World Trade Organization: Selected U.S. Company Views about China's Membership
Published: 2002-09-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: China's entry into the World Trade Organization (WTO) on December 11, 2001, brought the world's seventh largest economy under global trade liberalizing rules. If implemented, China's commitments will open China's economy and reform its trading activities, thereby expanding U.S. companies' opportunities for investing in China and for exporting goods, agricultural products, and services to China. Understanding U.S. companies' expectations is fundamental for policymakers to judge the degree to which the benefits of China's WTO membership are being realized. GAO analyzed U.S. companies' views about (1) the importance of, (2) the anticipated effects of, and (3) prospects for China implementing its WTO commitments. GAO surveyed a random sample of 551 U.S. companies and interviewed 48 judgmentally selected companies in four cities in China. Survey results reflect responses from 191 companies--a response rate of 38 percent--and may not reflect the views of all U.S. companies with activities in China.
section_title: What GAO Found
paragraphs: U.S. companies that responded to the GAO survey reported that most of China's WTO commitments are important to them. These companies, which already have a presence in China, identified rule of law--related reforms as more important than other reforms to increase market access, to liberalize foreign investment measures, and to make fundamental changes to continue China's transition to a market economy. Specifically, WTO commitments in the areas of intellectual property rights; consistent application of laws, regulations, and practices; and transparency of laws, regulations, and practices emerged as the most important areas in which China made commitments. Most companies responding to GAO's survey expected that China's WTO commitments would have a positive impact on their business operations, that the impact has already begun or would begin within 2 years and that it would lead to an increase in their volume of exports to China, market share in China, and distribution of products there. However, some company representatives whom GAO interviewed in China believed that China's implementation would be incremental. Survey respondents expected that most of the WTO--related commitment areas listed in GAO's survey would be difficult for Chinese officials to implement. Companies expected the important rule of law--related commitment areas to be the most difficult commitments to carry out and had mixed expectations about implementation for different government levels and geographic areas across China. Besides rule of law--related reforms, company representatives described how they expect that China's need to protect its domestic interests and China's culture with regards to business relationships might create impediments to implementation.

section_title: Letter
paragraphs: China’s December 2001 entry into (accession to) the World Trade  Organization (WTO) represents a major step in China’s recent reform  efforts, formalizing China’s commitment to abide by global trade rules.  China’s accession agreement included commitments to remove trade  barriers and open its markets to foreign companies and their exports in  numerous product sectors and for a wide range of services. The United  States is China’s second largest source of foreign direct investment, while  China is the ninth largest destination for U.S. exports. Successful  implementation of China’s WTO commitments may eventually provide U.S.  companies with greater access to China’s market of about 1.3 billion  consumers and result in fundamental changes that can foster China’s  continued transition to a market economy. Therefore, U.S. companies are  interested in how China’s implementation of its WTO commitments will  affect their ability to do business in China.
Related to your request that we undertake a long-term body of work  regarding China’s membership in the WTO we analyzed U.S. companies’  views about (1) the importance of WTO-related commitments to their  business operations in China, (2) the anticipated effects of China’s WTO- related reforms on their businesses, and (3) China’s prospects for  implementing these reforms.
To perform our work, we surveyed 551 randomly selected U.S. companies  with a presence in China, and interviewed 48 judgmentally selected  companies in 4 cities in China, as well as 2 U.S. trade associations with a  presence in China. Our survey results reflect responses from 191  companies. Because of the low response rate to our mail survey (38  percent), our results may not be generalizable to the larger population of all  U.S. companies doing business with China. Hence, our analysis is  restricted to companies that responded to our survey. However,  respondents included companies with business activities in all of the  agriculture, manufacturing, and services categories listed in our survey as  well as facilities or other types of presence in all of the locations in China  listed in our survey. For some questions, we grouped China’s numerous  WTO commitments into 30 areas, which encompassed fundamental  market, market access, investment measure, and rule of law-related  reforms. A detailed description of our scope and methodology is included  in appendix I of this report; responses to the survey and structured  interviews are included in appendixes II and III, respectively, and a profile  of respondents is included in appendix IV.
subsections: section_title: Background
paragraphs: China became the 143rd member of the WTO on December 11, 2001, after  almost 15 years of negotiations. These negotiations resulted in  commitments to open and liberalize its economy and offer a more  predictable environment for trade and foreign investment in accordance  with WTO rules. The United States and other WTO members have stated  that China’s membership in the WTO provides increased opportunities for  foreign companies seeking access to China’s vast market. China is already a  major destination of U.S. investment overseas, and China and the United  States are already major trading partners.
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.  They range from the rules for how China’s trade regime will be reformed in  accordance with WTO principles to specific market access commitments  for goods and services. A number of commitments are to be phased in over  10 years.
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. Many commitments seek to improve the rule  of law. Generally, China agreed to ensure that its legal measures would be  consistent with its WTO obligations. These rule of law-related  commitments include broad reforms to publish and translate trade-related  laws and regulations and apply them uniformly at all levels of government  and throughout China. China will have to adhere to internationally  accepted norms to protect intellectual property rights and enforce relevant  laws and regulations relating to patents, trademarks, copyrights, trade  secrets, and integrated circuits. China also made a substantial number of  other rule of law-related commitments regarding transparency, judicial  review, and nondiscriminatory treatment of businesses.
The accession agreement also includes market access commitments for  goods, including commitments that will reduce tariffs on agricultural and  industrial products from about 14 percent in 2001 to less than 10 percent in  2010, 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, including sectors that are  important to U.S. companies such as banking, insurance, and  telecommunications. However, some limitations, including those that  require joint ventures with Chinese partners in some sectors or restrict the  amount of foreign investment, will continue.
It is important to note that, in addition to the commitments set forth in the  accession agreement, WTO membership confers obligations and rights on  China. For example, membership obligates China to adhere to more than 20  existing multilateral WTO agreements that cover various areas of  international trade. China, like all other WTO members, must adhere to the  WTO’s three main agreements governing key areas of international trade:  (1) the General Agreement on Tariffs and Trade, (2) the General Agreement  on Trade in Services, and (3) the Agreement on Trade-Related Aspects of  Intellectual Property Rights. Other specialized multilateral WTO  agreements that apply to China include the Agreement on Trade-Related  Investment Measures, the Agreement on Agriculture, the Agreement on  Technical Barriers to Trade, and the Agreement on Subsidies and  Countervailing Measures. Numerous sections of China’s protocol and  working party report refer to or reiterate specific provisions of a number of  these underlying WTO agreements. Membership also gives China various  rights under WTO rules. For example, the Understanding on the Rules and  Procedures Governing the Settlement of Disputes gives access to a formal  mechanism for resolving disputes over WTO trade-related issues.
section_title: U.S.-China Investment and Trade
paragraphs: Eventual implementation of China’s WTO commitments should result in  greater freedom for American firms to invest and trade in China, according  to the U.S. Department of Commerce. The United States was the second largest foreign investor in China in 2000. China was the ninth largest  destination for U.S. exports in 2001. In 2001, U.S. companies exported  about $18 billion of merchandise to China. The major exports included  transport equipment, electrical machinery, office machines, general  industrial machinery, oilseeds, and fruits. Figure 1 shows the increasing  level of U.S. foreign direct investment in China. Figure 2 shows the  increasing levels of U.S. trade with China. See appendix V for additional  information regarding U.S.-China investment and trade.
section_title: WTO-related Reforms Are Important to U.S. Companies
paragraphs: U.S. companies reported that many WTO-related commitment areas were  important to them, according to our survey of U.S. companies with  business activities in China. The 30 commitment areas included market  access, investment measures, fundamental market, and rule of law-related  reforms. Thirteen of the 30 commitment areas were important to a majority  of the responding companies. Commitment areas related to enhancing the  rule of law emerged as most important both for those who responded to  our survey and for those who took part in our structured interviews. The  relative importance of some other commitments varied among  manufacturing and services firms but was consistent with the nature of  their operations. In interviews, company representatives emphasized and  explained the importance of key commitments.
subsections: section_title: Rule of Law-related Commitment Areas Are Most Important
paragraphs: We found that survey respondents were particularly focused on reforms  related to enhancing the rule of law. At least three quarters of respondents  selected intellectual property rights; consistent application of laws,  regulations, and practices; and transparency most frequently when asked  to rate the importance of individual commitment areas to their companies  (based on a list of 30 WTO-related commitment areas that we specified in  the survey). These results did not materially change when we compared the  survey results for small- and medium-sized companies and large  companies. Other than those related to rule of law, respondents most  frequently selected trading rights (the right to import or export); tariffs,  fees, and charges; and scope of business restrictions as the commitment  areas important to their companies. All 30 commitment areas were  important to at least one quarter of our respondents. Table 1 shows the  number of survey respondents that said each WTO-related commitment  area was important to their company.
The relative importance that companies assigned to rule of law-related  commitment areas (compared to those related to other reforms) generally  remained consistent for agricultural, manufacturing, and services firms.  These three types of firms most frequently identified rule of law-related  commitments as important. However, given the nature of their businesses,  these firms differed in the areas that they identified next most frequently.  Manufacturers assigned greater importance to tariffs, fees, and charges.  Manufacturers as well as agricultural firms also assigned greater  importance to trading rights (the ability to import and export) and customs  procedures and inspection practices. This is consistent with the needs of  manufacturers to move goods into and out of China. Services firms  assigned greater importance to commitment areas related to the scope of  business restrictions and market access for services, consistent with the  historical limitations on their ability to operate in China and their need for  approval from the Chinese government in order to do business there.  Structured interviews with representatives of U.S. companies in China  generally corroborated the survey results regarding important WTO-related  commitment areas.
section_title: Company Views on Important Commitments
paragraphs: Many survey respondents and company representatives we interviewed  emphasized the importance of China’s rule of law-related reforms to the  functioning of their operations in China and pointed to specific problems  with current laws, regulations, and practices. For example, in order to  explain the importance assigned to certain commitment areas, one  company representative noted that because licensing procedures in China  are notoriously opaque, transparency is a priority for his company. One  survey respondent’s written comments emphasized the importance of equal  treatment under the law, saying that “getting a level playing field for U.S.  business versus Chinese competitors is critical.” Another representative of  a large multinational company told us that rule of law-related reforms are  important, because China’s application of product standards and other  measures varies greatly between localities. Furthermore, this company  representative said that Chinese officials often promulgate regulations and  procedures without sufficient comment periods, the regulations  themselves are often deliberately vague, and intellectual property rights  (IPR) violations are still rampant. Another individual told us about the  biggest problem his company had encountered in China, which involved  the rule of law. Several years ago, his company won a court judgment  against a client who had failed to pay on a contract. Despite winning the  judgment, this U.S. company had been unable to collect the debt, and the  court had failed to take steps to enforce the judgment.
In addition to rule of law-related reforms, several company representatives  also explained the importance to their companies of a number of other  reforms, including (1) reductions in tariffs and nontariff barriers (market  access) and (2) the liberalization of investment-related measures. First,  several manufacturers discussed the importance of obtaining increased  market access through tariff reductions. One representative of a food  manufacturer explained that China’s implementation of its WTO  commitments would make it easier and cheaper to import the ingredients  used in his company’s products. Another representative of a manufacturing  firm reported that high tariffs were one of the most important issues for his  company. He noted that although tariffs have already come down on  several imported products, his company still pays high tariffs on certain  other products. Concerning nontariff barriers and reforms to China’s quota  system, one company representative explained that his company  sometimes encounters problems in selling products in China because  quotas reserve a portion of the market for domestic manufacturers. This  has caused problems because it lead to inventory overruns for his  company. Second, several representatives of various U.S. companies in  China also highlighted the importance of other reforms, such as  commitments liberalizing investment-related measures. For example, one  company explained that repatriating profits made in China still involves a  lengthy process. Representatives of another U.S. multinational company  that we interviewed complained about the difficulties that China’s  restrictive foreign exchange regime creates. This company maintains a  separate holding company in order to move renminbi (China’s currency)  from one joint venture to another within China. Finally, several companies  that provide services in China pointed out that numerous commitment  areas are important to them (indirectly) because they are important to their  clients’ ability to do business in China (directly).
section_title: Companies Expect Positive Results from China’s WTO Accession
paragraphs: Respondents to our survey expected China’s WTO accession and  implementation of its commitments to improve their ability to do business  in China and to increase their business with China. More than three  quarters of the companies generally expected a positive impact on their  business from China’s WTO commitments, and most expected to begin to  see this impact relatively soon—though some company representatives  indicated that the full impact would take time. Companies identified their  current business goals for China, and most companies we interviewed said  that their company’s goals had already changed to reflect China’s WTO  membership. Furthermore, companies generally expected that their  business activities in China would increase as a result of China’s  implementation of its WTO commitments, including their volume of  exports to China, market share in China, and distribution of products there.
subsections: section_title: Positive Impact Generally Expected Soon
paragraphs: A majority of the companies participating in our survey and interviews  expected a positive impact to eventually result from implementation of  China’s WTO commitments. Some companies had already experienced an  impact, and most companies expected to begin to experience an impact  within the next few years. Companies provided a variety of explanations  for their expectations regarding the eventual impact.
When asked what impact they expected China’s WTO commitments would  have on their companies, most survey respondents reported that they  expected a positive or very positive impact. These positive expectations  were generally consistent for firms in all sectors, but services firms had a  somewhat higher percentage (93 percent) of positive and very positive  expectations compared to manufacturing firms and agricultural firms (79  percent and 62 percent, respectively). Some respondents expected little or  no impact on their business in China. A smaller group of respondents  reported that they thought China’s WTO membership would have a  negative impact on their business. Figure 3 shows the expected impact of  implementation of China’s WTO commitments for respondents to both our  mail survey and to the structured interviews in China.
Most companies expected to begin to experience an overall business  impact from China’s WTO commitments in the next few years, but this view  was not unanimous. About one-fifth of survey respondents reported that  they expected an immediate impact or had already experienced an impact.  More than half of the survey respondents expected to begin to experience  an overall business impact from China’s WTO commitments sometime from  less than 1 year to 4 years. In contrast, a small fraction of respondents  expected to begin to experience an impact in 5 to 10 years or never  expected to experience an impact from China’s WTO commitments. About  one-tenth of respondents did not know or had no basis to judge how soon  their companies might begin to experience an impact. Table 2 summarizes  these company responses.
section_title: Company Views on Impact
paragraphs: Company representatives that we interviewed in China made comments  that lend support to the general expectation that change will be positive,  but many believed that China’s implementation would be incremental and  would be tempered by China’s desire to protect its workers. One  representative said that his company planned to boost investments and  build a national business in China. He explained that his company expected  to obtain trading rights and national treatment in taxes as a result of WTO.  Others explained that demand for services had already increased, that the  trajectory of the reforms resulted in immediate benefits, and that the  lowering of trade barriers had helped a great deal. One representative  noted that some impact began before accession, but that the full impact  from WTO implementation will be incomplete for some time to come.  Similarly, another individual stated that all the commitments would  eventually be implemented but that the time needed for implementing  different commitments would vary considerably. A representative who  agreed that it will take time for WTO concepts to take hold also said that  the impact is dependent on how forceful the central government continues  to be about WTO reform.
section_title: Broad Range of Goals for U.S. Companies in China Reflects China’s WTO Membership
paragraphs: Our survey of U.S. companies with a presence in China, which was  conducted soon after China’s accession to the WTO, asked respondents to  identify their current goals for doing business in China. The company goals  that survey respondents most frequently identified were “establish a  presence for the future,” “increase exports to China,” and “benefit from  lower labor costs,” as shown in table 3. Identification of these three  company goals follows logically from survey respondents’ identification of  the commitment areas that their companies considered important. First,  because many companies may want to establish a presence for the future,  this may explain why rule of law reform is important. Second, many  companies may want to increase exports to China. This may drive their  interest in lower market access restrictions resulting from China’s WTO  commitments. Third, some companies may want to take further advantage  of China’s low wages once China implements some fundamental market  reforms and liberalizes some investment measures. Even firms with a  history of more than 10 years in China identified these goals as priorities  for their companies.
Manufacturing, agricultural, and services firms reported slightly different  priorities in their companies’ most frequently identified goals. A larger  percentage of manufacturers identified benefiting from lower labor costs  (49 percent) and the cost or quality of raw materials (27 percent) in China  as company goals compared to agricultural or services firms (38 and 18  percent, and 0 and 12 percent, respectively). Similarly, a larger percentage  of manufacturers identified increasing exports to China (50 percent) as a  company goal than either agricultural or services firms (38 percent and 27  percent, respectively).
subsections: section_title: Company Views on Goals for China
paragraphs: More than half of the companies that we interviewed in China reported that  China’s official membership in the WTO had changed their company’s goals  and expectations for future business opportunities in China to a moderate  or great extent. Specifically, 16 company representatives said their goals  had changed to a great extent while 12 reported their goals had changed to  a moderate extent. When asked to describe the extent to which their  company’s goals had changed, responses varied widely and focused on  their companies’ operations. On one end of the spectrum were several  companies whose operations had already changed as a result of China’s  recent WTO membership. For example, one corporate representative in  China noted that China’s WTO membership had resulted in big increases in  demand for his company’s services and that his firm will also be allowed to  provide a wider range of services to its clients in the future. In another  example, a service provider looking forward to broader distribution rights  speculated that if China had not gained WTO membership, his company  would likely have withdrawn completely from China.
At the other end of the spectrum were companies whose goals remained  relatively unchanged. These companies focused on their ability to operate  in China regardless of China’s WTO commitments. One company  representative said, “We’re here, and we know how to operate.” This  respondent emphasized that he hoped that China’s WTO membership  would open new opportunities, but his company was not relying on that  possibility. Other representatives said that, “WTO does not change our  operations at all,” and that “we’ve been here a long time without WTO.”  Another company representative explained that the future will be more  open but that his company had already been planning for expansion for 5 to  10 years because China is a major focus of its Asia operations. Similarly,  another company representative noted that “WTO will improve the market  down the road, but the market exists with or without WTO.”
Finally, representatives of several companies that we interviewed  expressed uncertainty regarding how China’s WTO membership would  affect their companies’ goals and operations in China. Several firms with  agricultural interests or dependent on agricultural inputs for their  manufacturing operations discussed their early concerns about China’s  implementing rules and regulations, which indicated problems that could  affect their goals. One firm cited China’s promulgation of agricultural  regulations as well as recent prohibitions on investment in specific  agricultural sectors. A representative of another agricultural firm noted  that as a result of agricultural compliance issues that Chinese officials had  raised since China’s WTO accession, his business had experienced greater  difficulties doing business in China. A representative of a U.S. company  operating a joint venture in China summarized his company’s uncertain  expectations as follows: “Future goals depend on the whole dynamic of  forcing the Chinese government to be more liberal and systematic as well  as more fair in terms of legal protection.”
section_title: Company Activities Expected to Increase in China
paragraphs: In addition to expressing views on their companies’ goals in doing business  with China, survey respondents also indicated how the implementation of  China’s WTO commitments would affect their companies’ activities. About  85 percent of the respondents that completed this survey question  expected their companies’ overall activities in China to greatly or  somewhat increase. Almost 15 percent of the respondents expected their  overall activities to stay the same, while only one respondent expected  overall business activities to greatly decrease. Expectations for how the  implementation of China’s WTO commitments would affect specific  company activities are shown in figure 4.
Corporate representatives whom we interviewed reiterated these  expectations for an overall increase in company activities. Some  companies told us that they hoped to increase their manufacturing base,  their number of offices in China, and/or their investment in China in the  next few years. Other companies predicted that implementation of China’s  WTO commitments could create many additional business opportunities.  One company representative noted that there is currently a “boom  mentality” in China.
For a few business activities, survey respondents reported mixed  expectations regarding how they would be affected by the implementation  of China’s WTO commitments, as shown in figure 4. Specifically, an almost  equal percentage (about 50 percent each) of the respondents reported that  the geographic diversity of their companies’ investments in China would  either increase or stay about the same. With regard to investment in  existing facilities in China, 50 percent of the respondents expected their  companies’ activities to increase, while 47 percent expected their  companies’ activities to stay about the same. Fifty-four percent of the  respondents indicated that their investment in new facilities in China  would increase, while 44 percent indicated that their investments would  stay about the same.
At least 5 percent of the companies responding expected two activities to  decrease. First, ventures with Chinese partners will reportedly decrease for  16 percent of the respondents. Implementation of China’s WTO  commitments will allow foreign-invested enterprises in some sectors to  operate wholly owned foreign enterprises rather than being restricted to  joint ventures. For example, a services firm that we interviewed reported  that it has been restricted by requirements that it have Chinese partners but  hopes to transition to a wholly owned foreign enterprise in 3 to 5 years.  Second, competition from foreign or Chinese firms located in China will  reportedly decrease for 9 percent of the respondents. One respondent  addressed his company’s hopes that WTO will “level the playing field” for  U.S. companies in China. For example, leveling the playing field for U.S.  companies could include encountering decreased competition from China’s  state-owned enterprises as market forces lead to the further closure of  inefficient and unprofitable companies and as foreign-invested (joint  venture) enterprises lose the benefit of discriminatory practices once  China’s WTO-related reforms are implemented.
section_title: Companies Expect Impediments to Implementation of China’s WTO Reforms
paragraphs: U.S. companies with business activities in China expected a number of  impediments to implementation of China’s WTO reforms. Views varied  concerning the expected ease or difficulty of implementing specific  commitment areas, but we were able to identify some common themes  from our survey and structured interviews. Companies generally expected  many of China’s WTO commitment areas to be relatively difficult for  Chinese officials to implement, especially many of those they considered  important. Large numbers of respondents expected reforms to be generally  difficult or did not know what to expect in terms of WTO implementation  throughout specific locations in China and/or in terms of China’s various  levels of government. Companies also described numerous challenges that  China faces as it continues to reform its economy and implement its WTO  commitments.
subsections: section_title: Many Commitments Expected to Be Difficult to Implement
paragraphs: Companies with a presence in China had different expectations regarding  Chinese officials’ implementation of particular WTO commitments. Our  analysis of survey responses showed that 7 of the 30 commitment areas  listed in the survey ranked “High” in difficulty, 13 commitment areas ranked  “Medium” in difficulty, and 10 of the commitment areas ranked “Low” in  expected difficulty for the Chinese government to implement.  Furthermore, when asked whether each WTO commitment area would be  easy or difficult for the Chinese government to implement, respondents  expected that two-thirds of the commitment areas listed in the survey  would be relatively difficult to implement. However, large numbers of  respondents (sometimes as many as 50 respondents) did not know what to  expect concerning the ease or difficulty of specific commitment areas or  said some were not applicable to their business.
Companies most frequently identified five commitment areas related to  rule of law reform as the WTO commitments that they expected to be  relatively difficult to implement. Respondents also expected some non  rule-of-law-related commitment areas to be relatively difficult for Chinese  officials to implement. These included reforms to the operation of state- owned enterprises, which are related to fundamental market reforms; and  standards, certification, registration, and testing requirements, which are  related to market access reforms.   On the other hand, most of the  commitment areas that are related to reforming China’s foreign investment  measures were considered relatively less difficult for China to implement.  Table 4 shows the company responses indicating the commitment areas  deemed difficult for the Chinese to implement (in terms of the number of  “difficult” responses each commitment area received). Our interviews with  representatives of U.S. companies in China generally supported these  findings.
section_title: Difficult Commitments Also Most Important
paragraphs: In general, the commitment areas expected to be the most difficult to  implement were those that survey respondents also identified as most  important. Specifically, our analysis identified rule of law-related  commitment areas as the commitment areas of greatest importance to  respondents’ companies and also showed that respondents expected these  reforms to be the most difficult for China to implement, as shown in table 5.  Reforms to China’s state-owned enterprises (SOE) were also expected to  be difficult for China’s government officials to implement but were  relatively less important to survey respondents. Companies we interviewed  explained that reforming SOEs creates a huge challenge for the Chinese  and will take a number of years, but that other reforms will have a more  immediate impact on their companies’ ability to do business in China and  are consequently more important to them.
Our analysis identified another group of commitments respondents  expected to be both moderately important and moderately difficult for the  Chinese to implement. This group is comprised of 37 percent of the  commitment areas and includes a range of fundamental market, market  access, and investment measure-related reforms. Some commitment areas  related to these three types of reforms may appear easier for Chinese  officials to implement, because, in some cases, the reforms require specific  regulatory or legal changes rather than more systemic legal changes  associated with rule of law.
Finally, our analysis showed that various other commitment areas were  expected to be relatively less difficult for the Chinese to implement.  However, while tariffs, fees, and charges and trading rights were expected  to be less difficult for Chinese officials to implement, these commitment  areas were still rated “High” in importance. It is important to note that all  the commitment areas that emerged as low in both importance and  difficulty were still important to at least 20 percent of survey respondents.
section_title: Mixed Views for Implementation by Level of Government and Region
paragraphs: Companies we surveyed also expressed mixed views regarding the ease or  difficulty expected for implementation in various locations and for  different levels of government in China. For example, almost as many  respondents expected reforms to be very or somewhat easy for the  national/central level of government as those who expected reforms to be  very or somewhat difficult. Similarly, an almost equal number of  respondents expected officials in China’s major cities to have an easy or  difficult time making reforms. Nevertheless, survey respondents expected  China’s local and provincial governments and autonomous regions to have  the most difficulties implementing reforms. Table 6 provides a summary of  these responses.
Company representatives whom we interviewed provided a number of  explanations for these expectations by level of government. For example,  one company representative compared China to Europe, in that each  Chinese region is like a different country and they each have different rules  and regulations. Another company official explained how differences  within China play out at the local level. He believed that the local officials  have a different mind-set, because existing approval processes are their  livelihood (he cited import inspections as an example). In his view, local  officials want to protect the domestic market and local suppliers from  losing jobs. A specific example provides further context for understanding  how these differences relate to specific business operations. As one  company representative explained, he believed that there is no unified  customs system and therefore, customs procedures will be slow to change.  In his view, state directives often do not get to local customs authorities  and authorities may interpret the directives differently.
Another reason that might help explain the varied expectations by level of  government is that many respondents’ knowledge about different parts of  China is limited. Specifically, more respondents selected “Don’t know” than  “Yes” or “No” for 24 of the 26 locations listed in the survey when asked  whether they expected that reforms would be relatively difficult for the  Chinese to implement. Beijing and Shanghai were the only locations where  more respondents expected reforms to be relatively easy to implement  (compared to the number of respondents who did not know whether  reforms would be difficult and the number of respondents who expected  reforms to be difficult to implement). With regard to Beijing, 43 percent of  the respondents expected reforms would be relatively easy to implement,  while 22 percent of the respondents expected reforms to be difficult to  implement. In Shanghai, 54 percent of the respondents expected that  reforms would be relatively easy to implement, while 15 percent of the  respondents expected reforms to be difficult to implement. Respondents  also expected reforms to be more difficult to implement in locations where  fewer U.S. companies have a presence in China. These locations included  the western provinces (Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, and  Tibet), Guizhou and Yunnan, Sichuan, Heilongjiang, and Inner Mongolia.
section_title: Company Views on the Challenges Ahead for WTO Implementation
paragraphs: Companies’ overall positive expectations for their future in China were  tempered by their views regarding the domestic challenges China faces as  it implements WTO-related reforms. Company representatives described  the numerous challenges China faces during implementation of its WTO commitments. Their comments covered a spectrum of opinions ranging  from the broad view that, overall, China’s accession would be great for  China and the United States, to less enthusiastic expectations based on  their companies’ experiences in China. One representative said that WTO  has huge potential for his company and implementation of China’s  commitments could radically improve his company’s ability to operate.  Another representative explained how expectations were somewhat mixed  within his own company: “It should be positive, but our immediate  expectations are not very high. The intentions are good, and the Chinese  have made radical reforms. The desire is there on the part of the Chinese.”  Other U.S. companies noted a somewhat neutral reaction to China’s early  months of WTO membership. A representative of one U.S. multinational  that has invested in China since the 1980s said that WTO has not improved  matters much for his company. A service provider said his company has  held off on optimistic expectations, because the results of implementation  could be positive or negative depending on available opportunities to  provide services in China and regulations forthcoming from the Chinese  government. Another respondent expressed his company’s skepticism as  follows: “ very concerned that China will do as they see  fit, without regard to the WTO agreement.” Other respondents referred to  the uncertainty of doing business in China through observations that  implementation would only extend as far as necessary in order to satisfy   policies on paper often differ from actual practice,  particular government agencies will make implementation difficult in  China despite seeming to comply , and  the pace of change and degree of compliance will likely be irregular.
Company representatives’ open-ended comments regarding the challenges  ahead generally focused on three common explanations for these  anticipated challenges: China’s ability to implement rule of law-related  reforms, China’s need to protect its domestic interests, and China’s culture  and its emphasis on relationships.
subsections: section_title: Rule of Law Challenges
paragraphs: Several company representatives explained why they believe that China  will experience the greatest challenges in implementing its rule of law- related WTO commitments. One respondent to our survey characterized  China’s current “standard” approach to legislation as follows, “Pass a gray  law, see how it goes, modify interpretation accordingly.” Another  respondent noted that “for rule of law issues, there isn’t a structure in place  and a structure won’t be in place for a long time.”
Several other company representatives whom we interviewed provided  numerous examples to illustrate the difficulties anticipated with other rule  of law-related reforms. Other explanations focused on the inherent barriers  to transparency such as China’s history and culture; the evolutionary  nature of the issue (for example, several respondents said that  transparency is not a common concept in China); and a tendency to draft  regulations and procedures that are deliberately vague. One company  representative reported that Chinese agencies are likely to provide  conflicting answers to business inquiries. In addition, several companies  also cited consistent application of laws as a potential difficulty. At the  central government level, China is committed to implementing WTO, but all  cities and provinces understand WTO differently, in the view of one U.S.  corporate representative. According to another interview respondent,  China is so big that even if there is a central government policy, the policy  may still vary throughout the country at different levels of government.
Other company representatives cited reforms to enforcement of laws and  regulations relating to intellectual property rights (IPR) as another area  fraught with difficulty. Respondents noted that Chinese officials have  enacted reforms resulting in overall improvements to IPR protection, but  that challenges continue. One company provided a specific example of a  current problem that is expected to continue: “Local companies copy our  product and packaging, even though these companies are operated by the  local governments. Trademark registration takes at least 6 to 8 months.  Even if a company wins a copyright case, you can’t get the government to  enforce the copyright violation, so it’s not worth the time and money  expended on filing a case.” IPR violations were also described by one  company representative as a game embedded in China’s culture. Several  respondents predicted that IPR would remain a problem in the years to  come, because the government will not risk destabilizing the labor force by  enforcing IPR laws and regulations.
section_title: China’s Need to Protect Its Domestic Interests
paragraphs: Company representatives also described the domestic challenges China  faces in protecting its domestic interests while implementing WTO  commitments. Company representatives told us that they expected WTO  reforms to be part of a long-term process, but they believed that the  Chinese leadership is dedicated to living up to their WTO commitments.  One individual noted that any change must be considered within the  broader context of China’s political and economic environment. In his  words, “The final test will be how such change affects or impacts on  domestic interests including the domestic economy and political interests  and pressures.” Several respondents referred to the balancing act that  China faces as it implements reform and dismantles state-owned  enterprises while still needing to protect the labor force and maintain  economic stability. One company assessed the likely result by saying that  while China may comply with the letter of its commitments, the process of  reforming sectors populated by state-owned enterprises will be slow in  order to protect those industries and to avoid displacing large numbers of  workers. One individual said that China will not forgo domestic stability to  meet WTO requirements and therefore, domestic firms will continue to be  favored.
section_title: China’s Culture and Its Effect on Business Relationships
paragraphs: A number of companies noted the need to remain attentive to cultural  differences in doing business with China and their expectations that  implementation will be a lengthy and gradual undertaking. Several  corporate representatives mentioned the continued importance of personal  relationships, known as “guanxi” in China. For example, one respondent  noted that in China relationships are more important than policy and policy  is more important than the rule of law. Another respondent echoed this  theme and encouraged patience with the Chinese and their culture.  Specifically, with reference to China’s WTO commitments, he said,  “Patience and understanding will reap rewards. China bashing will not.”
Another company representative advised that although it might be  necessary to apply pressure to ensure that Chinese officials adhere to WTO  rules, it is important to do so in a manner that does not cause officials to  lose face.
section_title: Concluding Observations
paragraphs: If implemented, China’s commitments will open China’s economy and  reform its trading activities, thereby expanding U.S. companies’  opportunities for investing in China and for exporting goods, agricultural  products, and services to China. Understanding U.S. companies’  expectations is fundamental for policymakers to judge the degree to which  the benefits of China’s WTO membership are being realized. As you have  requested, over the next several years we will continue to gather the views  of the business community regarding China’s implementation of its WTO  commitments and report the results to you.
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 VII.
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) and the monitoring and enforcement of China’s  commitments. This work includes examining through annual surveys, the  experience of U.S. firms doing business in China. The 2002 GAO Survey of  U.S. Companies on China-WTO Issues and related interviews discussed in  this report provided an opportunity for us to assess business views and  expectations for their work in China while also exploring methods for  soliciting business views on an annual basis in the future. Our objectives  for this initial preparatory survey were to assess U.S. businesses’ (1) views  about the importance of WTO-related commitments to their business  operations in China, (2) views about the anticipated effects of China’s  WTO-related reforms on their businesses, and (3) opinions regarding  China’s prospects for implementing these reforms. To respond to our  objectives, we mailed surveys to 551 selected chief executive officers  (CEO) or presidents of U.S. companies with a presence in China;  conducted structured interviews in China with representatives of 48 U.S.  companies, two foreign-owned companies with operations in the United  States and China, and representatives of two U.S. trade associations with  representative offices in China; met with representatives of other U.S.  business associations in China and the United States; and considered other  surveys of U.S. businesses in China.
subsections: section_title: Survey Development
paragraphs: We reviewed relevant documents related to China’s WTO accession and  implementation to understand the context for questions included in our  survey. These documents included China’s accession agreement, referred  to as the Protocol on the Accession of the People’s Republic of China. This  is a set of legal documents totaling more than 800 pages that describes  China’s WTO commitments. It includes the protocol itself and the  accompanying Report of the Working Party on the Accession of China.  These documents describe how China will adhere to WTO principles and  technical guidelines. Additionally, the agreement includes schedules for  how and when China will grant market access to foreign goods and  services, and several other annexes. We also consulted with high-level  officials from several public and private sector agencies, organizations, and  firms to obtain input on question development, survey administration, and  prior surveys on related issues. Specifically, we refined our survey based on  consultations with U.S. government agencies and offices including the  Office of the U.S. Trade Representative, the Department of State, the  Department of Commerce (International Trade Administration and Bureau  of Economic Analysis), the Department of Agriculture, and the  Congressional Research Service to discuss draft survey questions and  methods of survey administration. In addition, we circulated the draft  survey instrument among and sought comments from the following  organizations: the American Chambers of Commerce in the People’s  Republic of China, the American Farm Bureau, the Coalition of Service  Industries, the Emergency Committee for American Trade, the National  Association of Manufacturers, the U.S. Chamber of Commerce, and the  U.S.-China Business Council. Finally, we participated in a feedback session  with representatives of three private sector firms with a presence in China  prior to pretesting our draft survey instrument. We conducted telephone  pretests with representatives of five U.S. firms with a presence in China,  which resulted in additional refinements to the survey instrument.
In the survey, we asked U.S. businesses to identify their business activities  in China based on 25 agriculture/manufacturing categories and 18 services  categories. For both agriculture/manufacturing and services, businesses  could also choose an “other” category that allowed them to write in a  description of their business activities in China. The  agriculture/manufacturing categories were based on the Department of  Commerce’s North American Industry Classification System. The services  categories were based on the WTO’s services classifications and the U.S.  Bureau of Economic Analysis’s services classifications used in its reports  on services trade. The categories are shown in table 9 in appendix IV.
section_title: Sample Development
paragraphs: Preparation of the sample for the survey on China-WTO issues required  multiple steps. Our target population was the population of U.S. companies  with a presence in China. However, consultation with the agencies,  organizations, and firms previously mentioned confirmed that a  comprehensive list of U.S. companies with investments in China did not  exist. Consequently, we collected membership directories from the  American Chambers of Commerce in the People’s Republic of China  (Beijing; Chengdu, Sichuan; Guangdong; and Shanghai) and contact lists of  American companies in China from the Department of Commerce’s U.S. &  Foreign Commercial Service’s (FCS) offices in Beijing, Chengdu,  Guangzhou, Shanghai, and Shenyang. We selected the names of all U.S.- incorporated companies from these lists and entered them into a database.  In cases where the nationality of incorporation was not identified, we  obtained this information to the extent possible through searches of  publicly available information and contacts with individual companies in  the United States and China. We combined company names from these  directories into a single list. A total of 3,139 company names was included  in the database after we combined the names of U.S.-incorporated  companies from these sources. We excluded companies located in the  United States, but whose ultimate parents were incorporated outside the  United States (for example, we excluded companies incorporated in the  British Virgin Islands). A total of 1,945 company names remained in the  database after completion of various automated steps to identify duplicate  listings such as listings of multiple subsidiaries of the same parent  company. Additional manual searching of the company names in the  database and various business directories identified subsequent duplicate  entries and further reduced the list to 1,695 company names. This list of  1,695 company names represented known U.S. companies registered with  one of the five FCS offices and/or a member of one of the four American  Chambers of Commerce in China with publicly available membership  lists. We then selected a random sample of 1,000 company names from the  combined list of 1,695 companies. We chose to select a sample of 1,000  companies based on the expectation that an unknown number of the 1,000  companies would be identified as subsidiaries of other parent companies in  the sample, or subsidiaries of companies not incorporated in the United  States, and/or would not have contact information that could be located  using publicly available information and individual contacts with the  companies.
We searched a variety of sources, including the Leadership Directories’  Yellow Book, Nexis, and Internet search engines, in order to locate each  company’s parent company name in the United States and/or to confirm the  nationality of incorporation, locate corporate headquarters’ mailing  addresses in the United States, identify the CEO or other most senior  company officer’s name, and locate telephone numbers for reminder  telephone calls. We also searched corporate Web sites, called companies,  and looked at other business directories to locate mailing addresses,  contact names, and telephone numbers. This process resulted in a final  mailing list of 551 active U.S. companies with a presence in China and  parent companies incorporated in the United States. The disposition of the  random sample of 1,000 U.S. company names (after completion of our  search for corporate contact information) is outlined in table 7. 2002, we mailed a second copy of the survey to all companies from which  we had not received a survey response. Telephone reminder calls to  nonrespondents began on April 17, 2002, and continued through May 24,  2002. We mailed questionnaires to company CEOs and presidents at their  headquarters offices in the United States, but a range of company officials  in the United States and China, including managing directors, directors of  international trade, and vice presidents, among others, completed the  questionnaires.
section_title: U.S. Companies Responding and Not Responding to the Questionnaire
paragraphs: Of the sample of 551 U.S. companies with a presence in China that we  surveyed, responses indicated that 505 were eligible for inclusion in the  sample.   We received 191 usable questionnaires from eligible companies,  for an overall response rate of 38 percent (191 usable responses/505 eligible  sampled elements=38 percent). Because of this low response rate, we  restricted our analysis to the subset of firms that participated in our survey,  and we did not make estimates about the larger population of all U.S.  businesses with a presence in China. The low response rate to the survey  would threaten the validity of estimates made using these data, particularly  if those not providing data were materially different from those who did  provide data. As a result, the representativeness of weighted estimates for  the population might be subject to significant bias. Because the survey  results represent only responses received and are not projected to the  population of U.S. companies with a presence in China, sampling errors  have not been calculated. Therefore, we present survey results in this  report in unweighted form, representing only those firms that participated  in our study and that provided answers to the individual questions  analyzed.
Other potential sources of errors associated with the questionnaires, 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.  Specifically, as previously discussed, we solicited feedback on a draft of the  survey from numerous internal and external parties. We pretested 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. All nonrespondents received a follow-up copy of the survey and a  follow-up telephone call. All data were double-keyed during entry. We  performed computer analyses to identify inconsistencies or other  indications of errors and had all computer analyses reviewed by a second  independent analyst. The final disposition of the 551 surveys is presented in  table 8.
section_title: Structured Interviews
paragraphs: We conducted structured interviews with representatives of 48 U.S. firms in  Beijing, Guangzhou, Shanghai, and Shenzhen, China. These structured  interviews gave us an opportunity to discuss survey responses in greater  detail as well as to gain an understanding for the context of these  responses, to determine whether responses to these questions varied  between interview respondents in China and survey respondents based in  the United States, to discuss the questions and survey administration issues  with survey nonrespondents, and to obtain information from firms not  included in the survey sample (including firms that did not appear in our  random sample). Consequently, the firms that we interviewed included  survey respondents and nonrespondents as well as companies not included  in the mail survey sample. In addition to these criteria, our invitation list for  the interview sessions also represented a broad cross section of the  business sectors invested in China. We also interviewed representatives  from two U.S. trade associations with offices in China in order to gain  further insight into the possible range of business views. We discussed  topics during the interviews that included the anticipated effects of China’s  WTO membership, WTO compliance issues, and background issues to help  us with our future work. Tabulations of the interview responses were  independently verified.
section_title: Additional Limitations
paragraphs: All firms that we interviewed or surveyed 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 independent agency of  the U.S. Congress. In addition, respondents had varied knowledge of  China’s WTO commitments and their application to their line of business.
We did our work in Washington, D.C., and in Beijing, Guangzhou, Shenzhen,  and Shanghai, China. We performed our work from July 2001 to September  2002 in accordance with generally accepted government auditing  standards.
section_title: GAO Survey of U.S. Companies on China-WTO Issues
paragraphs: The United States General Accounting Office on your company’s experience in conducting (GAO), an independent agency of Congress, business with China.  The questionnaire has been asked by Congress to study China’s should take about 20 minutes to complete.
World Trade Organization (WTO)
Please designate one person to have overall commitments.  As part of this work, we are responsibility for completing and returning surveying U.S. companies with business this questionnaire for your company and interests in China.  In particular, this survey provide the following information so we can seeks to obtain U.S. business views on (1) call or e-mail that person if additional reforms in China associated with information is necessary. implementing WTO commitments, (2) expectations for China’s implementation of WTO commitments, and (3) anticipated changes to business opportunities resulting from China’s WTO membership. Your responses will allow us to present meaningful information to Congress. This survey will serve as a foundation for future GAO efforts to advise Congress about the status of China’s compliance in implementing its WTO commitments.
If you would like to return the questionnaire information that could identify individual by fax, please fax to: (202)-512-2550.  If you respondents.
Most of the questions in the survey can be chinasurvey@gao.gov.
Thank you very much for your cooperation comments you would like to add to your and assistance.
QUESTIONNAIRE TO GAO)
1.   Less than 100 2.  What types of business relationships does 2.   From 100 to 249 your company currently have with China?
Enterprise (WOFE)      8.   Limited Liability Company 2.   Less than 50      9.   Company Limited by Shares 3.   From 50 to 99    10.   Other (Please describe.)
4.   From 100 to 249 5.   From 250 to 499    11.   None of the aboveGo to Question 4 6.   From 500 to 1,000 7.   More than 1,000 3.  How long has your company engaged in a business relationship with China? (Check 8.  How soon does your company expect to make a profit in China? (Check one.)  N=186 1.   Less than 2 years 2.   From 2 to 5 years 2.   Within 3 years 3.   From 6 to 9 years 3.   Within 4 to 5 years 4.   From 10 to 20 years 4.   Within 6 to 10 years 5.   More than 20 years 5.   Within 10 years 6.   10 years or more 4.  Does your company import from China, 8.   Other (Please describe.) export to China, both import from and export to China, or neither import from nor export to China? (Check one.)  N=189       1.   Only import from China       2.   Only export to China       3.   Both import from and export to       4.   Neither import from nor export to                      ChinaGo to Question 6 9.  Which of the following categories describe your business activities with China? (Check all that apply.)   1.   Agriculture, forestry, fish, & hunting 27.   Banking & all other financial services   3.   Beverages & tobacco 29.   Professional services (legal,                  accounting, medical, etc.)
6.   Petroleum & coal 30.   Computer, database, & related services   7.   Chemicals including pesticides,   8.   Plastic, rubber, clay, & related products   9.   Wood & paper products 34.   Retail / Franchises 10.   Furniture & related products 35.   Wholesale / Distribution 11.   Textiles, apparel, accessories, & leather 37.   Construction & related services 12.   Machinery (except electronic) 13.   Computer & peripheral 15.   Audio & video equipment 40.   Health-related & social services 16.   Semiconductor & other electronic 41.   Recreational, cultural, & sporting 17.   Navigational, measuring, medical, & 42.   Tourism and travel-related services 18.   Manufacturing & reproducing magnetic 43.   Other (Please specify.)
China’s economic reforms during the past 5 any? (Check one.)  N=190 years have improved the climate for U.S. businesses in China? (Check one.)  N=191 1.   Very positive impact       1.   To a very great extent 3.   Little or no impact       2.   To a great extent       3.   To a moderate extent 5.   Very negative impact       4.   To some extent       5.   To little or no extent 6.   Don’t know/No basis to judge ……………………………………….       6.   Don’t know/No basis to judge 12.  How soon do you expect you will begin to experience an overall business impact on your 14.  Currently, what are your company’s goals in company, if any, from China’s WTO doing business with China? (Check all that commitments? (Check one.)  N=168 1.   Immediately/ Has already occurred       1.   Establish a presence for the future 2.   Less than one year 3.   From 1 to 2 years       2.   Benefit from lower labor costs in 4.   From 3 to 4 years 5.   From 5 to 6 years       3.   Benefit from foreign investment 6.   From 7 to 10 years 7.   More than 10 years       4.   Benefit from the cost or quality of 8.   Never, no effects expected       5.   Establish a regional base in China 9.   Don’t know/No basis to judge       6.   Expand a regional base in China       7.   Establish a distribution network in       8.   Expand a distribution network in       9.   Increase exports to China     10.   Other (Please specify.) _______________________________ 15.  For each of he items listed below, how will your company’s activities be affected by the implementation of China’s WTO commitments (increase or decrease in investments, exports, etc.)? (Check one box for each item.) (1) (2) (3) (4) (5) (6) (7)
subsections: section_title: 9. Profits from China N=178
paragraphs: 10.  Number of agents or 11.  Market share in China  N=174 12.  Competition from foreign or Chinese firms located in China 13.  Other (Please describe and rate 14.  Overall business activities in        China  N=178 Please answer the following two questions for each of the Chinese locations listed in the grid below. 19.  Does your company have a facility or other presence in this location? (Check one box for each item.) 20.  Do you expect that reforms will be relatively difficult for the Chinese to implement in this location? (Check one box for each item.)
Do you anticipate that reforms will be relatively difficult for the Chinese to implement in this location? location? (1) (2) (1) (2) (3)
1.  Beijing  Q19, N=169; Q20, N=162  2.  Tianjin  Q19, N=136; Q20, N=120  3.  Hebei  Q19, N=115; Q20, N=102  4.  Shanxi  Q19, N=115; Q20, N=103  5.  Inner Mongolia  Q19, N=114; Q20, N=104  6.  Liaoning (except Shenyang)
Q19, N=114; Q20, N=102  7.  Jilin  Q19, N=114; Q20, N=102  8.  Heilongjiang  Q19, N=112; Q20, N=100  9.  Shenyang  Q19, N=119; Q20, N=105     10.  Shanghai  Q19, N=169; Q20, N=157     11.  Jiangsu  Q19, N=118; Q20, N=108     12.  Fujian  Q19, N=120; Q20, N=107     13.  Zhejiang  Q19, N=113; Q20, N=103     14.  Shandong  Q19, N=120; Q20, N=107     15.  Jiangxi  Q19, N=113; Q20, N=101     16.  Anhui  Q19, N=113; Q20, N=101     17.  Guangdong  Q19, N=147; Q20, N=131     18.  Guangxi  Q19, N=116; Q20, N=101     19.  Hainan  Q19, N=112; Q20, N=100     20.  Henan  Q19, N=109; Q20, N=97     21.  Hubei  Q19, N=116; Q20, N=102     22.  Hunan  Q19, N=112; Q20, N=97     23.  Sichuan  Q19, N=119; Q20, N=104     24.  Chongqing  Q19, N=117; Q20, N=104     25.  Guizhou & Yunnan  Q19, N=115; Q20, N=102     26.  Any Western province (Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, & Tibet)
Q19, N=116; Q20, N=98 21.  Some reforms will have to be made by different levels of government.  Based on your company’s experience, how difficult or easy do you believe it will be to make the reforms at each of the levels of government listed below? (Check one box for each item.) (6) (1) (2) (3) (4) (5)
section_title: Xinjiang, Tibet) N=186
paragraphs: 22.  How likely is your company to contact the following groups or individuals if your company encounters difficulties related to China’s implementation of its WTO commitments?  (Check one box for each item.) (1) (2) (3) (4) (5) (6)
section_title: 3. Other Chinese government
paragraphs: agencies or officials (Please       specify.):  N=165   4. Chinese consultants  N=178   5. U.S. trade associations       representing your company’s   6. U.S. Embassy or Consulate in   7. U.S. Trade Representative  N=178   8. U.S. Department of Agriculture   9. U.S. Department of Commerce 10. U.S. Department of State  N=178 11. U.S. Congress  N=175 12. Other (Please specify):  N=23 23.  Is your company providing or planning to provide assistance or training in the following areas to Chinese officials or businesses? (Check one box for each item.) (1) (2) (3)
section_title: 1. General training in WTO rules and procedures N=180
paragraphs: 2.  General training in China’s WTO commitments  N=178   3.  Protection of Intellectual Property Rights (IPR)  N=179   4.  Customs facilitation  N=177   5.  Revising laws & regulations to comply with WTO   6.  Enforcement of contracts & judgments  N=180   7.  Ways to increase transparency  N=182   8.  Quota administration  N=179   9.  Testing certification  N=180 10.  Distribution rights  N=180 11.  Other (Please specify.)  N=26 24.  If your company has provided or is planning to provide assistance or training to Chinese officials or businesses, please describe the training in the space below and/or attach additional sheets describing the training. 25.   Is there anything else you would like to tell us regarding China’s accession to the WTO, including any problems or concerns that China’s WTO commitments do not address?  (Please attach additional sheets if necessary.)
Thank you for your participation!
section_title: GAO Structured Interviews of U.S. Companies about China-WTO Issues
paragraphs: U.S. General Accounting Office Structured Interview of U.S. Companies in China about China-WTO Issues Q1) Currently, what are your company’s operations in China? (Skip if company responded to survey.)
1.  2.  3.  4.  5.  6.        7.      Wholly-Owned Foreign Enterprise (WOFE)       8.      Limited Liability Company       9.      Company Limited by Shares     10.      Other (Please describe.)
The effects of China’s WTO membership Q2) To what extent, if any, has China’s official membership in the WTO changed your company’s goals and expectations for future business opportunities in China? 5.    No basis to judge Please describe: Q3) From your company’s perspective, what are China’s most important WTO commitments?        (Prompt from list.) Why?
Q4) From your company’s perspective, are there particular WTO commitments that you expect to be relatively difficult to implement? (Prompt from list.) Why?
Q5) What impact do you expect that China’s WTO commitments will have on your business, if any? 1.  2.  3.  4.  5.  6.
Don’t know/No basis to judge Q6) How soon do you expect you will begin to experience an overall business impact on your company, if any, from China’s WTO commitments? 1.  2.  3.
From 1 to 2 years 4.
From 3 to 4 years 5.
From 5 to 6 years 6.
From 7 to 10 years 7.  8.
Never, no effects expected 9.      Don’t know/No basis to judge Q7) To what extent, if any, is your company’s business strategy in China dependent on China’s compliance with its WTO commitments? 1.  2.  3.  4.  5.
WTO implementation and compliance issues Q8) From your company’s perspective, in what areas have the Chinese successfully complied with their WTO commitments?
Q9) From your company’s perspective, in what areas have the Chinese not complied with their WTO commitments?
Q10) Is your company involved in efforts to assist the Chinese in implementation of their WTO commitments (Prompt:  formal and informal training by your company, U.S. or other governments, associations, non-profit organizations, etc.)? 1.  2.
If yes, please describe: Q11) How, if at all, does your business track China’s implementation of its WTO commitments (legislative and regulatory changes, practices, etc.)? 1.
Day-to-day experience of doing business in China 2.  3.  4.
Contacts with Chinese government officials 5.
Contacts with U.S. government officials 6.
GAO’s future compliance surveys Q12) Do you feel that most U.S. businesses in China have a sufficient understanding of China’s WTO commitments, as they relate to their own industries, to identify all potential compliance problems?
Q13) Who is the most knowledgeable respondent in your company for questions related to China’s compliance with its WTO commitments? 1.
Self or other corporate representative in China 2.
Company’s government affairs representative 3.  4.
Respondent varies depending on question 5.  6.
Other (please describe)
Q14) From your company’s perspective, how concerned are you that reporting compliance problems with WTO commitments to the U.S. government might result in retaliatory action by Chinese government entities against your company?
Q15) Are there any tactics you would recommend to GAO to ensure that we receive candid responses from businesses in future surveys and interviews?
Q16) Do you have any suggestions to GAO for monitoring China’s compliance with its WTO commitments?
Q17) For future compliance surveys, what is the most convenient format for you and others in your company?
Q18) Is there anything else you would like to tell us regarding China’s accession to the WTO, including any  problems or concerns that China’s WTO commitments do not address?
Thank you very much for your cooperation and assistance.
Categorization of commitment areas for questions 3 & 4: Tariff & nontariff trade restrictions (increased market access)   1.  Tariffs, fees, & charges   3.  Other quantitative import restrictions (licensing & tendering requirements)   4.  Standards, certification, registration, & testing requirements (product safety, animal, plant, & health standards, etc.)   5.  Customs procedures & inspection practices   7.  Market access for services Investment-related measures (liberalized foreign investment)   8.  Government requirements stipulating minimum  amount of production that must be exported   9.  Foreign exchange restrictions (including balancing & repatriation of profits) 10.  Technology transfer requirements 11.  Local content requirements 12.  Scope of business restrictions (types you can  provide, customers you can do business with, number of transactions you can conduct, & where you can conduct business geographically) 13.  Restrictions on partnerships & joint ventures (choice of partner & equity limits) 14.  Establishment & employment requirements (capital, deposit, years in practice, threshold sales, forced investment, & nationality/residency requirements) 15.  Trading rights (ability to import & export) 16.  Number of products subject to state/designated   trading 18.  Subsidies for Chinese firms 20.  Operation of state-owned enterprises   21.  Price controls including dual and discriminatory pricing 22.  Equal treatment in taxation 23.  Equal treatment for access to funding (loans & equity issues), supplies, & human resources   24.  Consistent application of laws, regulations, & practices (within & among national, provincial & local levels) 25.  Transparency of laws, regulations, & practices    (publishing and making publicly available) 26.  Enforcement of contracts & judgments/Settlement of disputes in Chinese court system 27.  Independence of judicial bodies 28.  Equal treatment between Chinese & foreign entities under Chinese laws, regulations, & 29.  Intellectual Property Rights 30.  China’s application of safeguards against U.S. exports (antidumping duties and other legal actions against surges in imports)
section_title: Profile of Survey and Structured Interview Respondents
paragraphs: This appendix summarizes key items of interest from the survey and  structured interview results in order to present a profile of the companies  providing the data discussed in this report. We asked survey and structured  interview respondents a series of questions to describe their business  operations in China. Detailed results are also included in the reprinted  survey and structured interview guide found in appendixes II and III.
subsections: section_title: Respondents Came from a Wide Range of Industries, Locations, and Types of Operations
paragraphs: The 191 respondents to our mail survey included companies from a wide  range of industries, locations, and types of operations in China. For  example, respondents included companies with business activities in all of  the agriculture, manufacturing, and services categories listed in our survey.  About 69 percent of respondents identified manufacturing as their primary  business activity with China, while 25 percent of respondents identified  services as their primary business activity with China. Only eight  respondents (about six percent) identified agriculture as their primary  business activity with China. Almost 60 percent of respondents were  relatively specialized and identified only one category to describe their  business activities with China. Conversely, about 20 percent of respondents  selected two categories to describe their business activities in China, and  another 18 percent of respondents selected three or more categories to  describe their company’s activities there. Table 9 displays the number of  respondents included in individual categories to describe their business  activities with China.
Respondents reported that they carry out these business activities in  facilities and offices across all of China. Beijing, Shanghai, and Guangdong  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  survey (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  Beijing, Guangdong, or Shanghai. About 46 percent of respondents had a  facility or other presence in one or more of these three locations, while  another 45 percent were located in Beijing, Shanghai, and/or Guangdong  plus one or more other locations. Figure 5 shows the number of companies  that reported having a facility or other presence in each location in China  listed in our survey.
section_title: Respondents Conduct Business through Variety of Business Relationships
paragraphs: Survey and structured interview respondents reported that they engage in a  range of business relationships in their many locations throughout China.  More than 50 percent of the respondents had one type of business  relationship, about 25 percent had two types of business relationships, and  more than 10 percent of the respondents reported three or more types of  business relationships there. Representative offices, joint ventures, wholly  owned foreign enterprises, and agents/distributors were the most  frequently reported types of business relationships, respectively. Table 10  provides a description of each type of business relationship. Figure 6  displays the number of survey and structured interview respondents that  reported each type of business relationship.
More than 40 percent of the survey respondents reported that their  companies both imported from and exported to China as part of these  business relationships. More than one quarter of the respondents reported  that they only exported to China. Almost one quarter of the respondents  reported that they neither import from nor export to China. Companies that  neither import from nor export to China include businesses operating  representative offices and service providers, among others.
section_title: Size and Experience of Respondents Vary
paragraphs: Survey respondents also varied with respect to the number of employees in  the United States, the number of employees in China, and the length of time  that their companies had engaged in business relationships with China.  Large companies, those with 500 or more employees in the United States,  accounted for about 60 percent of the respondents. In contrast, only 20  percent of the respondents reported having more than 500 employees  (including joint venture employees) in China.
Respondents to our survey had a strong base of experience to draw on as  they answered our questionnaire. Respondents reported business  relationships with China ranging from less than 2 years to more than 20  years, with 6 to 9 years and 10 to 20 years as the most frequent responses.  Most of the respondents had engaged in a business relationship with China  for more than 5 years. In fact, more than half of large company respondents  had been in China more than 10 years. Smaller companies that responded  to our survey had generally maintained a presence in China for fewer years  than large companies. Figure 7 shows the length of time that survey  respondents had engaged in a business relationship with China.
Companies with a longer history in China and agriculture/manufacturing  firms reported that they were already profitable more frequently than  companies with a shorter history in China or firms whose primary business  activity in China focused on services. Specifically, for companies engaged  in a business relationship with China for 6 to more than 20 years, about 72  percent of them reported that they were already profitable. Among  companies engaged in a business relationship with China for 5 years or  less, only about 43 percent of them reported that they were already  profitable. Overall, about 66 percent of respondents engaged in  agriculture/manufacturing reported that they were already profitable  compared to less than 50 percent of the respondents only engaged in  services activities.
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. U.S. companies have increased their presence in China  through manufacturing and service operations, and both exports and  imports of goods and services have risen dramatically, including those of  small- and medium-sized companies. In addition, many U.S. companies  have integrated operations in which trade occurs with their affiliates in  China.
subsections: section_title: U.S. Investment in China
paragraphs: Total U.S. direct investment in China reached nearly $10 billion in 2000,  according to the U.S. Department of Commerce (on a historical-cost basis),  making the United States the second largest source of foreign direct  investment in China. This amount represents nearly 27 times the amount of  U.S. foreign direct investment in China in 1990. U.S. investment in China  followed a different pattern from overall U.S. investment worldwide.  Figures 8 and 9 show the percentages of foreign investment worldwide and  U.S. foreign direct investment by industry sector in China in 2000. The  largest portion of worldwide U.S. direct investment abroad went to finance,  insurance, and real estate, which accounted for 40 percent of total U.S.  investment abroad. However, in China, finance, insurance, and real estate  accounted for less than 10 percent of U.S. investment in 2000. In China, the  largest portion of U.S. foreign direct investment went to manufacturing,  which accounted for almost 60 percent of investment. Globally,  manufacturing accounted for less than 30 percent of U.S. investment in  2000. This difference reflects China’s foreign direct investment policy,  which aimed at guiding direct investment into targeted industries in  accordance with China’s economic and industrial development strategy.  The targeted economic sectors include infrastructure (such as roads) and  high-technology industries.
section_title: U.S. Trade with China
paragraphs: U.S. exports of goods and services have also grown significantly over the  past decade. In terms of trade in goods, U.S. exports totaled almost $18  billion in 2001, making China the ninth largest market for U.S. goods. The  United States was also the top export destination for China in 2001, as $102  billion in goods from China were imported here. As a result of this  difference between exports and imports, the United States has had a trade  deficit in goods with China since 1983. In terms of exports, U.S. small- and  medium-sized companies accounted for a growing share of companies that  export to China. In 1999, about 83 percent of companies that exported to  China were small- and medium-sized firms compared to about 77 percent in  1992, according to the U.S. Department of Commerce. In addition, the value  of these exports to China rose 85 percent from 1992 to 1999. Nonetheless,  large firms still accounted for more than 70 percent of total U.S. exports to  China in 1999.
U.S. exports to China include products such as transport equipment,  electrical machinery, office machines, oilseeds, and fruits. Figure 10 shows  the distribution of U.S. exports to China in 2001 by broad industrial  groupings. This distribution of U.S. exports to China is very similar to the  distribution of U.S. exports to the world overall. For example, machinery,  electronics, and high-tech apparatus; auto vehicles, other vehicles, and  parts; and chemicals, plastics, and minerals were the three major exporting  sectors, both worldwide and to China in 2001.
U.S. private services exports to China have also grown over the past  decade, rising from $1.6 billion in 1992 to $4.6 billion in 2000, according to  the U.S. Department of Commerce. The United States maintains a services  trade surplus with China, importing about $2.8 billion in services from  China in 2000. China is currently a relatively small market for U.S. services  exports, making up less than 2 percent of total U.S. services exports in  2000.
For some multinational companies, investment and trade with China are  integrated. Companies may establish a presence in China through foreign  direct investment in order to supply goods and services to the Chinese  market or to produce products in China for export. In 1999, the most recent  year available for such data, U.S. businesses exported about $3 billion in  goods to their affiliates in China, according to the U.S. Department of  Commerce. This accounted for nearly one quarter of total U.S. exports to  China in that year. In addition, U.S. parent companies sold nearly $500  million in services to their affiliated companies in China, accounting for  about 10 percent of total U.S. cross-border sales of services to China in  2000. In order to supply services abroad, companies can either provide the  service from the United States (cross-border trade) or establish affiliates in  foreign countries to supply the foreign markets directly. In the case of  China, U.S. businesses provided about $1.7 billion in services through local  affiliates in 1999. This is more than double the amount provided in 1998  ($800 million) and has grown annually since 1993, the first year for which  these figures were available.
section_title: Summary of Other Business Surveys of U.S. Companies in China
paragraphs: We identified and reviewed similar surveys that other organizations had  conducted of U.S. companies in China to help us develop our own  questionnaire and to increase our understanding of issues of interest to  companies doing business in China. These surveys, administered between  1998 and 2001, were sponsored by U.S. government agencies, professional  associations, and consulting firms and had response rates ranging from just  under 5 percent to just under 30 percent. Table 12 summarizes the surveys  we reviewed in terms of their sponsors, populations, response rates, key  survey topics, WTO-related findings, and other relevant factors.
These surveys cannot be directly compared to our survey, because they  were administered at different points in time to different populations and  asked different questions. All of the surveys discussed here addressed  issues that overlapped with the items considered in our survey. However,  some of them had very different purposes than our survey. In addition, all  of the other surveys had low response rates, which raises major questions  about generalizing their results to the full populations from which the  samples were drawn.
Nevertheless, we found that, at a very broad level -- such as basic  expectations about WTO -- there were some similarities between the  responses to the other surveys and the responses to our survey.  Furthermore, the results of these surveys can sometimes provide further  insights into the results that we obtained. For example, we asked a  question about profitability, as did several of the other surveys. Our  question asked how soon firms expected to be profitable. Other surveys  asked about the profitability of investments and improvements in operating  margins. While all of these questions probed the same issue, the way in  which the questions were asked and the response options all differed;  therefore, reporting on the other surveys’ results allows for some  additional insights and perspectives. The sections that follow describe  some of the main findings from these surveys in order to provide some  context for our survey.
subsections: section_title: Effects of China’s WTO Membership
paragraphs: Respondents to the other surveys were generally positive about the effects  of China’s WTO entry. For example, more than three quarters of the  respondents to the 2001 American Chamber of Commerce annual  membership survey expected China’s WTO entry to have a positive impact  on their companies. Respondents viewed the major positive impacts as  increased transparency (85 percent), increased business scope (81  percent), and increased investment options (66 percent). Almost 90 percent  of the China-based respondents to the 2001 Deloitte-Touche Tomatsu  survey reported that the importance of the Chinese market will likely  increase in the 3 years after China’s WTO entry. Almost two-thirds of these  respondents expected their companies to expand existing product or  enterprise lines in China.
section_title: Challenges of Doing Business in China
paragraphs: There are many difficulties with doing business in China, according to  respondents to the other surveys. For example, almost two-thirds of the  respondents to the 1998 U.S. Embassy Survey reported that problems with  transparency were worse or much worse than they had expected. More  than half of the respondents to this survey also reported that the cost of  doing business, the problems with customs procedures, and the risks  encountered in dealing with foreign exchange rates were worse than they  had expected. Almost half of the respondents reported that protectionism,  the enforcement of regulations, and intellectual property rights (IPR)  protection were worse than expected. Similarly, at least two-thirds of the  respondents to the 2001 American Chamber of Commerce annual  membership survey indicated that transparency, bureaucracy, weak  enforcement of laws, business scope restrictions, and protectionism  negatively affected their companies.
section_title: Potential Compliance Problems
paragraphs: The other surveys also listed a number of potential compliance problems.  More than two-thirds of the respondents to the May 2000 Department of  Commerce survey foresaw difficulties with China’s ability to develop a  WTO-compliant legal framework and enforce the obligations consistently  throughout the country. About half of these respondents expected  difficulties with or due to corruption, local/provincial implementation, IPR,  transparency in practices, and/or transparency in regulations. More than  three quarters of the respondents to the 2001 American Chamber of  Commerce annual membership survey were concerned or very concerned  that China’s WTO agreement will be ignored, that new regulations will be  enacted to counter WTO commitments, and that there will be increased  protectionism by the Chinese government. China’s implementation of its  WTO commitments was a concern for most respondents (about 90 percent)  to the 2001 Deloitte-Touche Tomatsu survey.
The 2000 Department of Commerce survey asked a question on concerns  about potential retaliation for reporting compliance problems to the U.S.  government. About half of the survey respondents reported that they  feared retaliation if they reported WTO compliance problems to U.S.  government officials.
section_title: Profitability
paragraphs: Questions about profitability generally yielded results similar to those  obtained in response to our survey. Almost 60 percent of the respondents  to the 1998 U.S. Embassy Survey reported that they were already  profitable. Slightly more than 50 percent indicated that they had attained a  return on their investment. About 50 percent of the respondents to the 2001  American Chamber of Commerce annual membership survey reported that  their operating margins had improved either “substantially” or “somewhat”  from 2000 to 2001, while about 25 percent of respondents reported that  their operating margins had deteriorated either “substantially” or  “somewhat” over the same time period. About 50 percent of the  respondents to the 2001 Deloitte-Touche Tomatsu survey expected their  investments to be profitable in less than 3 years, while slightly less than 33  percent expected investments to be profitable in about 3 to 4 years.
section_title: Familiarity with China’s WTO Commitments
paragraphs: Two of the other surveys asked questions about respondents’ familiarity  with China’s WTO commitments. Almost 66 percent of respondents to the  2000 Department of Commerce survey reported that at the time they did  not understand the WTO obligations for their sector. Only about 10 percent  of respondents to the 2001 Deloitte-Touche Tomatsu survey that were  located in China reported that they were familiar with China’s  commitments to a “great extent.” Sixty-four percent reported that they  were familiar to a certain extent, while 25 percent reported that they had  very little familiarity. The area in which respondents already in China most  wanted to increase their familiarity was in taxation and customs  commitments (74 percent), followed by marketing and distribution (59  percent), IPR and financial services (38 percent), technology transfer (33  percent), labor and benefits (31 percent), and venture capital investment  (28 percent).
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those named above, Carolyn Black-Bagdoyan, Ming Chen,  Martin De Alteriis, Matthew Helm, Simin Ho, Stanley Kostyla, Janeyu Li,  Rona Mendelsohn, Suen-Yi Meng, Beverly Ross, Richard Seldin, and  Timothy Wedding made key contributions to this report.
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subsections: section_title: Order by Mail or Phone
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section_title: Public Affairs