World Trade Organization: U.S. Companies' Views on China's Implementation of Its Commitments
Published: 2004-03-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As the second largest source of foreign direct investment in China, U.S. companies continue their keen interest in China's implementation of its World Trade Organization (WTO) commitments. China's 2001 WTO commitments include specific pledges to increase market access, liberalize foreign investment, continue fundamental market reforms, and improve the rule of law. In 2002, GAO reported on selected U.S. companies' views, finding that many commitment areas, particularly those related to rule of law, were important to U.S. companies. GAO also found that company representatives expected China's reforms would have a positive impact on their business operations but expected some difficulties during implementation. In 2003, GAO continued to analyze companies' views about (1) the extent to which China has implemented its WTO commitments and (2) the impact of China's implementation of its WTO commitments on U.S. companies' business operations. GAO collected the views of representatives from 82 U.S. companies with a presence in China. GAO focused on companies in the agriculture, banking, machinery, and pharmaceutical industries. Results reflect a response rate of 60 percent of the study population. These responses may not reflect the views of all U.S. companies with activities in China.
section_title: What GAO Found
paragraphs: U.S. company representatives who completed GAO's 2003 questionnaire thought that China had implemented most of the 26 listed WTO commitment areas on average only to some or little extent. When respondents assessed five areas found to be of greatest importance to their companies overall--(1) standards, certifications, registration, and testing requirements; (2) customs procedures and inspection practices; (3) intellectual property rights; (4) tariffs, fees, and charges; and (5) consistent application of laws, regulations, and practices--responses were mixed, but they reported that China had taken at least some steps to implement these commitment areas. Our analysis showed that the importance placed on specific areas differed among the agriculture, banking, machinery, and pharmaceutical industries. For example, agricultural respondents identified tariffs as important while banking respondents identified scope of business restrictions for services as important. Few respondents were able to assess all of China's commitment areas for reasons that varied depending on each company's experience and operations in China. More than two thirds of respondents reported that China's implementation of its WTO commitments had a positive impact on their companies' ability to do business in China. However, some respondents indicated that China's reform efforts had created difficulties for their company operations in China. Overall, company representatives reported that company activities, such as volume of production in China and company revenue stream, have increased since China joined the WTO. However, respondents noted that changes in business activities cannot be directly attributed to China's WTO accession.

section_title: Letter
paragraphs: The 2001 conclusion of 15 years of China’s intense negotiations to join the  World Trade Organization (WTO) raised expectations for U.S. companies’  opportunities to trade with and invest in China. In 2002, we reported on  selected U.S. companies’ views about their expectations for China’s  implementation of its WTO commitments related to their companies doing  business in China. The report revealed that a wide range of commitments  were important to U.S. companies, their belief that WTO commitments  would positively impact their businesses, and their expectation that  implementation would include difficulties as well as successes. China’s  first two years of WTO membership repeatedly confirmed the accuracy of  these expectations.
In continuation of your request that we undertake a long-term body of work  regarding China’s membership in the WTO, we again analyzed selected U.S.  companies’ views about (1) the extent to which China has implemented its  WTO commitments in key industries and (2) the impact of China’s  implementation of its WTO commitments on these U.S. companies’  business operations.
To perform our work in 2003, we developed a questionnaire and used it to  conduct structured interviews with representatives of U.S. companies with  a presence in China. We selected participants from a commercial database  listing U.S. companies in China, focusing our company selection on those  within four industries: agriculture, banking, machinery, and  pharmaceuticals. Out of a study population of 149 companies, we received  79 questionnaires, for an overall adjusted response rate of 60 percent. In  addition, we received three questionnaires from companies we interviewed  in 2002 and 11 questionnaires from representatives of nonprofit agricultural  organizations. Unless otherwise indicated, results include the 79  respondents from the study population plus the three respondents  interviewed in 2003 and 2002. We do not generalize results to the larger  population of U.S. companies doing business in China. Appendix I contains  a more detailed description of our scope and methodology; responses to  the questionnaire are included in appendix II. We performed our work from  October 2002 to January 2004 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: After 15 years of negotiations to join the WTO, on December 11, 2001,  China bound itself to open and liberalize its economy and offer a more  predictable environment for trade and foreign investment in accordance  with WTO rules. U.S. investment and trade with China is of substantial  interest to U.S. companies and has increased during the past 10 years. Our  2002 survey of U.S. company views revealed companies’ expectation of a  positive impact from China’s implementation of WTO commitments as well  as anticipation of difficulties during implementation.
subsections: section_title: China’s WTO Commitments
paragraphs: The results of China’s negotiations to join the WTO are described and  documented in China’s final accession agreement, the Protocol on the  Accession of the People’s Republic of China, which includes the  accompanying Report of the Working Party on the Accession of China, the  consolidated market access schedules for goods and services, and other  annexes. China’s WTO commitments are complex and broad in scope.  Some commitments related to reforming China’s trade regime require a  specific action from China, such as reporting particular information to the  WTO, while others are more general in nature, such as those that affirm  China’s adherence to WTO principles.
The accession agreement includes market access commitments regarding  goods and services. These include commitments that will reduce tariffs on  products, as well as commitments to reduce or eliminate many other trade  barriers such as quotas or licensing requirements on some of these  products. Further, China made commitments to allow greater market  access in 9 of 12 general service sectors. In the banking sector, for example,  China has agreed to reduce licensing requirements and has removed  restrictions on foreign currency services.
To improve its trade regime, China has generally agreed to make numerous  rule of law-related reforms such as publishing and translating trade-related  laws and regulations and applying them uniformly at all levels of  government and throughout China. China committed to adhere to  internationally accepted norms to protect intellectual property rights and  enforce relevant laws and regulations related to patents, trademarks, and  copyrights. Moreover, China made a substantial number of other rule of  law-related commitments regarding transparency of law, judicial review,  and nondiscriminatory treatment of businesses.
section_title: U.S.-China Investment and Trade
paragraphs: In the past 10 years, U.S. investment and trade with China have increased  significantly. At the end of 2002, U.S. companies had total direct  investments of $10.3 billion in China, largely in the manufacturing sector.  This amount represents more than 10 times the approximately $900 million  invested a decade earlier in 1993. In addition, U.S. goods exports and  services to China grew at an average annual rate of 12 percent since 1993,  totaling $27 billion in 2002, according to the Department of Commerce.  While the United States holds a large bilateral trade deficit with China, it  has a bilateral goods surplus in areas such as transportation equipment and  agricultural products. Appendix III provides additional details regarding  U.S. investment and trade with China.
section_title: GAO’s Previous Survey of U.S. Companies
paragraphs: In 2002, we conducted a study of U.S. companies’ views about the  importance of, the anticipated effects of, and the prospects for, China’s  implementing its WTO commitments. Our analysis of responses from 191  of 551 surveyed companies revealed that most of China’s WTO  commitments were important to the companies, with rule of law-related  reforms the most important. Specifically, at least three quarters of the  respondents selected intellectual property rights; consistent application of  laws, regulations, and practices; and transparency of laws, regulations, and  practices as the most important commitment areas for their companies.  Other than those related to rule of law, respondents most frequently  selected trading rights; tariffs, fees, and charges; and scope of business  restrictions as important commitments.
We also found that most companies expected that China’s implementation  of its WTO commitments would have a positive impact on their business  operations, although many anticipated impediments to implementation of  China’s WTO reforms. More than three quarters of the companies reported  that they expected China’s implementation of its WTO commitments would  lead to an increase in their companies’ activities in China, including their  export volume to China, market share in China, and distribution of  products there. However, many respondents also expected that many WTO  commitments, particularly in rule of law-related commitment areas  regarding consistent application of laws, regulations, and practices, and  intellectual property rights, would be difficult for Chinese officials to  implement. (See table 1 for 2002 survey respondents’ views on the  expected level of difficulty of China’s implementation of commitment areas  that were most important to them.)
section_title: Companies Report Progress Made in China’s WTO Implementation
paragraphs: Overall, in 2003, respondents thought that China had implemented most of  the 26 specific WTO commitment areas to at least some extent when asked  to characterize China’s reform efforts along a four-point scale ranging from  no extent to great extent. Responses were mixed when company  representatives assessed the commitment areas that we found to be of  greatest importance to their businesses. In addition, the importance placed  on specific commitment areas differed among respondents of the four  industry groups--agriculture, banking, machinery, and pharmaceuticals. It  is also important to note that many respondents reported they had no basis  to judge the extent to which China had made reforms related to some WTO  commitment areas, for reasons that varied depending on each company’s  experience and operations in China.
subsections: section_title: Overall, Companies Report Low and Moderate Marks for the 26 WTO Commitment Areas
paragraphs: Respondents’ assessments of each area varied widely, but they generally  reported low and moderate ratings of China’s implementation. See figure 1  for respondents’ views on the extent of China’s implementation of the 26  commitment areas, excluding those with no basis to judge. Many  respondents had no basis to judge the extent of China’s WTO reforms in  certain commitment areas. This indicates that few companies have an in- depth knowledge of Chinese reforms across all 26 areas, as discussed in  further detail later. Consequently, the number of company representatives  evaluating each individual commitment area varied from 14 to 67.
On average, respondents assigned lower marks when assessing the  implementation of 19 of the 26 listed commitment areas. For example,  company representatives thought that China had made reforms to only  some or little extent when assessing China’s trading rights reforms (right  to import or export products) and price controls. Company  representatives said they eagerly awaited the implementation of China’s  trading rights commitments in late 2004. Several company representatives  noted that implementation of these commitments would provide more  control over their business relationships in China and reduce or eliminate  the need to rely on third parties such as distributors and trading  companies. Although China had agreed to stop using price controls to  restrict the level of imports, one company representative derided China’s  price control reforms and others noted their concern regarding the Chinese  government’s continuing control of prices on specific products.
Respondents on average assigned higher marks to the remaining 7  commitment areas. For example, respondents thought that China had  made reforms to a moderate extent when assessing China’s reforms to  tariffs, fees, and charges; requirements stipulating a minimum amount of  production that must be exported; and restrictions on partnerships and  joint ventures. Several respondents described China’s efforts in lowering  tariffs, fees, and charges including one respondent who noted that China  had reduced tariffs for an agricultural product from 35 to 15 percent since  joining the WTO. Company representatives also discussed China’s  allowance for greater market access for services, stated that WTO has  allowed companies to provide after-sales service, and one said that “China  is doing a good job” in addressing this area.
section_title: Respondents Had Mixed Views on Important Commitment Areas
paragraphs: Respondents’ assessments of the most important commitment areas  provide further detail regarding companies’ views on China’s progress. See  table 2 for the ranking of the commitment areas by importance to  respondents, which we calculated using weighted responses. More than  half of respondents reported that China had made reforms to a moderate or  great extent when asked to assess China’s overall progress in implementing  reforms that were important to their companies. However, when asked to  assess China’s implementation of specific commitment areas, responses for  four of the five most important areas fell in the “some or little extent”  category. Company representatives from the four industries assigned  varied levels of importance to specific commitment areas.
The five specific commitment areas ranked as most important to  respondents overall were (1) standards, certifications, registration, and  testing requirements; (2) customs procedures and inspection practices; (3)  intellectual property rights; (4) tariffs, fees, and charges; and (5) consistent  application of laws, regulations, and practices. Among these five areas,  tariffs, fees and charges received higher marks, with respondents reporting  on average that China had made reforms to a moderate extent.  Respondents noted that it was relatively easy to assess China’s  implementation of tariffs, fees, and charges because China had set time  schedules for tariff reductions on various products. Many respondents told  us that China’s efforts to achieve tariff reductions were on schedule,  allowing companies to pay lower tariffs on imported products.
Respondents provided lower ratings on average for the four other  important commitment areas and indicated that China had only  implemented these reforms to some or little extent. In the area of  standards, certifications, registration, and testing requirements, for  example, some respondents discussed continuing requirements such as  product registrations that require approval from multiple Chinese  government agencies, delays and bureaucratic bottlenecks in processing  product registration, and the use of product standards to protect Chinese  agricultural producers. When evaluating China’s reforms made in customs  procedures and inspection practices, company representatives discussed  the “hassles” and inefficiencies created by an unpredictable and slow  customs system characterized by inconsistent application of standards and  duties. In addition, numerous company representatives discussed the  limitations of China’s efforts to address intellectual property rights.  Respondents cited specific experiences with generic copies of  pharmaceutical products, products illegally copied to look like those of  U.S. companies, and false labeling of Chinese products. Some respondents  even commented on the Chinese government’s inadequate enforcement of  intellectual property rights. Furthermore, some respondents noted  inconsistency in China’s application of laws, regulations, and practices  within and among national, provincial, and local levels of government. For  example, one banking representative said that different local governments  each have different explanations of China’s laws and regulations. This issue  illustrates a larger rule of law-related problem discussed by company  representatives: the Chinese national government’s commitment to WTO  implementation did not always coincide with local governments’  interpretation and implementation of China’s commitments.
subsections: section_title: Industries Placed Importance on Different Commitment Areas
paragraphs: Respondents among the four selected industries (agriculture, banking,  machinery, and pharmaceuticals) had different views on the commitment  areas most important to their companies. For example, representatives of  agricultural companies and organizations noted the significance of quota  reductions while representatives of banking firms emphasized  commitments related to market access for services and foreign exchange  restrictions. Moreover, machinery company representatives identified  customs procedures and inspection practices as an important area for their  transport of goods. For pharmaceutical companies, intellectual property  and trading rights stood out as among the most important commitments.  Table 3 shows respondents’ views on the most important commitment  areas by industry.
The relative importance that respondents from the four industries assigned  to each of the 26 commitment areas reflected the nature of their  businesses. Company representatives also described the importance of  these commitment areas in terms of their experiences with China’s reform  efforts. First, for example, agricultural companies identified the tariff-rate  quota system as well as China’s application of sanitary and phytosanitary  measures and inspection requirements as important. Similarly, other  agriculture respondents emphasized the importance of tariffs and one  company representative noted that some agricultural tariffs applicable to  his company had declined as much as 40 percent. A representative of an  agricultural organization also noted that although China had increased  trading rights, continued quota restrictions undermined this effort. Second,  key issues for banking firms (a service industry) included China’s market  access commitments to fully open the industry to foreign banks 5 years  after China’s accession to the WTO. Banking industry representatives also  identified scope of business restrictions, which can limit the types of  services offered to clients, as important. However, company  representatives also told us that market access obstacles, such as branch  licensing that limits the ability of foreign banks to offer additional products  and to expand geographically, continue to exist. Next, machinery  companies identified the importance of China’s tariff rates and product  certification system that sometimes involves on-site inspection of  manufacturing facilities outside of China. Some machinery company  representatives discussed the importance of timely product certification at  the ports, the importance of an efficient product registration process for  new products imported into China, and the need for testing procedures at  customs that allow products to enter the country without damage caused  by product testing. Finally, representatives from pharmaceutical  companies identified protection of intellectual property rights as important  and said that they continue to face challenges in this area. Specifically,  several pharmaceutical company representatives discussed the continued  need for patent protection to prevent counterfeiting of drugs sold at a  fraction of the price charged for the genuine product. A few representatives  of pharmaceutical firms noted that the Chinese government had allowed  counterfeit generic drugs to be sold and believed that China displayed  discrimination favoring Chinese products rather than complying with the  principle of national treatment, under which imported foreign products and  services are treated no less favorably than domestic products or services.  As described by one company representative, although protection of  intellectual property rights is getting better, the situation is still bad.  Another respondent said simply that “piracy is everywhere” in China.
section_title: Many Respondents Could Not Assess Progress of China’s WTO Implementation
paragraphs: Another notable finding of our questionnaire is that many respondents  were unable to assess certain commitment areas listed in our  questionnaire. Company representatives provided a number of  explanations for their limited ability to evaluate China’s progress in  implementing specific WTO commitment areas. Specifically, for 13 of the  26 specific commitment areas we asked about, more than half of the  respondents said they had no basis to judge the extent to which China had  made reforms in these commitment areas. Most notably, for four  commitment areas, at least three quarters of the respondents selected “no  basis to judge” when asked to assess the extent to which China had actually  made reforms in these commitment areas. These areas included export  restrictions, such as eliminating taxes and charges on exports; China’s  application of safeguards against U.S. exports, which includes  antidumping measures and other legal actions against import surges; local  content requirements; and government requirements stipulating a  minimum amount of production that must be exported. See figure 2 for the  number of respondents who indicated they had no basis to judge China’s  reforms and those who assessed China’s implementation of its WTO  commitment areas.
The reasons for a “no basis to judge” response could result from any  number of factors, including the irrelevance of specific commitment areas  to particular companies, lack of experience with commitment areas, and  lack of knowledge about China’s WTO commitments. Some company  representatives told us that they could not assess commitment areas that  simply did not apply to their companies. For example, representatives of  machinery companies had no basis to judge “scope of business restrictions  for services” because they did not provide services. Other respondents  stated that their companies did not have experience with particular  commitment areas, such as one respondent’s inability to comment on  “independence of judicial bodies” because the respondent’s company had  not accessed the Chinese judicial system. Moreover, some respondents  noted that they did not have sufficient awareness and understanding of the  exact terms of China’s WTO commitments and/or did not actively track  specific Chinese implementation efforts. Several respondents told us that  they often could not distinguish between China’s broad economic reforms  and its actions taken to implement specific WTO commitments. Other  respondents said that the WTO did not apply to their company’s business  model, did not really matter to their business, or did not have relevance to  current market conditions that affected their business.
section_title: Most Respondents Reported a Positive Impact from China’s WTO Implementation
paragraphs: Most respondents reported that China’s implementation of its WTO  commitments had had a positive impact on their companies, even though  some company representatives indicated that China’s reform efforts would  continue to present challenges for their company operations in China. For  example, one respondent noted the success of his company’s overall  operations in China but stated that implementation of China’s WTO  commitments remained slow and problematic. Another company  representative noted that although actual changes are happening very  slowly, the overall pressure to reform is having a positive effect. Companies  also provided information on whether various business activities had  increased, stayed about the same, or decreased since China joined the WTO  in December 2001. The majority of respondents reported that most of the  13 business activities such as revenue stream and volume of production in  China had increased. Company representatives described a broad range of  increased company activities including new lines of business and new  products, expansion of existing business to meet growing demand, and the  opening of new branch offices and factories. Some respondents discussed  the broad range of factors that influence company business activities.  Respondents cited other factors, such as the business environment in  China and general market and economic conditions, as more direct  influences on company activities than China’s WTO membership.
subsections: section_title: Company Representatives Reported Positive Impact on Business in China
paragraphs: Overall, company representatives reported a generally positive impact  from implementation. More than two thirds of the 80 company  representatives responding to this question reported that China’s  implementation of its WTO commitments had had a positive impact on  their companies, as shown in figure 3. Some respondents noted that China’s  accession to the WTO had increased business opportunities for their  companies through changes such as decreased tariffs and increased  transparency of laws and regulations. Respondents also noted that the  lower tariffs helped to improve business in China and had had an  immediate impact on their bottom line because of reduced costs, ultimately  helping their companies increase profits. One company representative told  us that the prevalence of government officials with a pro-business attitude  and the ability to speak English proficiently had contributed to the positive  impact on company operations in China.
Responses regarding the impact of China’s WTO implementation on their  companies varied when analyzed by company size and industry. First, when  analyzed by company size, a majority of representatives of small- and  medium-sized enterprises reported little, no, or a negative impact from  WTO implementation. Large company representatives responded more  positively, with nearly three quarters selecting either “very positive” or  “generally positive” when asked what impact China’s WTO implementation  had on their company’s ability to do business in China. Second, a majority  of respondents in three of the four industries reported a positive impact on  company operations. Specifically, most of the representatives of  agricultural companies reported little, no, or a negative impact from  China’s implementation efforts. Agriculture respondents discussed  negative consequences resulting from WTO-inspired testing requirements  that ultimately resulted in the rejection of U.S. shipments to China. In  contrast to agriculture, almost all of the banking industry respondents  reported either a very positive or generally positive impact on their  companies’ ability to do business in China. One representative from a  banking company stated that his company has a positive view of market  development in China—the rules seem much clearer for banks and there is  an increased sense of assurance that the company can be successful as a  result of China’s WTO implementation. A majority of the manufacturing  and pharmaceutical company respondents also reported more positive  than negative responses regarding the impact of China’s WTO  implementation on their companies.
subsections: section_title: Impact from China’s Reforms Expected to Continue
paragraphs: A number of company representatives reported a positive outlook for their  future in China when asked about the likely impact that China’s WTO  implementation would have in 2 years’ time, but they also noted the  challenges they expect to continue. Some respondents said they expected  the overall business environment in China would improve significantly.  Others specifically discussed WTO commitments that would have an  impact on their ability to do business in China. For example, some  respondents stated that additional tariff cuts would reduce product costs  and result in increased profits. However, other respondents discussed  obstacles hindering reform efforts. One company representative noted that  China’s regulatory reforms may be fine on paper, but speculated that actual  implementation could invalidate the intent of the reforms. Some company  representatives noted that different interpretations of laws and regulations  as well as varied approaches to implementation between provinces and  levels of government create challenges for foreign companies in China.  Several company representatives discussed ongoing delays to business  operations resulting from Chinese requirements for product registration  and testing. Generally, company representatives said that progress is  continuing, that their parent companies would continue investing in  business operations in China, and that they expected the overall business  climate to improve, but reforms could take time.
section_title: Company Business Activities in China Increasing
paragraphs: Overall, our questionnaire respondents reported that their company  activities have increased since China joined the WTO. Respondents  indicated whether their companies’ business activities in 13 areas had  increased, stayed about the same, or decreased since China joined the WTO  in December 2001. Specifically, at least 70 percent of respondents reported  that their companies’ business activities had increased for 9 of the 13 listed  activities, as shown in figure 4. Some company representatives told us that  China’s WTO membership helps to attract foreign investment, which in turn  helps their businesses. In contrast, most respondents reported that the  other four activities had stayed the same or decreased. Activities that had  stayed the same or decreased included the number and value of their  ventures with Chinese partners. None of the respondents to our  questionnaire reported a decrease in the number of products distributed in  China, the scope of product distribution in China, or the number of services  provided in China. But almost one third of respondents indicated that the  number of company employees in the United States had decreased while  about one sixth reported an increase. Respondents told us that the number  of employees in the United States depends on factors other than China’s  WTO accession, such as current economic conditions, corporate  restructuring, changes in the company’s industry, and/or a change in  company strategy. Some respondents also discussed the difficulty of  identifying a link between other company activities and China’s WTO  membership. Company representatives cited a number of possible  influences on changes in company activity levels, such as China’s ongoing  economic reforms, an improving business environment in China, and  market development opportunities in China.
section_title: Concluding Observations
paragraphs: Our analysis of U.S. companies’ responses to our questionnaire provides  findings and lessons that have important implications for policymakers  who rely on private sector input in order to judge China’s progress in  opening its market. As noted in our March 2003 report, the private sector  plays an important role in monitoring and enforcement activities. Our  results indicate areas where China has made progress in carrying out WTO- related reforms and areas that might need more attention. Our results also  show that despite the problems U.S. companies are facing in China’s  implementation of specific commitment areas, more than two thirds of  respondents indicated that China’s WTO implementation had a positive  impact on their companies’ ability to do business in China.
Our work also provides a number of lessons regarding the use of private  sector input that could help shape best practices for U.S. government  efforts to monitor and enforce China’s compliance with its commitments.  First, because company experiences and assessments varied, both overall  and among companies in the same industry, policymakers are well advised  to seek input from a number of companies with interests in an area of  concern and not just a few companies. Doing so increases the  representativeness of the information gathered for monitoring purposes,  because views are often company-specific and one company in an industry  cannot be assumed to speak for all.
Second, we found that the number of company representatives who report  they have a basis to judge China’s implementation of specific WTO  commitment areas varies greatly. Broad input from a wide range of  companies assures policymakers that monitoring is authoritative and  complete because relatively few individual companies believed they had a  basis to judge all 26 commitment areas. Furthermore, in some cases, like  Chinese export restrictions, application of safeguards, and/or subsidies,  very few U.S. companies reported they had a basis to judge  implementation. This observation raises the question of whether U.S.  government officials can rely on private sector input to identify the full  range of China’s compliance problems. Instead, for some commitment  areas, alternative strategies that reach out to specific companies or that  rely on economic or legal information to identify problems, for example,  may be needed to monitor China’s implementation.
Finally, we report that respondents cited a number of factors that influence  company activities in addition to China’s efforts to implement specific WTO  commitments. These results reaffirm the importance of ongoing private  sector education about China’s WTO obligations and the market access  opportunities that the private sector should expect. Furthermore, it  indicates that any monitoring strategy benefits from collecting and  reviewing information about what companies may consider solely  “commercial problems” but that may actually involve WTO-related issues,  where the U.S. government can clearly take action.
Nevertheless, knowledge of U.S. company views remains fundamental for  policymakers to judge the degree to which the benefits of China’s WTO  membership are being realized. We will consider the implications of this  work as we conduct our current review of U.S. government monitoring and  enforcement activities.
We are sending copies of this report to interested congressional  committees. We will make copies available to others on request. In  addition, the report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-4128. Other GAO contacts and staff acknowledgments are  listed in appendix IV.
section_title: Objectives, Scope, and Methodology
paragraphs: The Chairman and the Ranking Minority Member of the Senate Finance  Committee and the Chairman and the Ranking Minority Member of the  House Committee on Ways and Means asked us to undertake a long-term  body of work relating to China’s membership in the World Trade  Organization (WTO). This work began in 2001 and includes examining,  through annual surveys, the experience of U.S. firms doing business in  China. Our objectives for this report were to assess the views and  experiences of selected U.S. companies with a presence in China regarding  (1) the extent to which China has implemented its WTO commitments in  key industries and (2) the impact of China’s implementation of its WTO  commitments on these U.S. companies’ business operations. To respond to  our objectives, we collected the views of 82 U.S. companies and 11  representatives of U.S. agricultural associations with offices in China.
subsections: section_title: Data Collection
paragraphs: To answer our two objectives, we gathered company views primarily via in- person interviews in China; we also conducted some interviews by  telephone in instances when it was logistically impossible to schedule in- person meetings. We used this approach because the work we conducted  for our 2002 report on U.S. company views indicated that this method  would yield better response rates than mail or Web surveys and would  allow us to contact the corporate representatives who were most  knowledgeable about WTO implementation issues. We selected the  participants from a commercial database listing U.S. companies that were  identified as being in China as of 2003. We purchased the database, Foreign  Companies in China 2003, from Commercial Intelligence Service, a  division of Business Monitor International. Our research indicated that this  database best met our need for identifying U.S.-nationality companies and  their respective contact information in China by industry. However, the  database likely does not include all U.S. companies in China, because  foreign investors present a constantly changing population, some  companies in China may not wish to publicize their presence, and/or  because it is not always clear who is the ultimate parent of corporate  subsidiaries.
section_title: Industry Selection
paragraphs: We selected industries that encountered implementation issues, had key  commitments implemented during China’s first year of WTO membership,  and industries with concentrations of U.S. foreign investment in China. The  four industries included: agriculture, banking, machinery, and  pharmaceuticals. Although fewer U.S. agriculture-related companies have a  physical presence in China than the other three selected industries,  agriculture emerged as a key implementation issue in 2002, and its  importance continued in 2003. In addition to interviewing the agricultural  firms listed in the purchased database, we also conducted structured  interviews with a judgmental selection of 11 representatives of nonprofit  agricultural associations in China. The representatives of these  associations promote U.S. agricultural exports to China for various  commodities. We interviewed them to gain a more complete understanding  of U.S. agricultural interests in China and do not generalize their responses  to the full universe of nonprofit agricultural associations. Funding for  representative offices of these associations in China is in part provided by  the U.S. government through the Department of Agriculture’s Foreign  Market Development Cooperator Program. We administered the same  questionnaire we used for the private sector firms, with slight  modifications to acknowledge the nature of these cooperators as nonprofit  associations rather than companies. Data for these associations are  presented separate from company representative responses in the report.  Next, the banking industry provided an opportunity to explore the  experiences of firms that provide services in China. Banking issues also  emerged as a concern for U.S. government officials during the first year of  China’s WTO membership. Third, machinery is an industry with  representation from a broad range of U.S. companies. Finally, for the  pharmaceutical industry, numerous commitments were scheduled for  implementation during China’s first 2 years of WTO membership. In  addition, this industry provided an opportunity for us to explore the  experience of companies with an interest in intellectual property rights, a  key issue during the first year of China’s WTO membership.
subsections: section_title: Sample Development
paragraphs: Companies from the four selected industries were identified in the  aforementioned electronic database, Foreign Companies in China 2003,  purchased from the Commercial Intelligence Service. The database  contained a total of 243 contacts for companies in the four selected  industries. We reviewed the list of contacts in order to judgmentally  identify primary, secondary and tertiary contacts for each company. In  addition, we confirmed U.S. incorporation for each company, leaving a  total of 149 companies in our study population.
During the scheduling process, it became apparent that positive responses  from companies on the invited list of 149 companies might not fill our  itinerary for the planned 2-week data-gathering trip to China in October  2003. Consequently, we supplemented the list of 149 companies with the  list of 48 companies that had completed interviews with us in China in  2002. Three of these 48 companies accepted the interview invitation and  completed structured interview questionnaires. These companies are  included in our data analysis of 82 questionnaire responses. See table 4 for  an explanation of the results of requests for interviews with the 149  companies from the four selected industries.
section_title: Questionnaire Administration
paragraphs: We conducted structured interviews with representatives of U.S. firms and  agricultural organizations in the United States and Beijing, Shanghai, and  Hong Kong, China, in October 2003. Structured interviews provided an  opportunity to discuss questionnaire responses in greater detail as well as  gain an understanding for the context of these responses. We discussed  topics during the interviews that included the importance of China’s WTO  commitment areas, the extent to which China had implemented reforms in  WTO commitment areas, and the impact of China’s reforms on  respondents’ companies.
We restricted our analysis to the subset of firms that responded to our  questionnaire, and we did not make estimates about the larger population  of all U.S. companies with a presence in China. From the study population  of 149 U.S. companies with a presence in China, we received 79  questionnaires, for an overall response rate of 60 percent.
As the response rate was 60 percent, and some key questions had a high  frequency of “no basis to judge” responses, we did not calculate sampling  errors, and we present questionnaire results in this report in unweighted  form. The unweighted responses represent the responses received and are  not projected to the population of U.S. companies with a presence in China  nor the four selected industries.
section_title: U.S. Companies Responding to the Questionnaire
paragraphs: Respondents to our questionnaire from the study population represented  four industries: agriculture, banking, machinery, and pharmaceuticals. The  largest number of respondents represented machinery companies,  followed by pharmaceuticals, banking, and agriculture. Figure 5 displays  the number of respondents from each of the four industries.
subsections: section_title: Location of Respondents in China
paragraphs: Questionnaire respondents reported that they carry out their business  activities in facilities and offices across all of China. Shanghai, Beijing, and  Guangzhou were the most frequent responses to the question of where  companies had a facility or other presence among all of the Chinese  locations listed in our questionnaire (listed in order of frequency of  responses). In fact, only a few respondents (less than five) did not have a  facility or other presence in Shanghai, Beijing, or Guangzhou. About one  third of respondents reported having facilities or some other presence in all  three of these locations, while about two thirds of respondents reported  having a presence in locations beyond Shanghai, Beijing, and Guangzhou.  Figure 6 shows the number of companies that reported having a facility or  other presence in each location in China listed in our questionnaire.
section_title: Respondents’ Business Relationships in China
paragraphs: Respondents reported that they engage in a range of business relationships  in their many locations throughout China. More than two fifths of  respondents reported having one type of business relationship; about one  third of the respondents had two types of relationships; and about one  quarter of the respondents reported three or more types of business  relationships there. Wholly owned foreign enterprises, joint ventures, and  representative offices were the most frequently reported types of business  relationships, respectively. Figure 7 displays the number of respondents  that reported each type of business relationship.
States and the number of employees in China. The number of employees in  the United States varied from none (such as a company incorporated in the  United States but with all employees in China) to 90,000. Most of the  companies that completed our questionnaire, however, were large  companies. Less than 15 percent of respondents reported that they had 500  or fewer employees in the United States. The number of employees that  companies reported having in China ranged from zero to 8,000. Almost two  thirds of respondents reported that they had 500 or fewer employees in  China.
section_title: Limitations
paragraphs: All firms that responded to our questionnaire were assured that their  responses would remain confidential. In spite of this, due to the sensitive  and/or proprietary nature of the topics discussed, it is possible that the data  presented in this report reflect the views of respondents only to the extent  to which they felt comfortable sharing them with an agency of the U.S.  Congress. In addition, respondents reported varied knowledge of China’s  WTO commitments and their application to their companies.
subsections: section_title: Measures Taken to Address Limitations
paragraphs: Other potential sources of errors associated with the questionnaire, such as  question misinterpretation and question nonresponse, may be present. We  included steps in the development of the questionnaire, the data collection,  and data analysis to reduce possible nonsampling errors. We developed this  questionnaire based on the experience we gained administering the  instrument for our 2002 survey of U.S. companies with a presence in China.  In addition, we solicited feedback from internal and external parties on a  draft of this year’s questionnaire. We pre-tested the questionnaire with  eligible representatives of U.S. companies with a presence in China to help  ensure that our questions were interpreted correctly and that the  respondents were willing to provide the information required.
We addressed possible interviewer bias, including the fact that we  conducted some interviews by telephone, by ensuring that all respondents  had copies of the instrument in front of them when we conducted our  interviews. We compared the results of our questionnaire to those of recent  surveys of U.S. companies in China that were conducted by the U.S.-China  Business Council and the American Chambers of Commerce in China and  in Shanghai. While these surveys targeted different populations of U.S.  companies in China and had low response rates, we noted that both had a  few questions that were similar to ones we used and that both obtained  results that were broadly similar to ours.
We did our work in the Washington, D.C., area, and in Beijing, Hong Kong,  and Shanghai, China. We performed our work from October 2002 to  January 2004 in accordance with generally accepted government auditing  standards.
section_title: Questionnaire of U.S. Companies in China (and U.S. Nonprofit Agricultural Organizations) on China-WTO Issues
paragraphs: 2003 Questionnaire of U.S.
We’d like to start off with a few background questions that will help us learn about your company’s  business operations (organization’s operations) in China in the ____________ industry.
Q1) First of all, could you please provide some background information about your company’s  business operations (organization’s operations) in the ____________ industry in China?
N (Total company representatives and nonprofit agricultural organizations) = 93  N (Total company representatives without nonprofit agricultural organizations) = 82  N (Agricultural companies) = 5  N (Nonprofit agricultural organizations) = 11  N (Banking companies) = 10  N (Machinery companies) = 53  N (Pharmaceutical companies) = 12  N (Other) = 2  *Q1a) (for agricultural organizations only)  Do all U.S. sales of your main commodity  commonly go through your organization?
Q2) Currently, what forms of business investment and operations does your company have  in China? N =  82      1.  [] Agent/Distributor in China       2.  [] Representative Office       3.  [] Minority Equity Joint Venture       4.  [] Majority Equity Joint Venture       5.  [  ] Contractual Joint Venture       6.  [  ] Foreign-invested Stock Companies       7.  [] Wholly Owned Foreign Enterprise       8.  [] Other (Please describe.)
Q3) Where in China does your company have facilities or any other presence? N = 81 t) Liaoning (except  Shenyang) i) Guizhou & Yunnan    ab) Western province (Any)  (Shaanxi, Gansu, Qinghai,  Ningxia, Xinjiang, & Tibet)
Q4) Approximately how many permanent, full-time employees does your company  (organization) have in the United States and in China? N = 82 a) Approximate number of permanent full-time employees in the United States    b) Approximate number of permanent full-time employees in China ________  Now we’d like to ask you some questions about your company’s (organization’s)  experiences in your industry since China joined the World Trade Organization in  December 2001.
Q5a) Please look at the list of China’s WTO reform commitment areas.  Which are  important to your company (organization) and why?
Tariff & nontariff trade restrictions (increased market access)
1.  Tariffs, fees, & charges     N=79  (Ag Org N =10)  2.  Quotas and other quantitative import restrictions (licensing & tendering requirements)     N=78  (Ag Org  N=11)  3.  Standards, certifications, registration, & testing requirements (product safety, animal, plant, & health standards, etc.)
N=78  (Ag Org N=11)  4.  Customs procedures & inspection practices     N=78  (Ag Org N=11)  5.  Export restrictions     N= 77  (Ag Org N=9)  6.  Market access for services  N = 79  (Ag Org N=9)
Investment-related measures (liberalized foreign investment) 7.  Government requirements stipulating minimum amount of production that must be exported     N= 78  (Ag Org N=10)  8.  Foreign exchange restrictions (including balancing & repatriation of profits)     N=79  (Ag Org N=10)  9.  Technology transfer requirements  N=77  (Ag Org N=10)  10.  Local content requirements  N=76  (Ag Org N=10)  11.  Scope of business restrictions for goods (types you can provide, customers you can do business with, number of  transactions you can conduct, & where you can conduct business geographically)     N=76  (Ag Org N=11)  12.  Scope of business restrictions for services (types you can provide, customers you can do business with, number of  transactions you can conduct, & where you can conduct business geographically)     N=75  (Ag Org N=10)  13.  Restrictions on partnerships & joint ventures (choice of partner & equity limits)     N=77  (Ag Org N=10)  14.  Establishment & employment requirements (capital, deposit, years in practice, threshold sales, forced investment, &  nationality/residency requirements)     N=77  (Ag Org N=10)  15.  Trading rights (ability to import & export)     N=77  (Ag Org N=10)        16.  Distribution rights (retail, wholesale and courier)     N=78  (Ag Org N=10)  17.  Subsidies (for Chinese firms or for export)     N=78  (Ag Org N=11)  18.  Operation of state-owned enterprises       N=76  (Ag Org N=10)  19.  Price controls including dual and discriminatory pricing    N=76  (Ag Org N=10)  20.  Equal treatment (in taxation, access to funding, and under Chinese law)   N=76  (Ag Org N=10)  21.  Consistent application of laws, regulations, & practices (within & among national, provincial & local levels)     N=78  (Ag  Org N=10)  22.  Transparency of laws, regulations, & practices (publishing and making publicly available)    N=78  (Ag Org N=11)  23.  Enforcement of contracts & judgments/Settlement of disputes in Chinese court system    N=77  (Ag Org N=11)  24.  Independence of judicial bodies    N=77  (Ag Org N=10)  25.  Intellectual Property Rights    N=76  (Ag Org N=10)  26.  China’s application of safeguards against U.S. exports (antidumping and other legal actions against import surges)   N=73 (Ag Org N=10)
Q5b) Now that you’ve thought about the commitments, could you please tell us which three  are most important to your company (organization), in order of importance? (Please  review the list of commitments when answering this question.)  a) Which is the most important? ________   b) Which is the second most important?  _______  c) Which is the third most important?  _______ Q6) Overall, based on your company’s (organization’s) experience, to what extent  – if any - has China actually made reforms in the commitment areas that are  important to your company (organization)?  Have they done so to a…  N= 77 (Ag Org N=11)
1. [ (3)]  Great extent  2. [ (2)]  Moderate extent   3. [ (4)]  Some or little extent  4. [  (1) ]  No extent   5.   Don’t know/No basis to judge  Follow up:  Please explain your response.
Q7) Please look at the list of WTO-related reform commitments again.  Based on your  company’s (organization’s) experience in your industry, to what extent has China actually  made reforms in these commitment areas since joining the WTO?  If you are not familiar  with any of the reform commitments, please indicate that you have no basis to judge. (Please respond according to the extent scale.) (i) (ii) (iii) (iv) (v)
Tariff & nontariff trade restrictions (increased market access) 1.  Tariffs, fees, & charges  N=79  (Ag Org N=11) (1) (0) (1) (4) (5)
2.  Quotas and other quantitative import restrictions (licensing &   (5) (2) (2) (2) (0) tendering requirements)   N=80  (Ag Org N=11) 3.  Standards, certifications, registration, & testing requirements   (0) (2) (4) (2) (2) (product safety, animal, plant, & health standards, etc.)  N=79  (Ag  Org N=10)  4.  Customs procedures & inspection practices  N=80  (Ag Org N=11) (1) (1) (5) (3) (1)
5.  Export restrictions    N=80  (Ag Org N=11) (9) (0) (0) (0) (2)
6.  Market access for services   N=80  (Ag Org N=11) (11) (0) (0) (0) (0)
Investment-related measures (liberalized foreign investment) 7.  Government requirements stipulating minimum amount of   (9) (1) (0) (0) (0) production that must be exported   N=80  (Ag Org N=10)  8.  Foreign exchange restrictions (including balancing & repatriation   (9) (0) (0) (1) (0) of profits)   N=79  (Ag Org N=10)  9.  Technology transfer requirements  N=78  (Ag Org N=10) (10) (0) (0) (0) (0)
10.  Local content requirements  N=77  (Ag Org N=10) (10) (0) (0) (0) (0)
11.  Scope of business restrictions for goods (types you can provide,   (9) (0) (1) (0) (0) customers you can do business with, number of transactions you can  conduct, & where you can conduct business geographically)  N=78 (Ag Org N=10) 12.  Scope of business restrictions for services (types you can   (10) (0) (0) (0) (0) provide, customers you can do business with, number of transactions  you can conduct, & where you can conduct business geographically)
N=77  (Ag Org N=10) 13.  Restrictions on partnerships & joint ventures (choice of partner &   (9) (0) (1) (0) (0) equity limits)  N=77  (Ag Org N=10) 14.  Establishment & employment requirements (capital, deposit,   (9) (1) (0) (0) (0) years in practice, threshold sales, forced investment, &  nationality/residency requirements)  N=78  (Ag Org N=10)  15.  Trading rights (ability to import & export)    N=79  (Ag Org   (2) (2) (4) (1) (2)
N=11)  16.  Distribution rights (retail, wholesale and courier)  N=79  (Ag Org   (5) (1) (1) (3) (1)
N=11)  17.  Subsidies (for Chinese firms or for export)  N=79  (Ag Org   (5) (3) (3) (0) (0)
N=11)  18.  Operation of state-owned enterprises   N=77  (Ag Org N=11) (6) (2) (1) (2) (0)
19.  Price controls including dual and discriminatory pricing    N=78  (9) (2) (0) (0) (0) (Ag Org N=11)  20.  Equal treatment (in taxation, access to funding, and under   (5) (3) (1) (1) (1)
Chinese law)  N=79  (Ag Org N=11)    21.  Consistent application of laws, regulations, & practices (within &   (1) (2) (5) (3) (0) among national, provincial & local levels)  N=79  (Ag Org N=11)  22.  Transparency of laws, regulations, & practices (publishing and   (1) (2) (5) (2) (1) making publicly available)  N=79  (Ag Org N=11)  23.  Enforcement of contracts & judgments/Settlement of disputes in   (5) (2) (1) (2) (0)
Chinese court system  N=78  (Ag Org N=10)  24.  Independence of judicial bodies  N=79  (Ag Org N=10) (6) (2) (2) (0) (0)
25.  Intellectual Property Rights  N=80  (Ag Org N=10) (7) (2) (1) (0) (0)
26.  China’s application of safeguards against U.S. exports   (8) (1) (0) (0) (0) (antidumping and other legal actions against import surges)  N=79 (Ag Org N=9)
Q8) Overall, what impact has China’s implementation of its WTO commitments had on  your company’s (organization’s members) ability to do business in China? N=80 (Ag Org  N=11) (Summarize the answers with the following prompt:  Overall, would you say that the impact  has been….)  1. [ (4)]  Very positive  2. [ (4)]  Generally positive   3. [ (1)]  Little or no impact  4. [  (2)]  Generally negative   5. [       ]  Very negative  6.   Don’t know/No basis to judge  Follow-up:  Does your company (organization) have any expectations about the  likely impact in two years’ time?
Q9a) Is the United States Government doing anything on your behalf to ensure that  China’s WTO commitments are implemented?  N=55  (Ag Org N=11)
Follow-up:  Is the USG doing anything on your behalf about IPR commitments?
N=57 (Ag Org N=9)
Q9b) How satisfied or dissatisfied are you with the United States Government’s efforts to  ensure that China’s WTO commitments are implemented? N=80  (Ag Org N=11)  1. [ (4)]  Very satisfied  2. [(6)]  Generally satisfied   3. [ (1)]  As satisfied as dissatisfied  4. [      ]  Generally dissatisfied   5. [      ]  Very dissatisfied  6. [    ]  Don’t know/No basis to judge  Follow-up (If applicable):  How satisfied are you with the U.S. Government’s efforts  to ensure that IPR commitments are implemented?
Q10) Has your company (Have your organization’s members) contacted any professional  associations or government agencies in China or the United States about any WTO issues?  questionnaire administration to account for differences in how respondents interpreted the  2.   No             GO TO QUESTION 11.  3.   Not sure           GO TO QUESTION 11.
Follow-up if the answer is “Yes.”   Which ones?  (Check off the boxes that correspond to the organizations.)   a.  China’s Ministry of Commerce   b.  Other Chinese government agencies  or officials (Please specify) e.  U.S. trade associations representing  your company’s interests  h.  U.S. Department of Agriculture  i.  U.S. Department of Commerce  j.  U.S. Department of State  l.  Other (Please specify): Follow up:  Whom did you contact on which issues?
What happened after you contacted these organizations and/or agencies?
Q11) Some reform commitments have to be made by different levels of government, such as  the central government or the provincial or city governments.  Has your company  (organization) experienced any differences in how reforms have been implemented  within and among national, provincial and local levels of government?
Q12) Please tell me whether your company’s (organization members’) activities in each of  the following areas have increased, stayed about the same, or decreased since China  joined the WTO in December 2001.  (Please respond using the scale provided.)  (i) (ii) (iii) (iv)
1.  Number of facilities in China   N=82 (Ag Org  (2) (1) (0) (6)
N=9)   2.  Value of total investments in China  N=82 (Ag  (0) (1) (0) (8)
Org N=9)   3.  Number of employees in China  N=82 (Ag Org  (4) (1) (0) (5)
N=10)   4. Number of employees in the U.S.  N=80 (Ag   (0) (3) (1) (6)
Org N=10)   5.  Scope of product distribution in China  N=81  (8) (0) (0) (2) (Ag Org N=10)   6. Number of products distributed in China  N=82  (7) (1) (0) (3) (Ag Org N=11)   7.  Number of services provided in China  N=82  (0) (0) (0) (11) (Ag Org N=11)   8. Number of ventures with Chinese partners    (0) (1) (0) (10)
N=82 (Ag Org N=11)   9.  Value of ventures with Chinese partners  N=82  (0) (1) (0) (9) (Ag Org N=10)   10.  Value of exports to China  N=82 (Ag Org  (8) (2) (0) (0)
N=10)   11.  Value of exports from China  N=82 (Ag Org  (2) (0) (0) (9)
N=11)   12.  Volume of production in China  N=82 (Ag   (0) (1) (0) (10)
Org N=11)   13.  Company revenue stream  N=82 (Ag Org  (4) (2) (0) (4)
N=10)
Q13) Is there anything else you would like to tell us regarding China’s joining the WTO,  and its implementation of its WTO commitments?
Thank you for your participation and help!
section_title: Profile of U.S. Investment and Trade with China
paragraphs: U.S. investment and trade with China have grown significantly over the  past decade. As a result of significant new investments from Hong Kong,  the United States, Japan, and Taiwan; China surpassed the United States as  the world’s largest recipient of foreign direct investment flows in 2002.  However, China still represents a very small share of the total stock of U.S.  investments worldwide. In terms of trade in goods and services, China is  the United States’ fourth largest trading partner, after Canada, Mexico, and  Japan. Both U.S. exports to China and imports from China have risen  rapidly over the past decade. However, the United States imports  significantly more from China than it exports to China, resulting in a U.S.  bilateral trade (goods and services) deficit with China of $102 billion in  2002, according to U.S. trade statistics.
subsections: section_title: U.S. Investment in China
paragraphs: As of the end of 2002, U.S. companies had a total stock of direct  investments in China of $10.3 billion—more than 10 times the  approximately $900 million invested a decade earlier in 1993. However,  compared to the $1.5 trillion of accumulated U.S. direct investments  worldwide, China accounts for less than 1 percent of total U.S. investment.  In terms of new investment inflows, though, China receives significant  investments from several countries, in addition to the United States. In  2002, according to Chinese statistics, nearly $53 billion in foreign direct  investment flowed into China, making it the world’s top investment  destination (rather than the United States) for the first time. Hong Kong  was by far the largest supplier of foreign direct investment to China, with  about 34 percent of the total, followed by the United States (over 10  percent), Japan (8 percent), and Taiwan (about 8 percent).
U.S. direct investment in China has largely focused on manufacturing  sectors, particularly computer and electronic products and chemicals.  Mining has also been a significant area of U.S. investment. Figure 8 shows  the distribution of the stock of U.S. direct investment in China as of 2002.
The pattern of U.S. investment in China, however, differs from the  worldwide pattern of U.S. investment. Figure 9 shows that manufacturing  accounts for about 26 percent of U.S. investments worldwide compared  with about 60 percent of investments in China (fig. 8). Similarly, globally  the United States has about one third (33 percent) of the stock of its  investments in other industries (e.g., agriculture, construction, retail trade,  and transportation and warehousing) compared with about 10 percent of  its investments in China in the other industries category. Finance and  depository institutions (except insurance) is the third largest area of U.S.  global investments, accounting for about 20 percent in 2002, while in China,  only about 3 percent of U.S. investments are in this area. This difference in  the pattern of U.S. investment in China compared to global patterns is not  surprising, because China is a developing country, has an abundant supply  of relatively low-cost labor, and is a growing producer of manufactured  goods worldwide. In contrast, the European Union, Canada, and Japan,  which accounted for well over half of the stock of U.S. direct investment  abroad, are developed countries with economies similar to the United  States.
section_title: U.S. Trade with China
paragraphs: U.S. trade in goods and services with China has also grown significantly  during the past decade. From 1993 to 2002, U.S. exports to China grew at an  average annual rate of 12 percent, compared with 5 percent for U.S.  exports worldwide during the same time period. Similarly, U.S. imports  from China grew at an average annual rate of 17 percent, while overall U.S.  imports grew at 8 percent annually. Consequently, China was the U.S.’s  fourth largest trading partner in 2002 (after Canada, Mexico, and Japan),  with about $27 billion in U.S. exports (goods and services) and about $129  billion in U.S. imports from China (goods and services). In 2003, goods  trade data show that this rapid growth continued, with U.S. exports to  China at about $27 billion, an increase of 30 percent from 2002. Similarly,  U.S. imports from China in 2003 were about $152 billion, an increase of 21  percent from 2002. Services trade data for 2003 were not available as of the  date of this report.
As a result of the difference between U.S. exports and imports, the United  States has had a growing bilateral trade deficit with China. In 2002, the U.S.  bilateral trade deficit with China reached $102 billion, the largest with any  country. The deficit resulted from the $104 billion difference in goods trade  (as opposed to services trade). The United States maintained about a $2  billion surplus in services trade with China in 2002.
In 2003, the U.S. bilateral goods trade deficit with China expanded further,  to about $125 billion, an increase of about $21 billion. The increase was  primarily due to an increase in the trade deficit in computers, electrical  equipment, and appliances, as well as smaller increases in textiles, apparel,  and leather; metal and machinery (except electric) products; and  miscellaneous manufactured components, including furniture. However,  the U.S. bilateral trade surplus with China in agriculture, food and tobacco  products, and minerals rose from about $260 million in 2002 to about $2.8  billion in 2003. Figure 10 shows U.S. exports and imports of goods by broad  industry category in 2003.
In terms of U.S. goods exports, China ranks sixth after Canada, Mexico,  Japan, the United Kingdom, and Germany. Top U.S. goods exports to China  in 2003 included: computers, electrical equipment, and appliances (23  percent); agriculture, food and tobacco products, and minerals (20  percent); metal and machinery (except electrical) products (16 percent);  petroleum and chemical products (16 percent); and transportation  equipment (12 percent). U.S. goods exports to China increased by 30  percent from 2002 to 2003, compared to an increase of 3 percent for U.S.  goods exports worldwide during the same period. Figure 11 shows the  relative share of broad industry groups in U.S. exports to China in 2003.
In terms of U.S. imports of goods, China is the second largest foreign  supplier to the U.S. market after Canada and ahead of Mexico. Top U.S.  goods imports from China in 2003 also included computers, electrical  equipment, and appliances (36 percent). As previously noted, U.S. direct  investment in China was relatively large in the computer and electronic  products area. A share of trade in this area between the United States and  China is likely to be intracompany trade, in which components are  produced in one country and exported to the other country. The  components are then used to produce final goods that are ultimately sold in  each market, as well as other countries. Other important imports included  miscellaneous manufactured components, including furniture (21 percent)  and textiles, apparel, and leather (19 percent). Figure 12 shows the relative  share of broad industry groups in U.S. imports from China in 2003.
Services trade with China is less significant to the United States relative to  services trade with other partners. Unlike goods trade, China is not in the  top 10 importers or exporters of services trade with the United States. In  2002, the United States exported about $6 billion worth of services to  China, compared with about $280 billion in exports worldwide. Other  private services (such as education, insurance, telecommunications, and  business, professional, and technical services) generated $2.6 billion in  sales, followed by other transportation such as freight charges from  transportation of goods by ocean, air, or land, and port charges ($1.4  billion). The United States imported about $4 billion in services from China  in 2002, compared with about $205 billion worldwide. Top U.S. imports of  services from China included other transportation ($2.3 billion) and travel  services ($1.1 billion). Figure 13 shows the value of U.S. services exports  and imports with China in 2002 by category.
section_title: Sources and Methods
paragraphs: In order to provide background on U.S. investment and trade with China,  we collected and analyzed the most recently available direct investment  abroad and cross-border private services trade data from the Bureau of  Economic Analysis (BEA) as well as goods trade data from the Bureau of  the Census. We collected the most recently available Census trade data  through the U.S. International Trade Commission’s Dataweb. We also  collected information on worldwide investment in China from reports from  the Organization for Economic Cooperation and Development and the  Congressional Research Service (based on Chinese government data  sources). Since these data are used solely in this appendix as background  information to the report, we did not assess the reliability of these data. For  more information on BEA’s methodology for collecting U.S. direct  investment abroad data, see “U.S. Direct Investment Abroad” in the  September 2003 issue of the Survey of Current Business and “U.S. Direct  Investment Abroad: 1994 Benchmark Survey, Final Results” located at  BEA’s Web site at www.bea.gov. For more information on BEA’s  methodology for collecting U.S. international services data, see “U.S.  International Services” in the October 2003 issue of the Survey of Current  Business also available at BEA’s Web site.
The industry categories that BEA and Census use do not correspond to the  industry classifications used in our questionnaire. Because of this, and  because the number of firms that responded to our questionnaire are not  representative of all companies in China nor of all U.S. companies in China  from these industries, these responses are not representative of the  industry groups used in this profile of U.S. investment and trade with  China. In addition, the industry categories used by BEA and Census have  changed since our 2002 report. Therefore, the figures in this report and our  prior GAO report are not comparable. In order to present broader industry  groups, we combined some Census data categories. These groupings are  presented in table 5. Census goods trade categories are based on the North  American Industry Classification System (NAICS). We collected these data  at the three-digit level of aggregation and combined product categories into  broader groups. These NAICS codes are listed in table 5. For services trade  data from BEA, we separated the category “financial services” from the  broader category of “other services.”
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, Martin de Alteriis, Shakira Edwards,  Victoria Lin, Rona Mendelsohn, Beverly Ross, and Timothy Wedding made  key contributions to this report.
section_title: Related GAO Products
paragraphs: World Trade Organization: Ensuring China’s Compliance Requires a  Sustained and Multifaceted Approach. Washington, D.C.: GAO-04-172T,  October 30, 2003.
GAO’s Electronic Database of China’s World Trade Organization  Commitments. Washington, D.C.: GAO-03-797R, June 13, 2003.
World Trade Organization: First-Year U.S. Efforts to Monitor China’s  Compliance. Washington, D.C.: GAO-03-461, March 31, 2003.
World Trade Organization: Analysis of China’s Commitments to Other  Members. Washington, D.C.: GAO-03-4, October 3, 2002.
World Trade Organization: Selected U.S. Company Views about China’s  Membership. Washington, D.C.: GAO-02-1056, September 23, 2002.
World Trade Organization: Observations on China’s Rule of Law  Reforms. Washington, D.C.: GAO-02-812T, June 6, 2002.
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