Consultations by the United States, WT/DS362/1, IP/D/26, G/L/819 (16 April 2007) [hereinafter “China – 

Measures Affecting IPR”], attached as Exhibit 20. 423 See TRIPS Agreement, Article 63.1. 
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ruling or bilateral agreement dealing with intellectual property, that Member may also request 

access to, or information regarding, those decisions or agreements.424 On October 25, 2005, the 

United States presented the Delegation of China with such a request. This was followed by 

similar requests from Japan and Switzerland.425

In its request, the United States asked for further clarification and additional information 

relating to specific cases of IP enforcement that China had referred to between 2001 and 2004.426 

The United States stated that the goal of this request was both to “encourage the sharing of such 

information” and to “gain a better understanding of such key features of IPR cases in China as 

the legal basis on which they have been decided and the remedies actually imposed on 

infringers.”427 The United States hoped to gain specific information regarding China’s remedies 

for IPR infringements in order determine why China’s enforcement system was not working and 

what could be done to fix it.428 Accordingly, the United States requested clarification in the 

following six categories: (1) specific legal basis for its findings of IPR infringement; (2) specific 

amounts and nature of remedies, provisional measures, and information relating to matters 

 

424 Id., Article 63.3. 425 See Request for Information Pursuant to Article 63.3 of the TRIPS Agreement, Communication from Japan, 

IP/C/W/463, 14 November 2005; Request for Information Pursuant to Article 63.3 of the TRIPS Agreement, 

Communication from Switzerland, IP/C/W/462 (11 November 2005). 426 See Request for Information Pursuant to Article 63.3 of the TRIPS Agreement, Communication from the 

United States, IP/C/W/461 (14 November 2005). The United States identified these cases as ones which 

China had referred to in previous publications where China had provided statistical data relating to its 

enforcement of IP rights through administrative, criminal and civil remedies. As an example, the United 

States referred to a publication by the State Council Information Office, entitled “New Progress in China’s 

Protection of Intellectual Property Rights,” dated April 25, 2005, where China referenced administrative 

cases of copyright infringement, administrative cases of trademark infringement and counterfeiting, and civil 

and criminal cases of first instance related to IPR infringement. Id. at fn.1. 427 Request for Information Pursuant to Article 63.3 of the TRIPS Agreement, Communication from the United 

States, IP/C/W/461 (14 November 2005). 428 U.S. Seeks Data on Chinese Protection of Intellectual Property, USINFO.STATE.GOV, October 26, 2005, 

available at http://usinfo.state.gov/ei/Archive/2005/Oct/26-168537.html. 
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involving repeat infringers; (3) identify location of action, year of commencement and resolution, 

and competent authority responsible for handling the referenced cases; (4) transfer of cases to 

criminal authorities, including number of cases transferred and amount of illegal profits 

involved; (5) identify cases involving foreign nationals and whether those nationals are of WTO 

Member countries or non-Member countries; and (6) identify the products and operations 

involved in the various infringement cases.429

At the time, the United States Trade Representative, Rob Portman, stated that the “United 

States is deeply concerned by the violations of intellectual property rights in China...If China 

believes that it is doing enough to protect intellectual property rights, then it should view this 

process as a chance to prove its case.”430

China responded by questioning the legal basis for the United States’ requests, noting 

specifically the China did not have a common law judicial system and therefore did not have 

“judicial decisions and administrative rulings of general application,” as the United States had 

requested and within the meaning of TRIPS Agreement Article 63.3.431 China also stated that 

the United States had not properly referred to a “specific case,” as required by Article 63.3 and 

requested clarification from the United States on this point. Finally, while China made a point of 

emphasizing its compliance with Article 63 and its willingness to cooperate with other WTO 

 

429 Request for Information Pursuant to Article 63.3 of the TRIPS Agreement, Communication from the United 

States, IP/C/W/461 (14 November 2005). 430 USTR Pursues WTO Process to Probe IPR Enforcement in China, Press Release, Office of the United States 

Trade Representative, October 26, 2005. 431 See Response to a Request for Information Pursuant to Article 63.3 of the TRIPS Agreement, Communication 

from China, IP/C/W/465 (23 January 2006) at ¶ 4. 
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Members, it also noted a Member certainly had a right to request information pursuant to Article 

63.3, but it found no corresponding obligation for a Member to reply to such request.432

The United States responded by providing further clarification as to how the rights of its 

citizens were affected by China’s cases for which it sought further information and explained its 

bases for believing its requests fell within the scope of Article 63.3. In this reply to China, the 

United States stated its belief that “our Governments can and should work to enhance mutual 

understanding of the true significance of these cases in light of the requirements of Part III 

[Enforcement] of the TRIPS Agreement.”433 However, despite expressed desires on both sides 

for cooperation and transparency, this particular means of information-gathering never produced 

the information the United States wanted and was unable to provide any further clarity on the 

effectiveness of China’s enforcement measures. 

B. U.S. Requests Formal Consultations With China Through 

WTO to Address Intellectual Property Laws and 

Protection

More than five years after China joined the WTO the United States was still dissatisfied 

with the high levels of IPR infringements in China and the perceived lack of effective 

enforcement efforts. In order to address some of the specific concerns regarding China’s IP 

 

432 See Response to a Request for Information Pursuant to Article 63.3 of the TRIPS Agreement, Communication 

from China, IP/C/W/465 (23 January 2006) at ¶¶ 2, 8, 9. China responded similarly to requests from Japan 

and Switzerland. See Response to a Request for Information Pursuant to Article 63.3 of the TRIPS 

Agreement, Communication from China, IP/C/W/466 (23 January 2006); Response to a Request for 

Information Pursuant to Article 63.3 of the TRIPS Agreement, Communication from China, IP/C/W/467 (23 

January 2006). 433 Follow-Up Request for Information Pursuant to Article 63.3 of the TRIPS Agreement, Communication of the 

United States, Addendum, IP/C/W/461/Add.1 (24 January 2006) at ¶ 6. 
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system, the United States took the first step in formal dispute resolution proceedings through the 

WTO and filed a request for consultations with respect to certain of China’s IP laws and 

regulations relating to copyrights and trademarks. 434 This request addressed four major 

concerns: (1) China’s thresholds for criminal procedures and penalties; (2) the disposal of 

infringing goods that were confiscated by Customs authorities; (3) gaps in copyright and 

enforcement protection for foreign works that have not yet been authorized for distribution or 

publication in China; and (4) the scope of criminal procedures and penalties for those who 

engage in unauthorized reproduction or distribution of copyrighted works.435

The first issue relates to China’s threshold requirements for criminal prosecution, which 

has been a hotly contested point in China’s laws in recent years.436 China’s criminal law 

contains vague phrases to define when certain acts of counterfeiting and piracy subject infringers 

to criminal sanctions. For instance, one who commits the act of infringement shall be subject to 

criminal penalties “if the circumstances are serious,” and shall be exposed to more extensive 

penalties “if the circumstances are especially serious.”437 In a similarly vague fashion, the law 

provides that those who sell counterfeit goods shall be subject to criminal penalties “if the 

 

434 See China – Measures Affecting IPR, attached as Exhibit 20. 435 Id. 436 See Crisis in IP Protection, at 101-109 (discussing China’s criminal enforcement system and problems posed 

by the threshold requirements); see also supra Part 2, Section II.A (reviewing the Report of the Working 

Party on the Accession of China, which noted WTO Members’ concerns over China’s criminal thresholds and 

the problems they raised in terms of enforcing of IP rights). 437 Criminal Law of the People’s Republic of China, Adopted at the Second Session of the Fifth National 

People’s Congress on July 1, 1979, Revised at the Fifth Session of the Eighth National People’s Congress on 

March 14, 1997, Article 213 [hereinafter “Criminal Law of China”], excerpts attached as Exhibit 21. See 

China – Measures Affecting IPR. 
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amount of sales is relatively large,” and the penalties will be more severe “if the amount of sales 

is huge.”438

China has previously attempted to address these ambiguous terms by issuing two Judicial 

Interpretations that provide more specific information as to what constitutes “serious” or 

“relatively large.” The Supreme People’s Court and the Supreme People’s Procuratorate 

promulgated the first in December 2004 and, upon continued pressure from the international 

community, the second in April 2007, just a few days prior to the United States’ filing of its 

request for consultations. 439 Pursuant to these interpretations, with regard to trademark 

infringement, the “circumstances are serious,” and thus criminal penalties apply, when the 

infringer’s illegal business volume (appraised according to the value of the goods at the prices at 

which they are sold) exceeds RMB 50,000 ($6,100) or the income from such goods is more than 

RMB 30,000 ($3,700).440 Additionally, one is criminally liable if he knowingly sells more than 

RMB 50,000 ($6,100) worth of goods with infringing trademarks.441 Similarly, an infringer is 

 

438 Criminal Law of China, Article 214. See China – Measures Affecting IPR. 439 See Judicial Interpretations by the Supreme People’s Court and the Supreme People’s Procuratorate on 

Several Issues of Concrete Application of the Laws in Handling Criminal Cases of Infringing Intellectual 

Property, December 22, 2004 [hereinafter “Judicial Interpretation I”], attached as Exhibit 22; Judicial 

Interpretations by the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues of 

Concrete Application of the Laws in Handling Criminal Cases of Infringing Intellectual Property II, April 5, 

2007 [hereinafter “Judicial Interpretation II”], attached as Exhibit 23. 440 See Judicial Interpretation I, at Article 1. This interpretation further defines “especially serious” 

circumstances as when the illegal business volume is more than RMB 250,000 ($30,500) or the illegal gains 

are more than RMB 150,000 ($18,300). Id. For a more detailed discussion regarding the First and Second 

Judicial Interpretations, see Crisis in IP Protection, at 104-109. 441 See Judicial Interpretation I, at Article 2. 
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criminally liable for copyright infringements when, for profit-making purposes, he reproduces 

and/or distributes at least 500 units.442

The United States challenged these provisions on two points, arguing that they were 

inconsistent with TRIPS Agreement Articles 41 and 61. As stated earlier, Article 41 contains the 

general enforcement requirement that Members must implement measures to ensure effective 

action against infringements and provide remedies that will deter future infringements.443 Article 

61 pertains specifically to criminal procedures and states that “Members shall provide for 

criminal procedures and penalties to be applied at least in cases of willful trademark 

counterfeiting or copyright piracy on a commercial scale.”444 The United States argued that 

determining the price thresholds for illegal business volume according to the price at which the 

infringing product is sold, as opposed to the value of the corresponding legitimate item, provides 

the infringer the opportunity to sell many low-priced counterfeit items without being subject to 

criminal liability. Similarly, the mere existence of quantitative thresholds essentially provides a 

“safe harbor” for infringers and equates to an absence of criminal liability for commercial scale 

infringement, which is inconsistent with the enforcement requirements of TRIPS Agreement 

Articles 41 and 61.445

The second issue addressed in the request for consultation pertains to Customs 

authorities’ disposal of infringing goods. Article 46 of the TRIPS Agreement states that 

 

442 See Judicial Interpretation II, at Articles 1, 2. This interpretation further defines “other serious 

circumstances” as when the amount of infringing products is 2,500 units or more. Id. at Article 1. 443 See supra Part 2, Section II.A; see also TRIPS Agreement, Article 41.1. 444 TRIPS Agreement, Article 61. 445 See China – Measures Affecting IPR. 
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authorities shall be allowed to order disposal of infringing goods outside the channels of 

commerce, without compensation, or order that the goods be destroyed. Specifically with 

respect to goods containing a counterfeit trademark, the Article also states that “the simple 

removal of the trademark unlawfully affixed shall not be sufficient, other than in exceptional 

cases, to permit release of the goods into the channels of commerce.”446 Article 59 provides that 

the provisions in Article 46 directly apply to Customs authorities.447 The United States alleged 

that China’s Customs regulations are inconsistent with these provisions of the TRIPS Agreement 

because they provide a hierarchy for disposal of infringing goods that allows for the goods to reenter the stream of commerce.448

China’s Customs procedures are detailed in its Regulations and the Implementing 

Measures.449 Pursuant to Article 27 of the Regulations and Article 30 of the Implementing 

Measures, the first option for disposal of infringing goods is to either give them to a charity 

where they can be used for the public welfare, or the right holder may purchase the infringing 

goods if it wishes to have them.450 If neither of these options is viable, the authorities shall 

remove the infringing mark and auction the goods off, with the proceeds going to the state 

 

446 TRIPS Agreement, Article 46. 447 See TRIPS Agreement, Article 59. 448 See China – Measures Affecting IPR. 449 See Regulations of the People’s Republic of China on Customs Protection of Intellectual Property Rights

(adopted at the 30th Ordinary Meeting of the State Council on 26 November 2003, published by the State 

Council on 2 December 2003, and effective from 1 March 2004) [hereinafter “Customs Regulations for IPR”], 

attached as Exhibit 24; Measures of the General Administration of Customs of the People’s Republic of China 

for the Implementation of the Regulation of the People’s Republic of China on the Customs Protection of 

Intellectual Property Rights (adopted at the executive meeting of the General Administration of Customs on 

April 22nd, 2004, and entered into force as of July 1st, 2004) [hereinafter “Customs Implementing 

Regulations for IPR”], attached as Exhibit 25. 450 See Customs Regulations for IPR, at Article 27; Customs Implementing Regulations for IPR, at Article 30.1. 
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treasury.451 If the first and second options do not apply, meaning that the goods cannot be used 

for public welfare, the right holder does not want to purchase them, and the infringing mark 

cannot be removed, only then will the goods be destroyed.452 The fact that these goods are 

allowed back into the stream of commerce, via an auction, after the mere removal of the 

infringing mark is inconsistent with China’s TRIPS obligations contained in Articles 46 and 59. 

The United States also challenged China’s copyright law, together with its administrative 

procedures regarding censorship or other approval for foreign copyrighted works, such as written 

materials, sound recordings and performances.453 The United States based this challenge on two 

main points. First, Article 4 of China’s Copyright Law states that “works the publication or 

distribution of which is prohibited by law shall not be protected by this Law.”454 Accordingly, to 

the extent that foreign copyright holders are denied protection and/or a means to enforce their 

rights if their work has not been authorized for publication or distribution, the United States 

argued that China’s laws are inconsistent both TRIPS Agreement Article 9.1, which incorporates 

minimum standards of copyright protection as detailed in the Articles 1 through 21 of the Berne 

 

451 See Customs Regulations for IPR, at Article 27; Customs Implementing Regulations for IPR, at Article 30.2. 452 See Customs Regulations for IPR, at Article 27; Customs Implementing Regulations for IPR, at Article 30.3 453 See China – Measures Affecting IPR (citing administrative regulations such as the Administrative regulations 

on Audiovisual Products, the Administrative Regulation on Publishing, the Measures for the Administration 

of Import of Audio and Video Products, the Procedures for Examination and Approval for Publishing 

Finished Electronic Publication Items Licensed by a Foreign Copyright Owner, and the Procedures for 

Recording of Imported Publications). 454 Copyright Law of the People’s Republic of China (Adopted at the Fifteenth Session of the Standing 

Committee of the Seventh National People’s Congress on 7 September 1990, and revised in accordance with 

the Decision on the Amendment of the Copyright Law of the People’s Republic of China adopted at the 24th 

Session of the Standing Committee of the Ninth National People’s Congress on 27 October 2001) [hereinafter 

“Copyright Law of China”], Article 4, attached as Exhibit 26. 
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Convention, and TRIPS Agreement Article 41.1 by failing to provide certain copyright holders 

with the opportunity to enforce their rights.455

Additionally, the United States emphasized that Article 5(1) of the Berne Convention 

provides that foreign authors shall be granted the same protections as domestic authors, and 

Article 5(2) states that a right holder shall be able to exercise their rights without being “subject 

to any formality.”456 Therefore, the United States argued that China’s laws requiring foreign 

right holders to successfully complete a review before being approved for distribution or 

publication constituted a “formality” that was inconsistent with TRIPS Agreement Article 9.1.457 

Additionally, to the extent that China’s pre-distribution and pre-authorization review procedures 

for Chinese nationals resulted in copyright protection and enforcement being available earlier 

than it was for foreign copyright holders, or if such procedures otherwise granted domestic right 

holders with more favorable protection or enforcement, this was inconsistent with the national 

treatment provision in TRIPS Agreement Article 3.1.458

Finally, the United States took issue with the fact that China’s law apparently did not 

provide criminal penalties for the unauthorized reproduction of copyrighted works, unless that 

reproduction was accompanied by unauthorized distribution.459 Article 217 of China’s Criminal 

 

455 See China – Measures Affecting IPR; TRIPS Agreement, Articles 9.1, 41.1. 456 Berne Convention for the Protection of Literary and Artistic Works (1979), Article 5, available at 

www.wipo.int/treaties/en/ip/berne/trtdocs_wo001.html. See China – Measures Affecting IPR. 457 See China – Measures Affecting IPR. 458 See id.; see also TRIPS Agreement, Article 3.1 (stating that “each Member shall accord to the nationals of 

other Members treatment no less favourable than that it accords to its own nationals with regard to the 

protection of intellectual property, subject to the exceptions already provided in” the major international 

intellectual property treaties). 

459 See China – Measures Affecting IPR. 
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Law provides circumstances under which criminal penalties will apply for copyright 

infringement, stating that such penalties shall apply, inter alia, for “reproducing and distributing 

a written work, musical work, motion picture...” and for “reproducing and distributing an audio 

or video recording produced by another person without permission of the producer.”460 The 

United States argued that, to the extent that China’s law did not provide for criminal penalties 

when one willfully infringed a copyright on a commercial scale through unauthorized 

reproduction, but without distribution, and vice versa, the law appeared to be inconsistent with 

China’s obligations contained in TRIPS Agreement Articles 41.1 and 61.461 Again, Article 41 

provides the general enforcement obligations while Article 61 provides that Members must at 

least provide criminal procedures and penalties in cases of willful infringement on a commercial 

scale. For its part, China attempted to clarify this language in its most recent Judicial 

Interpretation, promulgated just days before the United States filed its request for consultations at 

the WTO. In that Interpretation, Article 2 states that “for purposes of Article 217 of the Criminal 

Code, the term ‘reproduction and distribution’ means reproduction and/or distribution.”462 It 

reiterates this clarification by further stating that “if anyone illegally publishes, reproduces 

and/or distributes another person’s work and such copyright infringement constitutes a crime, 

that person shall be convicted and punished for the crime of copyright infringement.”463

 

460 Criminal Law of China, Article 217. 461 See China – Measures Affecting IPR. 462 Judicial Interpretation II, Article 2. 463 Id. 
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The two delegations met for formal consultations in early June but failed to reach a 

resolution on these issues.464 Accordingly, the United States has moved the matter forward to 

formal dispute settlement proceedings by requesting the establishment of a panel.465 

IV. OTHER PROBLEMS WITH CHINA’S INTELLECTUAL PROPERTY LAWS AND 

REGULATIONS: THE CASE FOR ADDITIONAL WTO CHALLENGES

As discussed in the previous section, the United States’ case pending at the WTO 

addresses some of the persistent concerns regarding China’s enforcement mechanisms with 

respect to IPR infringements, focusing mainly on China’s administrative procedures and criminal 

penalties. Some of the main points the United States raised in its request for consultations are 

concerns that existed at the time of China’s accession, namely the monetary thresholds that must 

be met to trigger criminal penalties and the administrative disposal of infringing goods by 

Customs authorities.466 Two similarly persistent concerns that the United States did not address 

in its first request for consultations are the fact that China continues to award very low damages 

 

464 See William New, US, China Fail to Resolve Differences in Consultations on WTO IP Cases, Intellectual 

Property Watch, June 11, 2007. Over the course of the proceedings, China has repeatedly stated its belief that 

its laws are fully in compliance with its TRIPS obligations and requested its trading partners be patient as it 

continues to work on its intellectual property regime. See China to Actively Respond to Trade Cases, 

Chinadaily.com, May 25, 2007, available at www.chinadaily.com.cn/bizchina/200705/25/content_ 

880525.htm; William New, US, China Fail to Resolve Differences in Consultations on WTO IP Cases, 

Intellectual Property Watch, June 11, 2007. Chinese officials have also stated that the U.S. does not 

understand China’s legal system, nor does it understand “basic concepts of IPR protection,” and further stated 

that the U.S. is misusing the WTO dispute settlement mechanism in an attempt to force China to apply 

measures beyond those required by the TRIPS Agreement. See id. 465 See China – Measures Affecting the Protection and Enforcement of Intellectual Property Rights, Request for 

the Establishment of a Panel by the United States, WT/DS362/7 (21 August 2007), attached as Exhibit 27; 

see generally Understanding on Rules and Procedures Governing the Settlement of Disputes, April 15, 1994, 

Marrakesh Agreement Establishing the World Trade Organization, Annex 2, Article 6.1, The Legal Texts: 

The Results Of The Uruguay Round Of Multilateral Trade Negotiations 354 (1999), 1869 U.N.T.S. 401, 33 

I.L.M. 1226 (1994) [hereinafter “Dispute Settlement Understanding”]. 466 See Working Party Report, paras. 297, 301-301; see also supra Part 2, Section II.A. (discussing Members’ 

concerns at the time of China’s accession). 
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in civil IPR disputes and that courts order destruction of infringing goods and tools only on rare 

occasions.467

This section explores China’s civil enforcement system for IP rights, by focusing on the 

issues of low damages and infrequent destruction of infringing goods and equipment used to 

make infringing goods. While the laws and regulations governing China’s civil enforcement 

system appear, on their face, to be technically compliant with the minimum standards of 

protection outlined in the TRIPS Agreement, the application of such laws has failed to achieve 

the necessary objectives of deterrence and compensation. In 2007, right holders typically 

expressed concerns not about the laws or regulations but about the inadequate enforcement and 

results that do not fully reflect harm to the right holder.468

Having an effective civil system for enforcement of rights is critical for rights holders. 

Companies work with the Chinese Government to help administrative authorities identify fake 

trademarks and other infringing goods, but the civil system should provide right holders the 

opportunity to recover damages lost from the infringement and to take the implements of 

 

467 This issue of civil judgments ordering destruction of infringing goods is based on TRIPS Article 46, whereas 

the United States based its disposal argument on Customs regulations that instruct goods to be released back 

into channels of commerce through auctions if the infringing marks can be removed, which is inconsistent 

with the Special Requirements Related to Border Measures contained in TRIPS Article 59. 468 See, e.g., National Association of Manufacturers, Submission in Response to Request by USTR for Public 

Comment with Respect to 2007 National Trade Report on Foreign Trade Barriers, November 1, 2006 

(emphasizing the need for increased enforcement of China’s laws relating to IPR protection); Motion Picture 

Association, Submission in Response to Request by USTR for Public Comment with Respect to 2007 National 

Trade Report on Foreign Trade Barriers, November 8, 2006 (emphasizing the need for increased 

enforcement of China’s IP laws); Intellectual Property Protection as Economic Policy: Will China Ever 

Enforce its IP Laws?, Statement of Professor Daniel C.K. Chow, Congressional-Executive Commission on 

China: Counterfeiting in China, May 16, 2005 (explaining that China’s laws are now considered by most to 

be in compliance with the standards set out in the TRIPS Agreement, but that enforcement of these laws is 

inadequate and does not establish sufficient deterrence to IP theft), available at www.cecc.gov/pages/ 

roundtables/051605/Chow.php. 
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infringement out of use through destruction. Civil actions should also provide China an 

important means of deterring future infringements. 

By comparing China’s remedies to those of the United States and other countries, certain 

aspects of China’s system are noticeably different. Together, low damage awards and the 

infrequent destruction of infringing goods and the equipment used to produce such goods create 

a system that generally does not provide adequate compensation to right holders for 

infringements and does not objectively create an effective deterrent against future infringements; 

such lack of effective enforcement is inconsistent with TRIPS Article 41. 

A. Key Enforcement Provisions in TRIPS Agreement: General 

Obligations and Civil Procedures 

As previously reviewed, enforcement provisions in the TRIPS Agreement contain certain 

general obligations, as well as more specific obligations with respect to, inter alia, civil 

procedures and remedies. The following tables provides a summary of the key requirements 

contained in TRIPS Articles 41-48. 

GENERAL OBLIGATIONS

Article 41.1 

Members shall provide enforcement procedures that will permit effective 

action against infringement of intellectual property rights, including 

expeditious remedies to prevent infringements and remedies which 

constitute a deterrent to future infringements. 

Article 41.2 

Enforcement procedures shall be fair and equitable; they shall not be 

unnecessarily complicated or costly, or entail unreasonable time-limits or 

unwarranted delays. 
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GENERAL OBLIGATIONS

Article 41.3 Decisions on the merits of the case shall be in writing, reasoned, and 

available to the parties of the proceedings. 

Article 41.4 Parties shall have the opportunity for judicial review of final administrative 

decisions and legal aspects of initial judicial decisions. 

CIVIL AND ADMINISTRATIVE PROCEDURES AND REMEDIES

Article 42 

Fair and Equitable Procedures – Members shall provide civil judicial 

procedures concerning enforcement of intellectual property rights. 

Defendants shall receive timely written notice with sufficient details, 

including the basis of the claims. All parties shall be allowed independent 

legal counsel and duly entitled to substantiate their claims and present all 

relevant evidence. 

Article 43 

Evidence – When a party presents reasonably available evidence to support 

its claim that evidence relevant to its substantiation of its claims lies in 

control of the opposing party, the judicial authorities shall have authority to 

compel the opposing party to produce such evidence. 

Article 44 Injunctions – Judicial authorities shall have authority to order a party to 

desist from an infringement. 

Article 45.1 

Damages – Judicial authorities shall have authority to order the infringer to 

pay the right holder damages adequate to compensate for injury caused by 

infringement. 

Article 45.2 Damages – Judicial authorities shall also have authority to order the 

infringer to pay the right holder’s expenses and appropriate fees.

Article 46 

Other Remedies – In order to create an effective deterrent to infringement, 

the judicial authorities shall have the authority to order that infringing 

goods be disposed of outside the channels of commerce or destroyed. They 

shall also have the authority to order the materials and implements which 

are predominantly used in the creation of the infringing goods be disposed 

of outside the channels of commerce so as to minimize risks of future 

infringements. With respect to counterfeit trademark goods, the simple 

removal of the unlawful trademark is not sufficient to permit the release of 
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CIVIL AND ADMINISTRATIVE PROCEDURES AND REMEDIES

goods back into the channels of commerce. 

Article 47 Right of Information – Judicial authorities shall have the authority to order 

the infringer to identify third parties involved in infringing activities. 

Article 48 

Indemnification of the Defendant – Judicial authorities shall have the 

authority to order a party at whose request measures were taken to provide 

adequate compensation to a party who was injured by being wrongfully 

enjoined or restrained. 

When a panel or the Appellate Body is analyzing whether a Member’s laws and 

regulations are consistent with its WTO obligations, the dispute settlement procedures are 

designed to “preserve the rights and obligations” detailed in the agreements, and to “clarify the 

existing provisions of those agreements in accordance with customary rules of interpretation of 

public international law.” 469 These customary rules are generally taken from the Vienna 

Convention on the Law of Treaties (Vienna Convention), which states that “a treaty shall be 

interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the 

treaty in their context and in light of its object and purpose.”470

When implementing these customary rules of interpretation, panels usually start by 

reviewing the dictionary definitions of the relevant words in order to identify the ordinary 

 

469 Dispute Settlement Understanding, Annex 2, Article 3.2. 470 See, e.g., European Communities – Customs Classification of Frozen Boneless Chicken Cuts, Report of the 

Panel, WT/DS269/R (30 May 2005) at ¶¶ 7.88-7.89 [ hereinafter “EC – Chicken Cuts, Panel Report”] 

(quoting the Vienna Convention on the Law of Treaties, Article 31.1); United States – Final Dumping 

Determination on Softwood Lumber from Canada, Report of the Panel, WT/DS264/R (13 April 2004) at ¶ 7.3 

(citing the Vienna Convention on the Law of Treaties, Article 31.1). 
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meaning.471 The analysis progresses by considering the key terms within the relevant context. 

The Vienna Convention again provides guidance by explaining that the context may include the 

text of the treaty, including the preamble and any annexes, as well as relevant negotiating 

documents or other agreements made by the parties in connection with the conclusion of the 

treaty.472 This context analysis is generally performed by starting first with the immediate 

context in which the relevant terms are found and then broadens from there, looking next to other 

substantive provisions of the treaty, including the preamble, and then on to other covered 

agreements if the meaning behind the relevant terms is still unclear. 473 The goal of this 

progression is to determine whether the other provisions of the treaty may provide insight into 

the intended meaning of the relevant terms, as a general goal of treaty interpretation is to 

ascertain the meaning which was intended when the parties agreed to the provisions.474

Pursuant to this framework, when analyzing the enforcement provisions of TRIPS and 

evaluating a Member’s compliance with the terms, one should start with the ordinary definition 

of the relevant words, then look to the immediate context contained in the provision. However, 

this provision should be considered not in isolation, but rather in conjunction with the other 

enforcement provisions in Part III of the TRIPS Agreement that might present additional relevant 

 

471 See, e.g., United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, 

Report of the Appellate Body, WT/DS285/AB/R (7 April 2005) at ¶ 164 [hereinafter “US – Gambling, AB 

Report”]; European Communities – Customs Classification of Frozen Boneless Chicken Cuts, Report of the 

Appellate Body, WT/DS269/AB/R, WT/DS286/AB/R (12 September 2005) at ¶ 175 [hereinafter “EC – 

Chicken Cuts, AB Report”] (noting that the dictionary is often a useful place to start but the definitions they 

provide are “not necessarily dispositive” and the ordinary meaning of a term must be “ascertained according 

to the particular circumstances of each case”). 472 See US – Gambling, AB Report, at ¶ 171 (referring to Vienna Convention, Article 31.2). 473 See, e.g., US – Gambling, AB Report, at ¶¶ 178-179; EC – Chicken Cuts, AB Report, at ¶ 193. 474 See EC – Chicken Cuts, AB Report, at ¶ 175. 
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context.475 This analysis must be performed while keeping in mind the object and purpose of the 

agreement, which, according to the preamble, is to “promote effective and adequate 

protection.”476

An important aspect to such enforcement analysis will be the General Obligations 

contained in Article 41. The first subparagraph of this provision requires that Members provide 

enforcement measures that “permit effective action against any act of infringement.”477 Such 

enforcement measures need to include “expeditious remedies to prevent infringements and 

remedies which constitute a deterrent to further infringements.”478 A key phrase in this provision 

is effective action, yet the agreement does not provide a definition. The dictionary provides the 

ordinary meaning of the word “effective” as follows: 

1. Concerned with or having the function of accomplishing or 

executing. 

2. Powerful in effect; effectual; efficient, efficacious. Making a strong 

impression; striking, vivid. 

3. That is concerned in the production of an event or condition; have 

the power of acting on objects. 

4. Fit for work or (esp. military) service. 

5. Having an effect or result. Actually usable or brought to bear; 

equivalent in its effect.479

 

475 See, e.g., Canada – Term of Patent Protection, Report of the Appellate Body, WT/DS170/AB/R (18 

September 2000). 476 TRIPS Agreement, Preamble. The preamble is one of the sources the WTO panel or Appellate Body often 

look to for context to try and understand the intended meaning behind the terms of the provisions. See, e.g., 

Canada – Term of Patent Protection, Report of the Appellate Body, WT/DS170/AB/R (18 September 2000) 

at ¶ 59; India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, Report of the 

Appellate Body, WT/DS50/AB/R (19 December 1997) at ¶ 57 (referring to the preamble as confirmation that 

the panel had accurately interpreted a provision of the TRIPS Agreement). 477 TRIPS Agreement, Article 41.1. 478 Id. 

479 Shorter Oxford English Dictionary, Clarendon Press (5th Ed. 2002) at 794. 
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Read in the context of this provision, it would seem that a general obligation for a Member’s 

enforcement measures is that they actually accomplish this aim of allowing right holders to take 

action against any act of infringement. Accordingly, in determining whether a Member has met 

its TRIPS enforcement obligations, it may not be enough that the Member has put in place the 

requisite laws, but rather the laws must actually be enforced480 and serve the purpose of enabling 

or executing action against infringement. 

It is also relevant to note, as a preliminary matter, that challenges at the WTO are 

designed to address “situations in which a Member considers that any benefits accruing to it 

directly or indirectly under the covered agreements are being impaired by measures taken by 

another Member.” 481 Accordingly, challenges must address a “measure at issue.” 482 The 

Appellate Body has established that, in principle, “any act or omission attributable to a WTO 

Member can be a measure of that Member for purposes of dispute settlement proceedings.”483 In 

addition to such acts as laws and regulations, this term has been interpreted to include acts or 

instruments that set forth “rules or norms” of general application and prospective application.484 

Pursuant to this definition, if a Member’s laws or regulations appear to be consistent with its 

 

480 See World Trade Organization, Intellectual Property: Protection and Enforcement, Understanding the WTO: 

The Agreements, at www.wto.org/english/thewto_e/whatis_e/tif_e/agrm7_e.htm (accessed May 29, 2007). 481 Dispute Settlement Understanding, Article 3.3. 482 See id., Article 6.2. 483 United States – Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products 

from Japan, Report of the Appellate Body, WT/DS244/AB/R (15 December 2003) at ¶ 81 [hereinafter “US – 

CORE Sunset Review, Report of the Appellate Body”]. See, e.g., United States – Measures Relating to 

Zeroing and Sunset Reviews, Final Report of the Panel, WT/DS322/R (20 September 2006) at ¶ 7.37 

(referring to analysis in US – CORE Sunset Review, Report of the Appellate Body); United States – Measures 

Relating to Zeroing in Sunset Reviews, Report of the Appellate Body, WT/DS322/AB/R (9 January 2007) at ¶ 

88 (upholding the panel’s reasoning with regard to measures at issue). 484 See United States – Measures Relating to Zeroing and Sunset Reviews, Report of the Appellate Body, 

WT/DS322/AB/R (9 January 2007) at ¶ 88; US – CORE Sunset Review, Report of the Appellate Body, at ¶ 81. 
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WTO obligations on their face, but are applied in a systematic manner that equates to a general 

rule or norm of application, those procedures could be challenged as such as measures that are 

impairing the benefits of other Members.485 

B. Low Damage Awards in Civil IPR Disputes 

A common and significant complaint regarding China’s judicial system with respect to 

IPR cases is that damage awards are often very low. 486 This fact has multiple TRIPS 

implications, with the first being that low damages are not likely to have a deterrent effect, as 

required by TRIPS Article 41.1. Additionally, these low damages often do not adequately 

compensate the right holder for the injury it suffered, which is inconsistent with TRIPS Article 

45.1. Finally, the TRIPS Agreement requires that civil judicial procedures provide right holders 

with a means to enforce their rights. 487 Enforcement of a right seemingly encompasses 

compensation when that right is infringed, so when a right holder receives little to no 

compensation upon a finding of infringement, it would appear that the relevant procedures are 

not providing the right holder with a means to effectively enforce its right. 

 

485 See US – CORE Sunset Review, Report of the Appellate Body, at ¶ 82 (stating that the objective of the dispute 

settlement system of trying to provide security and predictability in trade would be “frustrated if instruments 

setting out rules or norms inconsistent with a Member’s obligations could not be brought before the panel”); 

see also United States – Measures Relating to Zeroing and Sunset Reviews, Report of the Appellate Body, 

WT/DS322/AB/R (9 January 2007) at ¶ 88; United States – Measures Relating to Zeroing and Sunset 

Reviews, Final Report of the Panel, WT/DS322/R (20 September 2006) at ¶ 7.37. 486 See, e.g., Eric Langer, China Today: Intellectual Property Protection in China: Does it Warrant Worry?, 

BioPharm International, May 1, 2007; Copyright Enforcement Under the TRIPS Agreement, International 

Intellectual Property Alliance, October 2004, at 5. 487 See TRIPS Agreement, Article 42. 
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1. Low Damages Do Not Act as a Deterrent to Future 

Infringements 

As a general obligation, TRIPS requires Members to maintain enforcement provisions 

that will provide for “effective action” against IRP infringements, including “remedies which 

constitute a deterrent to further infringements.”488 In terms of deterrence, monetary damages are 

an obvious means of imposing a judgment that could likely keep someone from choosing to 

pursue infringement again in the future. Accordingly, when damage awards are routinely low, it 

would make sense that the level of deterrence provided by that system would also be low. 

Article 45.1 of the Civil and Administrative Procedures and Remedies provided for in the 

TRIPS Agreement requires judicial authorities to “have the authority to order the infringer to pay 

the right holder damages adequate to compensate for the injury the right holder has suffered 

because of the infringement....” China’s laws are technically in compliance with this provision, 

as the Patent, Trademark and Copyright laws all have similar provisions with respect to civil 

damages, providing that the amount of damages shall be based on the losses suffered by the right 

holder, or, when losses are difficult to determine, the profits earned by the infringer.489 While 

none of the laws provide a limit on damages, the Trademark and Copyright laws do provide a 

statutory alternative, stating that when damages cannot be determined based on other means, the 

 

488 TRIPS Agreement, Article 41.1. 

489 See Patent Law of the People’s Republic of China, Adopted at the 17th Session of the Standing Committee 

of the Ninth National People’s Congress on August 25, 2000, Article 60 [hereinafter “Patent Law of China”],

attached as Exhibit 28; Trademark Law of the People’s Republic of China, Amended for the Second Time 

according to the Decision on Amending the Trademark Law of the People’s Republic of China of the 24th 

Session of the Standing Committee of the Ninth National People’s Congress on October 27, 2001, Article 56 

[hereinafter “Trademark Law of China”], attached as Exhibit 29; Copyright Law of China, Article 48, 

attached as Exhibit 26. 
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court can determine the amount of damages but it cannot exceed RMB 500,000 ($65,000).490 

The laws demonstrate that Chinese judicial authorities have the authority to award significant 

damages, but the reality is that damages are typically small, severely hindering the deterrent 

aspect of China’s civil enforcement measures. 

In a review of 36 civil cases where Chinese courts determined valid IPR infringement had 

occurred, 23 cases resulted in damage awards of less than $10,000, and more than half of those 

cases actually resulted in damages of less than $5,000.491 In two of those cases, the court 

actually denied any damages at all and simply ordered the defendants to cease infringement.492 

Of the remaining 13 cases, eight cases resulted in damage awards between $10,000 and $30,000, 

and four cases resulted in damages between $30,000 and $70,000. In the last remaining case, the 

court awarded damages of around $1 million.493

 

490 See Trademark Law of China, Article 56; Copyright Law of China, Article 48. 

491 English case summaries obtained through InterLingua Legal Publishing in their monthly reports entitled 

China Intellectual Property Report (November 2006 – March 2007). A chart summarizing the relief 

requested and the relief received in these cases is attached as Exhibit 30. 

492 See Ao Mei Sofa (Shenzen), Ltd. v. Beijing AYSR Furniture, Ltd., China Intellectual Property Report, 

InterLingua Legal Publishing (January 2007) at 2; Mr. Gao Lin, Tianjin Jeigao Technology Trade Limited v. 

Beijing Shunhua Real Estate Development Limited, China Intellectual Property Report, InterLingua Legal 

Publishing (November 2006) at 5. In Gao Lin, the court relied on Article 63 of China’s Patent Law which 

provides that a person who sells a patented product is not responsible for economic losses if they obtained the 

product through legitimate channels of distribution and did not know of the infringement. In Ao Mei Sofa, 

the court found that the defendant had infringed on the plaintiff’s design patent by exhibiting a sofa with an 

identical design at an international furniture exhibition. However, because the court found that the defendant 

had only promoted the product as there was no confirmation that any sales were made following the 

exhibition, the court concluded that the plaintiff had therefore failed to provide evidence of economic losses. 

493 See Fujian Yipinde Tea Limited v. Pinpinde Tea Chain Limited, Mr. Cai Gangde, Fujian Shanhe Tea Limited, 

China Intellectual Property Report, InterLingua Legal Publishing (November 2006) at 23. In this case, the 

plaintiffs provided evidence that the defendants’ profit off selling large amounts of trademark-infringing tea 

was over RMB 20.5 million and had requested RMB 10 million in damages, yet the court awarded RMB 8 

million. 
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In a separate case, Beijing Panorama Stock Photo v. Beijing Jiutouniao Food 

Management Ltd, the plaintiff sued over copyright infringement when its photo was used in an 

advertisement without permission. 494 Upon finding that the defendant had infringed the 

plaintiff’s copyright, the trial court originally granted the requested damages in the amount of 

RMB 12,000 ($1,500). On appeal, the court reaffirmed the finding of infringement, but found 

that the plaintiff had failed to provide evidence regarding the actual amount of economic 

damages suffered and decided to base the amount of damages on the actual cost of the photo, 

which was found to be RMB 2,000 ($260).495 While this case raises the issue of evidentiary 

burdens a plaintiff must overcome in civil disputes, a point which is addressed in more detail 

infra, it also demonstrates a damage award that is inadequate.496 The amount awarded in this 

case is not likely to cover the costs incurred in the trial, particularly since this case went through 

an appeal, let alone inflict any sort of financial hardship that might act as a deterrent to future 

infringements. 

In a recent case, Nike, the American shoe manufacturer, sued three Chinese companies 

for infringement of Nike’s trademarked Air Jordan logo. Nike employees had found the 

counterfeit shoes being sold in Chinese stores for the equivalent of about $13, whereas the 

authentic shoes can easily cost over $100.497 Upon discovering the shoes, Nike informed the 

stores of the infringing goods and requested that they stop selling them. A few weeks later, Nike 

 

494 See China Intellectual Property Report, InterLingua Legal Publishing (February 2007) at 11-12. 

495 See id. 

496 See infra Section IV.C for a discussion on China’s evidentiary procedures that inhibit enforcement of 

intellectual property rights. 

497 See Nike Wins Counterfeiting Lawsuit Against Chinese Shoemakers, The Canadian Press, August 21, 2007. 
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noted that the stores were still selling the illegal shoes and commenced judicial proceedings 

shortly thereafter in the Shanghai 2nd Intermediate People’s Court.498 The court determined 

Nike’s trademark had been infringed upon and awarded RMB 350,000 ($46,000), which was 

significantly lower than the requested amount of RMB 1 million ($131,000).499

By comparison, the United States IP system permits recovery of full damages, even if 

that amount is very large. For example, ten of the largest awards in patent infringement cases in 

2006 ranged from $34 million to $307 million.500 The largest patent award ever handed down 

came in February 2007 against Microsoft in the amount of $1.52 billion.501 However, this case is 

also making its way through appeals and the judgment has currently been set aside.502 On a more 

general scale, the average award in a patent dispute in 2005 was $5.3 million, with the median 

award amount at $6 million.503 These numbers were rather different from 2004, where the 

average award was $31.7 million, but the median award was $2.8 million.504

The U.S. system is based on principles of equity, with the goal of making the right holder 

whole upon a finding of infringement. 505 However, this system also provides for punitive 

 

498 See Cao Li, Shoemakers Told to Pay Nike Compensation, China Daily, August 21, 2007; Nike Wins 

Counterfeiting Lawsuit Against Chinese Shoemakers, The Canadian Press, August 21, 2007. 

499 See id. 500 Noric Dilanchian, Patent Infringement Damages Skyrocket, Dilanchian Lawyers and Consultants, January 5, 

2007, available at www.dilanchian.com.au/content/view/177/36. 501 See Bloomberg News, Microsoft Asks Court to Nullify Patent Verdict, San Jose Mercury News, available at 

www.mercurynews.com/ci_6476950?source=rss. 502 See id. 503 See 2007 Patent and Trademark Damages Study, PricewaterhouseCoopers LLP, 2007, at 13, available at 

www.pwc.com/extweb/pwcpublications.nsf/docid/cb9df7557a7e45088525729500564c55. 504 Id. 505 See, e.g., United States Trademark Law, 15 U.S.C. § 1117(a) (stating that damages are awarded “subject to 

the principles of equity”); eBay Inc. v. Mercexchange LLC, 126 S. Ct. 1837 (U.S. 2006) (explaining that 
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damages, should the circumstances warrant such an award. Courts are instructed to consider the 

circumstances surrounding the infringement and are allowed to award up to three times the 

amount of actual damages incurred by the right holder.506 For instance, in the Nike example 

above, a court in the United States most likely would have increased the amount of damages it 

awarded due to the fact that the defendants had been made aware of the infringing shoes and yet 

continued to sell them.507

Australian IP law has similar provisions that allow the courts to increase the amount of 

damages beyond actual profits or damages to compensate for such situations as flagrant 

infringements or benefits accrued to the infringer. 508 One of the specific circumstances 

enumerated in Australian law that could justify an increased award of damages is “the need to 

deter similar infringements,”509 which implies that a larger amount of damages will have a higher 

degree of deterrence and vice versa. 

In Japan, between the years of 1990 and 1994, the average patent award remained 

constant at approximately $422,000, which has been described as “an amount which may not 

 automatic injunctive relief in patent infringement cases does not coincide with the “long tradition of equity 

practice” on which the patent system is based). 506 See United States Patent Law, 35 U.S.C. § 284 (providing that regardless of whether a judge or a jury 

determines the amount of damages “adequate to compensate for the infringement,” the court has the authority 

to increase the damages to up to three times the assessed amount); United States Trademark Law, 15 U.S.C. § 

1117(a) (stating that the court has the discretion, upon consideration of the circumstances of the case, to enter 

a judgment exceeding the actual amount of damages, but this should remain less than three times such 

amount). The U.S. Trademark Law also instructs that damages should be three times the amount of actual 

profits or damages in cases of willful infringement in connection with a sale or distribution of goods or 

services. 15 U.S.C. § 1117(b). 507 See, e.g., Bott v. Four Star Corp., 807 F.2d 1567 (Fed. Cir. 1986) (discussing acts of bad faith on the part of 

the infringer that justify increased damage awards). 508 See Australian Patent Act 1990, Sec. 122(1A); Australian Copyright Act 1968, Sec. 115(4). 

509 Australian Patent Act 1990, Sec. 122(1A)(b); Australian Copyright Act 1968, Sec. 115(4)(b)(ia). 
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necessarily be sufficient for the protection of IP rights.”510 In response to concerns regarding 

low damage awards, Japan’s Patent Office performed a study in 1997 that resulted in revisions to 

the way in which Japanese courts determined damages.511 Courts have now broadly interpreted a 

provision in Japan’s patent law that provides for damages to be based on lost profits according to 

the “working capability” of the patentee as including not only the current capabilities relating to 

the patent but also potential capabilities.512 Accordingly, Japan has experienced significant 

increases in the amount of damages awarded for infringements, with a case in 2002 awarding 

damages of approximately $63.5 million.513

Notably, the United States, Australia and Japan all ranked in the top ten countries for 

favorable IP environments, according to a business survey in 2007, and a review of their laws 

clearly shows that deterrence is a significant factor in determining damage awards for IPR 

infringement.514 As stated at the beginning of this section, the vast majority of Chinese IP 

decisions that have been reviewed provide very limited damages, most below $10,000 and few 

above $100,000, amounts that are unlikely to prevent recurrent infringement and act as a 

deterrent to others. 

 

510 Noriko Higashizawa and Kunihiro Sumida, Japan: IP Litigation, in IP Value 2004, Globe White Page, at 394, 

available at www.buildingipvalue.com/n_ap/393_396.htm. 511 See Larry Coury, C’est What? Saisie! A Comparison of Patent Infringement Remedies Among the G7 

Economic Nations, 13 Fordham Intell. Prop. Media & Ent. L.J. 1101, 1143-1145 (2002-2003). 512 See id. at 1144-1145; see also Japanese Patent Law, Article 102. 513 See Coury, C’est What? Saisie! A Comparison of Patent Infringement Remedies Among the G7 Economic 

Nations, at 1145; see also Noriko Higashizawa and Kunihiro Sumida, Japan: IP Litigation, in IP Value 2004, 

Globe White Page, at 394, available at www.buildingipvalue.com/n_ap/393_396.htm. 514 See Global Survey on Counterfeiting and Piracy, International Chamber of Commerce, January 29, 2007, at 9. 

This same survey, which was conducting by questioning 48 different companies, found China to have the 

least favorable IP environment. See id. at 10. 
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As noted, Chinese courts have, on occasion, awarded substantial judgments against 

Chinese companies. 515 This demonstrates that judicial authorities have the authority to 

compensate the right holder for the infringement and provide remedies that truly act as a 

deterrent, as is required by TRIPS. The failure of the Chinese courts to fashion remedies which 

in fact compensate IP holders for harm from infringement and that fail to deter further 

infringements would appear to be a violation of China’s obligations under TRIPS Agreement 

Articles 41.1 and 45.1.516

In evaluating whether China’s low damage awards amounts to WTO-inconsistent 

behavior, there are two provisions to consider. First, there is a procedural requirement in Article 

45.1 that requires Members to provide judicial authorities with the authority to adequately 

 

515 See, e.g., Yamaha Corporation Wins Compensation in Trademark Infringement Case, NTD Patent & 

Trademark Agency Ltd., June 25, 2007, available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no= 

88512&col_no=127&dir=200706. 516 There is some indication that Chinese courts are becoming more inclined to award significant damages, 

though at the moment, these still seem to be rare cases as opposed to a general trend. On June 5, 2007, the 

Supreme Court issued a final judgment in a trademark infringement case and ordered the defendants to pay 

the plaintiff, Japan’s Yamaha Corporation, damages in the amount of RMB 8.3 million ($1.1 million). See 

Yamaha Corporation Wins Compensation in Trademark Infringement Case, NTD Patent & Trademark 

Agency Ltd., June 25, 2007, available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp? 

a_no=88512&col_no=127&dir=200706. This is reportedly one of the largest awards in a trademark 

infringement case in China. Rouse & Co. International, Supreme Court Closes Final Chapter in Yamaha – 

Huatian Saga, China Intellectual Property Express Issue 289, July 2, 2007, available at 

www.iprights.com/cms/templates/chinaipx.aspx?articleid=3626&zoneid=4. With respect to patents, a 

landmark decision was handed down in June 2006 by the Zhengzhou Intermediate People’s Court. The court 

awarded damages in the amount of RMB 29.8 million ($3.7 million), which was the largest amount of 

damages ever awarded in an IPR infringement matter. See Cedric Lam and Janet Wong, China & Hong 

Kong: Recent Developments in Intellectual Property, Dorsey & Whitney LLP, in IP Value 2007, Globe 

White Page, at 263, available at www.buildingipvalue.com/07AP/p.262-265%20china,%20hong%20 

kong.pdf. Following this judgment, the case was appealed and the patent found to be invalid. The case is 

still on appeal at the HeNan High Court. See Rouse & Co. International, Patent Re-examination Board Finds 

Patent Invalid After Court Has Made Large Damages Award in Patent Infringement Proceedings, China 

Patent Express Issue 132, February 6, 2007. 
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compensate for injury that results from IPR infringement.517 Second, this provision must also be 

considered within the context of the Agreement and read in conjunction with the general 

obligations of Article 41. Under this structure, it is not enough that judicial authorities have the 

ability to award damages, but rather those damages must also be in compliance with Article 41.1, 

which requires that enforcement procedures include remedies that will act as a deterrent to future 

infringements. 

Given that the term ‘deterrent’ is not defined in the agreement, a WTO panel would likely 

rely on the general rules of treaty interpretation, as discussed above, by first considering the 

ordinary meaning of the term ‘deterrence’ and then looking to the other terms and provisions for 

context in trying to determine whether the damages generally provided for by China’s judicial 

system constitute a “deterrent.” 518 The dictionary states that deterrence is “the action of 

deterring or preventing by fear,” with ‘deter’ defined as: “(1) restrain or discourage (from acting 

or proceeding) by fear, doubt, dislike of effort or trouble, or consideration of consequences; (2) 

inhibit, prevent.”519 The panel would then look to the surrounding terms in the provision for 

context and in this case, the relevant phrase is “remedies that act as a deterrent to future 

infringements.”520 Pursuant to this definition, it seems clear that the average awards of the size 

China routinely grants are not likely to evoke fear or prevent an infringer from engaging in such 

behavior again. Rather such damage awards would likely be viewed simply as a cost of doing 

 

517 TRIPS Agreement, Article 45.1. 518 See, e.g., EC – Chicken Cuts, Panel Report, at ¶ 7.89. 

519 Shorter Oxford English Dictionary, Clarendon Press (5th Ed. 2002) at 658, 660. 520 TRIPS Agreement, Article 41.1. 
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business by the infringers, a frequent complaint of right holders with the legal system in 

China.521

While this alone may satisfy a panel that a violation of Article 41.1 exists, it could also 

go further with its analysis. The customary rules of treaty interpretation additionally provide for 

consideration of “any subsequent practice in the application of the treaty which establishes the 

agreement of the parties regarding its interpretation.”522 The phrase “subsequent practice” has 

been previously been interpreted to mean “a ‘concordant, common or consistent’ sequence of 

acts or pronouncements which is sufficient to establish a discernible pattern.”523 Accordingly, if 

it is possible to show that other Members524 have interpreted the same provisions of the TRIPS 

Agreement in a common way, it supports the contention that an outlier is acting inconsistently 

with its obligations. 

As stated above, there is plenty of evidence showing that other Member countries, who 

are perceived internationally as having positive IPR enforcement environments, award damages 

 

521 See, e.g., 2006 Special 301 Report, United States Trade Representative, April 28, 2006, at 18 (stating that low 

administrative fines are insignificant and simply viewed by infringers as an ordinary business cost). 522 European Communities – Customs Classification of Frozen Boneless Chicken Cuts, Report of the Appellate 

Body, WT/DS269/AB/R, WT/DS286/AB/R, at ¶ 255-259 [hereinafter “EC – Chicken Cuts, AB Report”] 

(referring to Article 31.3(b) of the Vienna Convention on the Law of Treaties). 523 EC – Chicken Cuts, AB Report, at ¶ 256 (quoting the definition provided by Appellate Body in Japan – 

Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R (4 October 1996) at 13). 

This definition has been further clarified to mean that two elements need to be established; first that there is a 

“common, consistent, discernible pattern of facts or pronouncements,” and second, that “those acts or 

pronouncements must imply agreement on the interpretation of the relevant provisions.” Id. at ¶ 257 (citing 

United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, Report of the 

Appellate Body, WT/DS285/AB/R (7 April 2005) at ¶ 192). 524 When interpreting subsequent practice, the Appellate Body has held that a finding of common and concordant 

practice does not require that “each and every party must have engaged in a particular practice,” but has also 

expressed the view relying on the practice of one member is generally insufficient. See EC – Chicken Cuts, 

AB Report, at ¶ 259. 
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much higher than those of China and some have even adopted statutory provisions that 

specifically address the correlation between higher damages and deterrence. This demonstrates a 

common interpretation as to a means of achieving deterrence and further supports the contention 

that China, as the outlier, is applying its laws in such a way that is inconsistent with the general 

obligation of providing remedies that will deter further infringements. 

Additionally, as explained above, the general obligations contained in Article 41.1 

suggest that in order for a Member to be in compliance with its TRIPS obligations, the laws not 

only need to exist, but they must be effective in accomplishing the desired action.525 In this case, 

the authority provided in Article 45.1 is intended to be applied so as to adequately compensate 

the right holder for the injury it suffered due to the infringement.526 The evidence presented 

showing a lack of adequate compensation, despite the fact that the authority to provide such 

compensation exists, demonstrates that China is not in compliance with its obligations contained 

in Article 45.1. 

2. Effective Enforcement of Intellectual Property 

Rights Requires Adequate Compensation When 

Those Rights Are Infringed

Article 42 of the TRIPS Agreement provides the requirement for fair and equitable civil 

enforcement procedures. Specifically, it states: 

Members shall make available to right holders civil judicial 

procedures concerning the enforcement of any intellectual property 

right covered by this Agreement. Defendants shall have the right 

 

525 See supra Part 2, Section IV.A. 526 TRIPS Agreement, Article 45.1. 
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to written notice which is timely and contains sufficient detail, 

including the basis of the claims. Parties shall be allowed to be 

represented by independent legal counsel, and procedures shall not 

impose overly burdensome requirements concerning mandatory 

personal appearances. All parties to such procedures shall be duly 

entitled to substantiate their claims and to present all relevant 

evidence. The procedure shall provide a means to identify and 

protect confidential information, unless this would be contrary to 

existing constitutional requirements.527 

The WTO Appellate Body (AB) has considered this provision of TRIPS in a previous 

dispute between the European Union and the United States.528 In that dispute, the AB interpreted 

Article 42 to mean that right holders are entitled to have access to “civil judicial procedures that 

are effective in bringing about the enforcement of their rights covered by the Agreement.”529 

Consistent with standard WTO analysis, this interpretation appears to incorporate the general 

obligations contained in Article 41.1, which require that Members provide enforcement 

procedures that will “permit effective action against any act of infringement of intellectual 

property rights covered by this Agreement.”530 Although WTO reports do not set legal precedent, 

the Appellate Body is often looked to for guidance when interpreting certain provisions of the 

WTO Agreements and, thus, this insight into TRIPS Article 42 is relevant. 

As discussed in the previous section, China routinely awards damages that are quite low. 

In addition to ordering low damages, the awards are often hard to enforce, meaning that even 

when a court awards damages to a right holder, actually receiving the money is an entirely 

 

527 TRIPS Agreement, Article 42. 528 See United States – Section 211 Omnibus Appropriations Act of 1998, Report of the Panel, WT/DS176/R (6 

August 2001). 

529 United States – Section 211 Omnibus Appropriations Act of 1998, Report of the Appellate Body, 

WT/DS176/AB/R (2 January 2002) at ¶ 215 (emphasis added). 530 TRIPS Agreement, Article 41.1. 
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separate obstacle. With respect to civil judicial decisions, an estimated 40 to 60 percent are 

actually carried out, and the number drops significantly when enforcement requires the 

involvement of officials in a different jurisdiction, to only about 10 percent.531

In the context of Article 42, and in light of the AB’s interpretation, this is troublesome 

because adequate compensation for injury is seemingly an essential component to effective 

enforcement of one’s rights. This contention is supported by the fact that TRIPS specifically 

requires judicial authorities to have the authority to provide a right holder with adequate 

compensation for the injury it suffered as a result of infringement.532 As noted above, judges 

deciding IP cases in China do have this authority, yet they often award damages that do not seem 

to be adequate compensation for the injury. This situation would appear to be inconsistent with 

China’s TRIPS obligations: if China’s civil enforcement procedures are applied in such a way as 

to essentially frustrate effective enforcement of a right by failing to adequately compensate for 

injury, this is inconsistent with TRIPS Articles 42 and 41.1. 

Inadequate compensation has an additional implication that supports the contention that 

China’s civil enforcement system does not truly provide all right holders with a realistic avenue 

to enforce their rights, and thus is not fully in compliance with its TRIPS obligations. Potential 

plaintiffs have to consider these low damage awards when considering whether to pursue a case 

for infringement. The costs associated with a case are extensive, particularly for foreign right 

holders who likely incur additional costs in bringing a case in a foreign jurisdiction. Accordingly, 

 

531 See Gary Clyde Hufbauer, Yee Wong, Ketki Sheth, US-China Trade Disputes: Rising Tide, Rising Stakes, 

Institute for International Economics, August 2006, at 41. 532 See TRIPS Agreement, Article 45.1. 
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right holders often feel that pursuing a claim in China is not worth the time and resources it 

would require, given that there is a significant chance that they will not recover damages that 

will cover the harm done and the awarding of costs are inadequate to cover the actual cost of 

pursuing the proceedings.533

For instance, a report on the pharmaceutical industry noted that “the lack of meaningful 

damages for patent infringement,” combined with difficulties in enforcing judgments, “has 

discouraged many foreign companies from pursuing patent infringement actions in China.”534 

Additionally, in 2006 it was reported that the Motion Picture Association (MPA) had brought ten 

civil suits in China to try and address high levels of piracy. Of those ten cases, the MPA 

received six settlements that reached a total of only $94,000, an amount which did “not begin to 

cover the costs associated with bringing the cases to court and hardly serves as a deterrent to 

counterfeiters.”535 Similarly, the International Federation of the Phonographic Industry (IFPI) 

has filed hundreds of infringement cases in China and estimates that the average cost per case is 

 

533 See, e.g., Transitional Review Under Section 18 of the Protocol on the Accession of the People’s Republic of 

China, Report to the General Council by the Chair, IP/C/43 (21 November 2006) at ¶ 72 (highlighting 

Canada’s concerns regarding China’s enforcement mechanisms and stating that Canadians were not bringing 

cases in China because there were high costs and only a small chance of success); Maria Trombly, Chinese 

Legal System Hinders IP Protection Efforts, CIO Insight, October 24, 2005 (discussing the difficulties in 

bringing a civil case for IPR infringement in China and stating that only exceptionally large companies, such 

as Johnson & Johnson or Proctor & Gamble, are able to overcome the procedural and financial obstacles to 

pursue successful cases). 534 Eric Langer, China Today: Intellectual Property Protection in China: Does it Warrant Worry?, BioPharm 

International, May 1, 2007. 535 The Developing U.S.-China Relationship: Analysis of China’s Weak Intellectual Property Rights Protection 

and Enforcement, Testimony of Dr. Neil C. Livingstone Before the U.S.-China Economic and Security 

Commission, June 8, 2006. 
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$13,000, while the recovery generally only covers one percent of those costs, with damages 

averaging $130 per suit.536

Given this financial reality, compensation for injury provides little motivation for 

bringing a case in China. Rather, when right holders choose to pursue civil remedies they do so 

with the goal of ceasing the infringement and taking a symbolic stance against the infringers.537 

For instance, the 3M Company, based in Minnesota, brought a case for patent infringement after 

it discovered that counterfeit versions of a popular series of respirator masks were being made in 

China. 538 After months of preparation, the company went to court and prevailed, winning 

damages in the amount of $31,000.539 3M knew that the costs would probably outweigh the 

financial recovery, but chose to pursue this case to send a message to the infringers that they 

planned on defending their brand integrity.540

3M is a large corporation who had the resources to pursue this action, despite knowing 

that it would incur significant financial costs in the process. However, not all right holders are in 

a similar position and pursing a civil case in China is often viewed as a non-viable option for 

dealing with infringement. As explained at the beginning of this section, the relevant TRIPS 

 

536 See Bruce Einhorn and Xiang Ji, Deaf to Music Piracy, BuisnessWeek, September 10, 2007. 537 See generally No Trade in Fakes Supply Chain Tool Kit, U.S. Chamber of Commerce Coalition Against 

Counterfeiting and Piracy, 2006 at 7 (providing a case summary on Ford Motor Company’s experiences 

fighting counterfeiting and piracy and stating that the company has found that it is generally hard to bring 

cases in foreign countries against IP infringements because monetary recoveries do not cover the costs of 

bringing the cases, yet Ford continues to pursue counterfeiters to protect the integrity of its brand). 538 See Lisa Lerer, The Mask Avengers, IP Law & Business, December 2006, available at

www.ipww.com/display 

.php/file=/texts/1206/china. 

539 See id. 540 See id. 
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provisions, when read together, make it clear that right holders are entitled to enforce their rights 

and to have access to a judicial system that will allow them to pursue such enforcement.541 To 

the extent that China’s civil procedures, and its generally inadequate compensation for IPR 

infringements, essentially inhibit certain right holders from pursuing enforcement of their rights, 

this is inconsistent with China’s WTO enforcement obligations under TRIPS Articles 41.1 and 

42. 

C. China’s Evidentiary Requirements May Be Applied in a 

Way That is Overly Burdensome and Limits the Right 

Holder’s Ability to Effectively Enforce Their Rights

As discussed in the preceding sections, consistently low damage awards have significant 

implications with regard to effectively enforcing IP rights and providing a system that will deter 

future infringements. In reviewing information on Chinese cases, it is often noted that a granting 

of higher damages is not awarded due to lack of sufficient evidence. This section focuses on 

China’s civil procedures with respect to evidence and questions whether they are being applied 

in a manner that is inhibiting effective enforcement of IPR. 

As previously discussed, TRIPS Article 42 provides the requirement of fair and equitable 

civil enforcement procedures, which includes the requirement that all parties to the procedures 

“shall be duly entitled to substantiate their claims and to present all relevant evidence.” Article 

43 contains specific provisions relating to evidence in civil and administrative proceedings, with 

Article 43.1 providing the following: 

 

541 See TRIPS Agreement, Articles 41.1 and 42; see also United States – Section 211 Omnibus Appropriations 

Act of 1998, Report of the Appellate Body, WT/DS176/AB/R (2 January 2002) at ¶ 215. 
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The judicial authorities shall have the authority, where a party has 

presented reasonably available evidence sufficient to support its 

claims and has specified evidence relevant to substantiation of its 

claims which lies in the control of the opposing party, to order that 

this evidence be produced by the opposing party, subject in 

appropriate cases to conditions which ensure the protection of 

confidential information.542

Again, this provision needs to be read in conjunction with the general obligation of Article 41.1 

that this authority should not just exist but it should “permit effective action against any act of 

infringement of intellectual property rights....”543

Finally, TRIPS Article 41.2 provides that the enforcement procedures “shall not be 

unnecessarily complicated or costly, or entail unreasonable time-limits or unwarranted 

delays.”544 Read together, these provisions appear to require that Members provide enforcement 

procedures that allow a right holder to present all relevant evidence, that entrust judicial 

authorities with the power to facilitate the gathering of such relevant evidence that may lie in the 

hands of the opposing party, and that are provided in an effective manner that is not 

unreasonably complicated or costly. 

It is often reported that China’s evidentiary requirements in civil procedures are both 

burdensome and complicated, with one author even reporting that the evidence collection 

process for an IPR infringement case in China “can reduce even the calmest foreign lawyer to 

 

542 TRIPS Agreement, Article 43.1. 543 See supra Part 2, Section IV.A. 544 TRIPS Agreement, Article 41.2. 
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tears.”545 One aspect of China’s civil procedure laws that tends to present problems in bringing a 

successful case of IPR infringement is that each party is responsible for proving the facts of their 

case.546 Additionally, China’s rules do not provide parties with the opportunity to directly 

request information from the opposing side, as the U.S. discovery procedures allow.547 Instead, 

China’s laws provide that when a party is unable to obtain evidence due to “objective reasons,” 

the party may request that the court investigate and collect the requisite evidence.548 Further, the 

court has the authority to “obtain evidence from the relevant units or individuals, and such units 

or individuals may not refuse to provide evidence.”549 However, it has been reported that 

Chinese courts rarely invoke these provisions, making it difficult for plaintiffs to substantiate 

claims, particularly with respect to damages.550 The available information regarding routinely 

 

545 See Lisa Lerer, Gathering Storm, IP Law & Business, December 2005, available at www.ipww.com/ 

display.php/file=/texts/1205/netac1205; see also Maria Trombly, Chinese Legal System Hinders IP 

Protection Efforts, CIO Insight, October 24, 2005 (noting that courts often do not compel disclosure from 

opposing sides and that the evidence required to substantiate a claim is much more detailed than in the United 

States); J. Benfamin Bai, Helen Cheng, and Peter J. Wang, Patent Litigation in Chinese Courts, IP Frontline, 

November 16, 2006, available at www.ipfrontline.com/depts/article.asp?id=10608&deptid=6. 546 See Civil Procedure Law of the People’s Republic of China, Adopted by the Fourth Session of the Seventh 

National People’s Congress on April 9, 1991, promulgated by Order No. 44 of the President of the People’s 

Republic of China, and effective on the date of its promulgation, Article 64 [hereinafter “Civil Procedure 

Law of China”], attached as Exhibit 31; Some Provisions of the Supreme People’s Court on Evidence in Civil 

Procedures, Passed at the 1201st meeting of the Judicial Committee of the Supreme People’s Court on 

December 6, 2001 and promulgated for implementation as of April 1, 2002 [hereinafter “Provisions on 

Evidence in Civil Procedures”], attached as Exhibit 32. 547 See, e.g., United States Federal Rules of Civil Procedures, 28 U.S.C. 26 (2007) (providing for such discovery 

methods as oral depositions, written interrogatories and document production). China’s evidentiary rules do 

appear to allow for an “exchange of evidence” upon application by a party, but they do not provide for an 

opportunity to request specific information that may be essential to your case. See Provisions on Evidence in 

Civil Procedures, Article 37. 548 See Civil Procedure Law of China, Article 64; see also Provisions on Evidence in Civil Procedures, Article 

16 (stating that the court will initiate such investigation of evidence upon an application by the party). 

549 Civil Procedure Law of China, Article 65. 550 See, e.g., Lisa Lerer, The Mask Avengers, IP Law & Business, December 2006, available at www.ipww.com/ 

display.php/file=/texts/1206/china (stating that it is nearly impossible to obtain evidence from the opposing 

side in Chinese civil litigation cases); see also 2007 Special 301 Report, United States Trade Representative, 
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low damages also supports the contention that judges do not utilize this authority to request 

information from the defendants that might help establish compensatory damages. 

This system makes it particularly difficult for plaintiffs to establish damages, which are 

ideally based on lost profits or the infringer’s sales of the illegal goods. 551 Imagine the 

difficulties of proving your opposing party’s sales revenues without having access to their 

records. Given this evidentiary burden, it is not surprising that insufficient evidence is often 

cited as the court’s justification for awarding low damages.552

Another major obstacle relates to China’s requirement that if a piece of evidence was 

created outside the territory of China, it must be notarized and then authenticated by relevant 

government authorities in order for a court to accept it.553 This can be an incredibly costly and 

time-consuming process, particularly for foreign parties who will likely have to have all of their 

 at 19 (noting that the United States has been pressing China to implement discovery procedures with 

compulsory measures for evidence protection). 551 See, e.g., Patent Law of China, Article 60 (providing that the amount of damages shall be assessed on the 

either the patentee’s losses or the infringer’s profits). 552 See, e.g., Beijing Panorama Stock Photo v. Beijing Jiutouniao Food Management Ltd, China Intellectual 

Property Report, InterLingua Legal Publishing (February 2007) at 11-12 (providing significantly lower 

damages than requested because the plaintiff “failed to provide evidence regarding the actual amount of 

economic losses suffered”); Ms. Zhang Xiaoyan v. China Central Television, China Intellectual Property 

Report, InterLingua Legal Publishing (February 2007) at 12-13 (denying plaintiff’s request for damages and 

awarding a significantly lower amount “due to lack of supporting evidence”); Ao Mei Sofa (Shenzhen), Ltd. 

v. Beijing AYSR Furniture, Ltd., China Intellectual Property Report, InterLingua Legal Publishing (January 

2007) at 2 (refusing plaintiff’s request for damages because “it could not be confirmed whether sales were 

made” of the infringing good). See generally J. Benjamin Bai, Helen Cheng, and Peter J. Wang, Patent 

Litigation in Chinese Courts, IP Frontline, November 16, 2006, available at www.ipfrontline.com/ 

depts/article.asp?id=10608&deptid=6 (explaining that evidence preservation is essential to proving damages 

in the Chinese civil system and stating that, “in practice, the assessment of damages is often a difficult and 

complicated process, which explains why damages awards in China are often very low by U.S. 

standards...However, there is no statutory limit on the amount of damages that can be awarded, and some 

Chinese judges have stated that they would award high damages if presented with admissible evidence to 

support them.”). 553 See Provisions on Evidence in Civil Procedures, Article 11. 
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evidence notarized and authenticated if they wish to even attempt civil enforcement of their IP 

rights in China. By comparison, the U.S. rules of evidence do not appear to differentiate 

between foreign and domestic evidence.554 Rather, there is a general rule that authentication “as 

a condition precedent to admissibility is satisfied by evidence sufficient to support a finding that 

the matter in question is what its proponent claims.”555

Consider the realities of China’s rules. CBS Broadcasting attempted to have a third 

party’s eye-shaped trademark registration canceled in China by claiming it was a popular and 

well-known mark belonging to CBS.556 The court refused to cancel the trademark at least in part 

because CBS had failed to get a supporting document notarized to prove its legitimacy.557 And 

when 3M Company of St. Paul, Minnesota decided to pursue its trademark infringement case in 

China, the evidentiary requirements proved to be daunting. 3M had to supply the court with 

tremendous documentation just to file its complaint. As most of the documentation was of 

foreign origin, it had to be notarized and much of it had to be authenticated at a Chinese 

consulate, which in this case was located in Chicago. After months of preparation, 3M’s lawyers 

presented the court with a stack of materials that was about four feet high.558

 

554 See United States Federal Rules of Evidence, 28 U.S.C. §§ 901-902. Certain foreign public documents must 

contain relevant certification as to the genuineness of the document, but related domestic public documents 

must also contain certifications, so the requirements are consistent. See 28 U.S.C. § 902. 555 United States Federal Rules of Evidence, 28 U.S.C. § 901(a). 556 See CBS Broadcasting Inc., U.S.A. v. Trademark Review and Adjudication Board of the PRC Administrative 

Department for Industry and Commerce, China Intellectual Property Report, InterLingua Legal Publishing, 

December 2006, at 17. 557 See id. 558 See Lisa Lerer, The Mask Avengers, IP Law and Business, December 2006, available at www.ipww.com/ 

display.php/file=/texts/1206/china. Foreign companies also face the additional obligation of having to 

translate all materials into Chinese. See Provisions on Evidence in Civil Procedures, Article 12. 
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Moreover, 3M Company reported that proving infringement was not difficult, but 

proving that the defendants had sold the illegal goods was “nearly impossible” given that there 

was no access to financial records.559 3M eventually filed a request, and paid a standard fee of 

RMB 22,500 ($2,900), to have the court inspect the defendant’s factory. This allowed for the 

discovery of serial numbers on infringing products that corresponded to similar numbers used on 

the infringing goods. While this satisfied the court’s desire to see a chain of sale linking the 

defendant to the infringing products found in the market, “proving anything beyond that basic 

link, like the magnitude of [the defendant’s] infringing activity, was impossible without records 

of sales volumes, profit margins, or operating income.”560

These examples highlight the extreme difficulties plaintiffs face pursuant to China’s 

evidentiary requirements in civil cases. These evidentiary requirements often result either in 

extremely low damage awards or actually deterring plaintiffs from bringing cases because the 

evidentiary requirements are simply insurmountable. Given that the TRIPS Agreement requires 

judicial authorities to have the authority to aid in obtaining evidence, it is striking that 

insufficient evidence is often a reason cited for the law damage awards. Moreover, it is hard to 

reconcile a system that requires a plaintiff to submit a four foot stack of notarized and 

authenticated documentation in order to bring a case with the requirements that parties are 

 

559 Lisa Lerer, The Mask Avengers, IP Law and Business, December 2006, available at www.ipww.com/display. 

php/file=/texts/1206/china. 560 Id.
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entitled to present all relevant evidence related to their claims but that such procedures not be 

unnecessarily complicated or costly.561

With respect to the impact of these evidentiary requirements on damage awards in 

general, numerous provisions in the TRIPS Agreement are relevant to establishing whether 

China’s enforcement is consistent with its WTO obligations. First, Article 45.1 establishes the 

importance of adequately compensating for injury as a result of infringement by requiring 

judicial authorities in civil proceedings to be able to award such damages.562 These judicial 

procedures must also allow parties to substantiate claims and present all relevant evidence,563 but 

such procedures cannot be unnecessarily complicated or costly.564 These provisions must also be 

construed within the context of the general obligation to enact enforcement measures that permit 

effective protection and enforcement of IP rights.565

As discussed above, adequate compensation is a seemingly inherent component to 

effectively enforcing one’s rights, yet the civil procedures China has enacted make it virtually 

impossible to present the relevant evidence necessary to substantiate a claim for damages that 

could be construed as adequate compensation. This appears to be inconsistent with China’s 

obligations under TRIPS Articles 41.1 and 42. 

Additionally, to the extent that these evidentiary burdens are so great that they essentially 

limit foreign right holders’ ability to bring a case, because they know they will incur substantial 

 

561 See TRIPS Agreement, Articles 41.2 and 42. 562 See id., Article 451. 563 See TRIPS Agreement, Article 42. 564 See TRIPS Agreement, Article 41.2. 565 See TRIPS Agreement, Article 41.1 and Preamble. 
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costs in satisfying the evidentiary requirements and still most likely will not be able to provide 

evidence to substantiate significant damages, it brings into question whether China’s procedures 

are also inconsistent with Article 41.2, by being “unnecessarily complicated or costly.” 

Similar to the previous discussion on deterrence, the TRIPS Agreement, on its face, does 

not provide a definition for this crucial phrase. Accordingly, looking at the ordinary meaning of 

the word “unnecessarily” provides that enforcement procedures should not be “excessively” 

complicated or costly.566 The term “complicated” is defined as “intricate, involved, confused, 

complex.”567 This idea that procedures cannot be excessively involved or costly coincides with 

the general obligation that right holders shall be entitled to enforce their rights, something they 

presumably would not be able to do if the methods for such enforcement were complicated and 

costly. The fact that right holders feel restricted in bringing cases because they know they will 

likely not be able to present sufficient evidence to establish damages adequate to even cover the 

cost of the proceedings, makes the aforementioned concern a reality. China’s evidentiary 

procedures for civil enforcement of IP rights are unnecessarily complicated or costly because 

they effectively limit a right holder’s ability to enforce its rights. To this extent, China’s laws 

and regulations are also inconsistent with Article 41.2. 

Finally, while it appears that China’s laws are technically in compliance with the 

obligation in Article 43.1 to provide judicial authorities with the authority to order the opposing 

side to present relevant evidence, as has been stated before, it is not enough to simply provide 

 

566 Shorter Oxford English Dictionary, Clarendon Press (5th Ed. 2002) at 3455 (stating the definition of 

unnecessary is “not necessary or requisite, needless; redundant; more than is necessary, excessive”). 567 Shorter Oxford English Dictionary, Clarendon Press (5th Ed. 2002) at 469.
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such authority. Read in light of the general obligations contained in Article 41.1, judicial 

authorities must actually use the authority so as to “permit effective action against any act of 

infringement of intellectual property rights....”568 To the extent that Chinese judges do not use 

the provided authority to obtain evidence in the defendant’s control that would be essential to 

awarding damages that may actually act as a deterrent to future infringements, China is not 

acting consistently with its obligations in Article 43.1. 

D. Destruction of Infringing Goods and Materials 

The issue of destruction, or lack thereof, is another persistent concern voiced by 

Members since the time of China’s accession.569 In addition to substantial financial damages, 

destruction of infringing goods, and the tools used to produce those goods, is an enforcement 

remedy that, on its face, has a clear deterrent effect: by destroying the infringing goods and tools 

it will be difficult, if not impossible, for the infringer to continue its illegal activity. The TRIPS 

Agreement addresses this fact in Article 46, providing other civil remedies (in addition to 

damages and injunctions discussed in Articles 44 and 45), which states: 

In order to create an effective deterrent to infringement, the 

judicial authorities shall have the authority to order that goods that 

they have found to be infringing be, without compensation of any 

sort, disposed of outside the channels of commerce in such a 

manner as to avoid any harm caused to the right holder, or, unless 

this would be contrary to existing constitutional requirements, 

destroyed. The judicial authorities shall also have the authority to 

order that materials and implements the predominant use of which 

has been in the creation of the infringing goods be, without 

compensation of any sort, disposed of outside the channels of 

 

568 See supra Part 2, Section IV.A. 

569 See Working Party Report at ¶¶ 300-301. 
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commerce in such a manner as to minimize the risks of further 

infringements.570

The provision does provide for some judicial discretion by instructing the authorities to consider 

such destruction requests in light of the circumstances of the case in order to maintain 

“proportionality between the seriousness of the infringement and the remedies ordered.” 571 

Moreover, the provision states that “in regard to counterfeit trademark goods, the simple removal 

of the trademark unlawfully affixed shall not be sufficient, other than in exceptional cases, to 

permit release of the goods into the channels of commerce.”572

China’s trademark and copyright laws specifically grant administrative authorities with 

the ability to confiscate and destroy infringing goods,573 and China’s courts are granted the 

authority to confiscate such illegal goods in the civil code. Pursuant to Article 188 of China’s 

civil law, “if the rights of authorship (copyrights), patent rights, rights to exclusive use of 

trademarks, rights of discovery, rights of invention...of citizens or legal persons are infringed 

upon by such means as plagiarism, alteration or imitation, they shall have the right to demand 

that the infringement be stopped, its ill effects be eliminated and the damages be compensated 

 

570 TRIPS Agreement, Article 46. (emphasis added) 571 Id. 572 Id. 573 Trademark Law of China, Article 53, attached as Exhibit 29; Copyright Law of China, Article 47, attached as 

Exhibit 26. Interestingly, the provision in China’s copyright law relating to destruction contains the same 

vague language that the United States is currently contesting with respect to China’s thresholds for criminal 

penalties. The copyright law states that “where circumstances are serious” the authorities may confiscate 

materials and tools used for producing the infringing goods. See Copyright Law of China, Article 47. Given 

that the TRIPS Agreement only requires that such authority exist, it is not likely the same language used in 

this context would be considered inconsistent with China’s WTO obligations. 
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for.”574 Article 134 then provides the “main methods of bearing civil liability,” which includes: 

ceasing infringements; removing obstacles; eliminating dangers; returning property; restoring 

property to its original condition; repairing, reworking or replacement; compensation for losses; 

eliminating ill effects and rehabilitating reputation. The article further states that these measures 

to impose civil liability “may be applied exclusively or concurrently. When hearing civil cases, 

a people’s court, in addition to applying the above stipulations, may serve admonitions, order the 

offender to sign a pledge of repentance, and confiscate the property used in carrying out illegal 

activities and the illegal income obtained therefrom.”

575

While these provisions do not appear to explicitly authorize destruction of infringing 

goods and production materials in civil IPR cases, the courts have, on occasion, ordered such 

destruction, signaling that the authority does exist.576 However, in a review of the same 36 cases 

discussed above, right holders requested destruction of the infringing products and/or tools in ten 

instances, yet such request was only granted once.577 In that case, the owner actually requested 

destruction of the molds and tools used to make infringing plastic insulation material, rather than 

the infringing product itself, and the court ordered destruction of the goods, but not the molds 

and tools.578 In three of those ten cases the right holder also requested destruction of the tools 

 

574 General Principles of the Civil Law of the People’s Republic of China, Adopted at the Fourth Session of the 

Sixth National People’s Congress, and promulgated by Order No. 37 of the President of the People’s 

Republic of China on April 12, 1986, and effective as of January 1, 1987 [hereinafter “China’s Civil Law”], 

Article 118, attached as Exhibit 33. 575 China’s Civil Law, Article 134. (emphasis added) 576 See Miss Zhang Lianqin v. Ping Luo Construction, Ltd., China Intellectual Property Report, InterLingqua 

Legal Publishing, February 2007, at 6 (ordering destruction of infringing goods in a patent dispute). 577 See Case Summary Chart, attached as Exhibit 30. 578 See Miss Zhang Lianqin v. Ping Luo Construction, Ltd., China Intellectual Property Report, InterLingqua 

Legal Publishing, February 2007, at 6.
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and molds used in producing the infringing products, yet these requests were not granted.579 

Chinese courts are much more inclined to grant requests for injunctions and order defendants to 

cease the infringing acts, but by not destroying the tools of infringement, the tools become 

available to the same party or to others, thereby permitting future infringement by the same or 

different individuals.580

It is difficult to understand the reasoning behind the judges’ decisions with respect to 

destruction, and while the TRIPS Agreement does seem to allow for some discretion in deciding 

when destruction is a proper remedy, the TRIPS Agreement also emphasizes the deterrent effect 

such a remedy can have.581

By comparison, the civil enforcement system in the United States has an established 

history of destroying infringing goods and tools. Section 1118 of the trademark law is entitled 

“Destruction of infringing articles” and provides that when the courts determine that a violation 

exists, they may order all products bearing infringing marks and “all plates, molds, matrices, and 

other means of making the same,” to be turned over for destruction.582 Similarly, section 503 of 

the copyright law provides that as part of the final order, “the court may order the destruction or 

 

579 See Bridgestone Limited, Japan v. Aeolus Tyre Limited et al., China Intellectual Property Report, 

InterLingqua Legal Publishing, November 2006, at 1; Zunhua Li Yuan Food v. Beijing Fu Yi Nong Chestnut, 

Ltd., China Intellectual Property Report, InterLingqua Legal Publishing, December 2006, at 2; Miss Zhang 

Lianqin v. Ping Luo Construction, Ltd., China Intellectual Property Report, InterLingqua Legal Publishing, 

February 2007, at 6. 580 See, e.g., Bridgestone Limited, Japan v. Aeolus Tyre Limited et al, China Intellectual Property Report, 

InterLingqua Legal Publishing, November 2006, at 1 (denying Bridgestone’s request to have the infringing 

tires and molds destroyed but ordering the defendants to stop manufacturing and selling the infringing 

goods); Zunhua Li Yuan Food, Ltd. v. Beijing Fu Yi Nong Chestnut et al., China Intellectual Property Report, 

InterLingqua Legal Publishing, December 2006, at 2 (denying plaintiff’s request for destruction of all 

infringing products and molds but ordering the defendants to immediately cease the patent infringement). 581 See TRIPS Agreement, Article 46. 582 United States Trademark Law, 35 U.S.C. § 1118 (2007). 
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other reasonable disposition of all copies or phonorecords found to have been made or used in 

violation of the copyright owner’s exclusive rights, and of all plates, molds, matrices, masters, 

tapes, film negatives, or other articles by means of which such copies or phonorecords may be 

reproduced.”583 Importantly, these laws do not simply exist, but they are actually enforced, with 

destruction being a common result in intellectual property disputes.584 Additionally, these laws 

not only provide for destruction, but courts have affirmed that the right holder may be allowed to 

verify such destruction, so as to ensure that the infringing articles are really eliminated.585

While the patent statute does not contain a similar provision regarding destruction, courts 

have used their inherent powers to enforce judgments as a means of justifying such orders.586 It 

is also common in the United States to obtain a seizure order prior to trial to both stop the harm 

of the infringement and to contain the infringing products and tools so that they may be 

destroyed upon a positive finding of infringement and the resolution of the case.587

 

583 United States Copyright Law, 17 U.S.C. § 503(b) (2007). 584 See, e.g., Christopher Phelps & Associates v. Galloway, 477 F.3d 128, 131 (4th Cir. 2007) (ordering the case 

to be remanded and suggesting destruction of copyright-infringing architectural plans); Capital Records, Inc. 

v. Mattingly, 461 F.Supp.2d 846,851-852 (S.D.Ill 2006) (granting permanent injunction against defendant 

and ordering defendant to destroy all copies of infringing music that were illegally downloaded onto a 

computer as well as the destruction of all copies that may have been transferred to any other physical medium 

or device); Health Industries Inc. v. European Health Spas, 489 F.Supp. 860, 869 (D.S.D. 1980) (ordering 

defendant to turn over all printed materials with the infringing trademark to the plaintiff for destruction); 

Amana Society v. Gemeinde Brau, 417 F.Supp. 310, 312 (providing that defendants must deliver all materials 

containing the infringing trademark to the plaintiffs for destruction). 585 See, e.g., Knitwaves, Inc. v. Lollytogs Ltd., 71 F.3d 996, 1009 (2nd Cir. 1995) (reversing the lower court’s 

finding of trademark infringement but affirming that an order of verification of destruction is allowed under 

both the trademark law and the copyright law). 586 See Lion Mfg. Corporation v. Chicago Flexible Shaft Co. et al., 106 F.2d 930, 934 (7th Cir. 1939) (addressing 

a dispute over whether the court had legal authority to order destruction of patent-infringing goods and 

concluding “that the court is vested with such authority by reason of its inherent power to enforce its 

judgments and decrees”). 587 See United States Trademark Law, 15 U.S.C. § 1116(d); United States Copyright Law, 17 U.S.C. §§ 502, 

503; see also First Technology Safety Systems, Inc. v. Depinet, 11 F.3d 641, 649 (6th Cir. 1993) (stating that 
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This system is in stark contrast to that of China, where destruction requests are frequently 

denied and it would appear that molds and tools used in making the infringing goods are usually 

left in the control of the infringer. While the TRIPS Agreement only requires authorities to have 

the power to order destruction, meaning that China would only be in obvious violation of its 

WTO obligations if its laws explicitly stated that the authorities could not destroy such goods 

and materials, if this power is rarely invoked and the patterns of infringement continue, China 

would appear to be violating its obligations to provide effective IP rights enforcement. 

Pursuant to the customary rules of treaty interpretation, the provisions in TRIPS 

regarding civil procedures must be read in conjunction with the general enforcement obligations 

contained in Article 41.588 Specifically, the requirement for authorities to be allowed to order 

destruction is addressed under Article 46, with the subheading “Other remedies.” 589 This 

reference to remedies thus incorporates the general obligation in Article 41.1 that Members 

implement enforcement procedures that include remedies “which constitute a deterrent to further 

infringements.” Accordingly, judicial authorities should not only have the authority to destroy 

infringing goods and tools, but this remedy should be applied in a manner so as to deter future 

infringements. 

As discussed above with respect to damages, the word deterrence is not defined by the 

terms of the Agreement. However, the ordinary meaning of the word “deterrence” is “the action 

 it is “well established that ‘the primary purpose of impoundment is to maintain the feasibility of the eventual 

destruction of items found at trial to violate the copyrights laws by safeguarding them during the pendency of 

the action.’ Midway Mfg. Co. v. Omni Video Games Inc., 668 F.2d 70, 72 (1st Cir. 1981)”). 588 See Dispute Settlement Understanding, Article 3.2; see also EC – Chicken Cuts, Panel Report, at ¶ 7.89. 

589 See TRIPS Agreement, Article 46. 
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of deterring or preventing by fear.”590 The meaning of the word “deter” is further defined as: 

“(1) restrain or discourage (from acting or proceeding) by fear, doubt, dislike of effort or trouble, 

or consideration of consequences; (2) inhibit, prevent.”591 Pursuant to these definitions, the civil 

remedy of ordering destruction of infringing goods and tools would need to be applied so as to 

prevent or inhibit future infringements. Given that destruction of infringing goods seemingly 

prevents the possibility of future infringements by way of sale or other commerce, and 

destruction of infringing tools and molds seemingly prevents the possibility of future 

infringements by way of production, the deterrent aspect of this remedy is clear. However, 

because China rarely applies this remedy, it has no immediate deterrent impact because the 

infringing goods and tools are left in the control of the infringer. 

Moreover, the ordinary meaning of the word “deterrence,” and the phrase “deterrent to 

further infringement” encompasses a prospective view. As stated above, “deter” means to 

“restrain or discourage (from acting or proceeding) by fear,...or consideration of 

consequences.”592 By reading this general obligation with respect to remedies in conjunction 

with the civil procedures outlined in the TRIPS Agreement, it follows that in order for a 

Member’s enforcement measures to be in compliance with its TRIPS obligations, the remedies it 

provides for in civil disputes should effectively deter future infringements of IP rights by making 

people fear the consequences of such infringing action. 

 

590 Shorter Oxford English Dictionary, Clarendon Press (5th Ed. 2002) at 660.

591 Id. at 658. 

592 Id. at 658. 
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While it is hard to gather concrete facts on levels of piracy and counterfeiting, the facts 

available show little to no decrease in illegal activity in recent years, further demonstrating that 

China’s remedies lack deterrent effect. For instance, the International Intellectual Property 

Alliance reports that piracy levels concerning records and movies have remained constant in 

China over the last three years, at 85 percent.593 Additionally, piracy levels of motion pictures in 

China increased between 2002 and 2004, from 91 percent to 95 percent, but then showed a slight 

decline in 2005 to 93 percent. 594 The lack of significant decline in these numbers is not 

surprising, given that (1) infringers in China are generally left with the tools to continue 

infringing behavior, meaning there is no loss of capital, and (2) the damages awarded in IP 

disputes are generally quite low. Rather, these numbers illustrate that the remedies provided by 

China’s civil system has been ineffective in generating a significant amount of risk or fear to 

deter infringers and in preventing additional infringements. An environment in which 

infringement of IP rights continues even after civil actions and where courts are not ordering 

the destruction of equipment used in the manufacture of IP-infringing goods would appear to 

constitute a violation TRIPS Article 41.1. 

With the extraordinary level of IP problems in China, it is not surprising that China’s 

trading partners are pursuing information on activities by China to increase enforcement 

effectiveness. For example, in October 2006, through the WTO, the United States requested 

 

593 2007 Special 301 Report, People’s Republic of China, Comments to USTR from the International Intellectual 

Property Alliance, February 12, 2007, at 96. 

594 Id. 
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information from China on its destruction activities. 595 Specifically, the U.S. requested 

information “with regard to the procedures regarding destruction of goods and materials used in 

producing counterfeit, pirated and other infringing goods pursuant to civil, criminal or 

administrative enforcement, for patent, trademark and copyright infringement.”596 The U.S. 

wanted to know, inter alia, whether goods or materials were destroyed or auctioned off after 

being seized or confiscated, and how they were restricted, if at all, from re-entering the channels 

of commerce. The U.S. also asked for statistics relating to “the destruction of goods and 

materials used to produce infringing goods in civil, criminal and administrative cases in 2005 

and the first six months of 2006.”597

China’s response only addressed administrative seizures of trademark-infringing goods: 

With regard to the procedures for the destruction of goods and 

materials used in producing counterfeit, pirated and other 

infringing goods, [the Chinese representative] said that according 

to Article 53 of the Trademark Law the objects to be detained or 

confiscated were the infringing products and instruments 

specifically used for the manufacturing of infringing products and 

did not include products and materials not involved in infringing 

activities. All infringing goods that had been confiscated were 

being destroyed and not put up for auction. In 2005, the AICs had 

seized and destroyed more than 18,400 pieces of infringing goods, 

amounting to 7000 metric tonnes.598 

 

595 See Transitional Review Mechanism of China, Communication from the United States, IP/C/W/482 (6 

October 2006). 

596 Transitional Review Mechanism of China, Communication from the United States, IP/C/W/482 (6 October 

2006) at ¶ 6. 

597 Transitional Review Mechanism of China, Communication from the United States, IP/C/W/482 (6 October 

2006) at ¶ 6. 

598 Transitional Review Under Section 18 of the Protocol on the Accession of the People’s Republic of China, 

Report to the General Council by the Chair, IP/C/43 (21 November 2006) at ¶ 39. 
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While China is destroying certain IPR-infringing products, there is little information 

suggesting that the implements for producing infringing goods are being destroyed or otherwise 

being taken out of commercial use. With the problems of IP enforcement being so great in China, 

the United States can and should look at protecting its rights and benefits under the relevant 

WTO Agreements by utilizing the WTO dispute settlement system and filing additional requests 

for consultations. 
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TABLE OF EXHIBITS 

i

Exhibit No. Description 

1 Table of Legislation Proposed by China for Amendment During the Working Party to 

Achieve TRIMs Compliance and Subsequent Dates of Amendment. 

2 Table of Notification Pursuant to Article 5 of the Agreement on Trade-Related 

Investment Measures. 

3 

Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures, Order 

of the President of the People’s Republic of China No. 48 (entered into force March 

15, 2001). 

4 Regulations for the Implementation of the Law on Sino-Foreign Equity Joint Ventures

(entered into force July 22, 2001). 

5 Policy on Development of Automotive Industry, State Development and Reform 

Commission, Order No. 8 (May 21, 2004). 

6 Policies for Development of Iron and Steel Industry, Order of the National 

Development and Reform Commission No. 35 (8 July 2005). 

7 

China—Measures Affecting Imports of Automobile Parts, Request for Consultations by 

the United States, WT/DS340/1, G/L/771, G/TRIMS/D/23, G/SCM/D68/1 (3 April 

2006).

8 

China – Certain Measures Granting Refunds, Reductions or Exemptions from Taxes 

and Other Payments, Request for the Establishment of a Panel by the United States, 

WT/DS358/13 (13 July 2007). 

9 

Circular of the State Administration of Taxation Concerning Transmitting the Interim 

Measure for the Administration of Tax Refunds to Enterprises with Foreign Investment 

for Their Domestic Equipment Purchases, Order No. 171 GuoShiFa [1999] No. 171 

(20 August 1999). 

10 

Circular of the State Administration of Taxation and the National Development and 

Reform Commission of the People's Republic of China, on Printing and Issuing the 

Trial Measures for the Administration of Tax Rebate for the Purchase of DomesticallyProduced Equipment in Foreign Investment Projects GuoShuiFa [2006] No. 111 (24 

July 2006). 

11 

Circular of the Ministry of Finance and the State Administration of Taxation 

Concerning the Issue of Tax Credit for Business Income Tax for Homemade Equipment 

Purchased by Enterprises with Foreign Investment and Foreign Enterprises, 

CaiShuiZi [2000] No. 49 (14 January 2000). 

12 

Circular of the State Administration of Taxation on Printing and Distributing the 

Measures Concerning Business Income Tax Credit on the Investment of Enterprises 

with Foreign Investment and Foreign Enterprises by Way of Purchasing Homemade 

Equipment, GuoShuiFa [2000] No. 90 (18 May 2000). 

13 Enterprise Income Tax Law of the People's Republic of China, of the President of the 

People's Republic of China [2007] No. 63 (16 March 2007). 
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TABLE OF EXHIBITS 

ii

Exhibit No. Description 

14 

Circular on Distribution of Interim Measures Concerning Reduction and Exemption of 

Enterprise Income Tax for Investment in Domestically Made Equipment for 

Technological Renovation; CaiShui [1999] No. 290 (8 December 1999) {English 

Summary, Chinese Original}. 

15 

Rules for Implementation of the Income Tax Law of the People’s Republic of China on 

Enterprises with Foreign Investment and Foreign Enterprises, Order No. [1991] 85 

Decree of the State Council (30 June 1991). 

16 Provisions of the State Council on the Encouragement of Foreign Investment, Order 

No. [1986] 95 GuoFa (11 October 1986). 

17 

Income Tax Law of the People’s Republic of China on Enterprises with Foreign 

Investment and Foreign Enterprises, Order [1991] No. 45 of the President of the 

People’s Republic of China (9 April 1991). 

18 

Catalogue for the Guidance of Foreign Investment Industries, Order [2004] No. 24 of 

the State Development and Reform Commission, the Ministry of Commerce of the 

People’s Republic of China (30 November 2004). 

19 Selected Trade Statistics 

20 

China – Measures Affecting the Protection and Enforcement of Intellectual Property 

Rights, Request for Consultations by the United States, WT/DS362/1, IP/D/26, 

G/L/819 (16 April 2007). 

21 Criminal Law of the People’s Republic of China, effective October 1, 1997. 

22 

Judicial Interpretations by the Supreme People’s Court and the Supreme People’s 

Procuratorate on Several Issues of Concrete Application of Laws in Handling 

Criminal Cases of Infringing Intellectual Property, effective December 22, 2004 

(“Judicial Interpretation I”). 

23 

Judicial Interpretations by the Supreme People’s Court and the Supreme People’s 

Procuratorate on Several Issues of Concrete Application of Laws in Handling 

Criminal Cases of Infringing Intellectual Property II, effective April 5, 2007 (“Judicial 

Interpretation II”). 

24 Regulation of the People’s Republic of China on the Customs Protection of Intellectual 

Property Rights, effective March 1, 2004. 

25 

Measures of the General Administration of Customs of the People’s Republic of China 

for the Implementation of the Regulation of the People’s Republic of China on the 

Customs Protection of Intellectual Property Rights, effective July 1, 2004. 

26 Copyright Law of the People’s Republic of China, amended October 27, 2001. 

27 

China – Measures Affecting the Protection and Enforcement of Intellectual Property 

Rights, Request for the Establishment of a Panel by the United States, WT/DS362/7 

(21 August 2007).

28 Patent Law of the People’s Republic of China, amended August 25, 2000. 
CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, 

TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY

PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS

TABLE OF EXHIBITS 

iii

Exhibit No. Description 

29 Trademark Law of the People’s Republic of China, amended for the second 

time on October 27, 2001.

30 Chinese Case Summary Chart 

31 Civil Procedure Law of the People’s Republic of China, effective April 9, 1991.

32 Some Provisions of the Supreme People’s Court on Evidence in Civil 

Procedures, effective April 1, 2002.

33 General Principles of the Civil Law of the People’s Republic of China, effective 

as of January 1, 1987.