World Trade Organization: Ensuring China's Compliance Requires a Sustained and Multifaceted Approach
Published: 2003-10-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: China's accession to the World Trade Organization (WTO) in December 2001 created substantial opportunities for U.S. companies seeking to expand into China's market. In joining the WTO, China agreed to liberalize its trade regime and open its markets to foreign goods and services. However, the U.S. government has become concerned about ensuring that China honors its commitments to offer a more predictable environment for trade. GAO was asked to describe (1) the monitoring of compliance challenges associated with the scope and complexity of China's WTO commitments and (2) the efforts to date of the key players involved in ensuring China's compliance: the executive branch, Congress, the private sector, the WTO and its other members. GAO's observations are based on its prior analysis of China's WTO commitments, its previous survey of and interviews with private sector representatives, and its examination of first-year efforts to ensure China's WTO compliance.
section_title: What GAO Found
paragraphs: The scope and complexity of China's WTO commitments present two main challenges to verifying China's compliance with its WTO accession agreement. First, the agreement is very broad: It encompasses more than 800 pages, spans eight broad areas, and sets forth hundreds of individual commitments on how China's trade regime will adhere to the WTO's agreements, principles, and rules and allow greater market access. Second, the agreement is complicated: Interrelated parts will be phased in at different times, and some commitments are so general in nature that it may not be immediately clear whether China has fully complied with its obligations. Each of the key players involved in ensuring China's compliance--the executive branch, Congress, the private sector, and the WTO and its members--has made efforts to ensure China's compliance. However, the first-year experience in this regard has demonstrated that these efforts will need to be sustained over a long period. The executive branch has applied additional resources and new intra-agency teams to these efforts, but it takes time to organize these activities. Congress has enacted legislation and established new entities to increase oversight of China's compliance. The private sector also has provided information to the executive branch and to Congress on the status of China's compliance efforts. And, within the WTO, a China-specific mechanism was established as a means for WTO members to annually review China's implementation of its commitments. Nonetheless, GAO's analysis indicates that a sustained approach is needed to ensure China's compliance.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our observations on the  challenges involved in ensuring that China honors its commitments to the  World Trade Organization (WTO). This hearing takes place not only at a  time of increasing trade between the United States and China, but also at a  time of increasing concern about broader aspects of the U.S.-China  relationship. Although China’s implementation of its WTO commitments  cannot fully eliminate those concerns, compliance with its WTO  obligations is a central feature of China’s economic relationship with the  United States and other WTO members. However, as we have found in our  analysis of the first year’s efforts to monitor and enforce China’s  compliance with its WTO commitments, the scope and complexity of the  agreement indicate that ensuring compliance will be difficult and will  require sustained efforts from all the key players to be successful.
To provide you with an update on these issues, today I will discuss (1) the  compliance challenges associated with the scope and complexity of  China’s WTO commitments and (2) the efforts to date of each of the key  players involved in ensuring China’s compliance with its WTO obligations:  the executive branch, Congress, the private sector, and the WTO and its  members. My observations are based on a series of studies that we  initiated at the request of this Committee and of the Senate Committee on  Finance. That work has included a comprehensive analysis of China’s  commitments, our survey and interviews with the private sector  representatives, and our examination of first-year U.S. compliance  efforts. Before I turn to the specifics on these issues, let me provide a  brief summary.
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 China’s  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 market. The United States is  one of the largest sources of foreign investment in China, and total  merchandise trade between China and the United States exceeded $145  billion in 2002, according to U.S. trade data. However, the United States  still maintains a trade deficit with China: Imports from China totaled  $124.8 billion, while exports totaled $20.6 billion in 2002. Through the first  half of 2003, exports to and imports from China grew about 25 percent  compared to same period in the previous year.
The U.S. government’s efforts to ensure China’s compliance with its WTO  commitments are part of an overall U.S. structure to monitor and enforce  foreign governments’ compliance with existing trade agreements. At least  17 federal agencies, led by the Office of the U.S. Trade Representative  (USTR), are involved in these overall monitoring and enforcement  activities. USTR and the departments of Agriculture (USDA), Commerce,  and State have relatively broad roles and primary responsibilities with  respect to trade agreement monitoring and enforcement. Other agencies,  such as the departments of the Treasury and Labor, play more specialized  roles. Federal monitoring and enforcement efforts are coordinated  through an interagency mechanism comprising several management- and  staff-level committees and subcommittees. The congressional structure for  funding and overseeing federal monitoring and enforcement activities is  similarly complex, because it involves multiple committees of jurisdiction.  Congressional agencies, including GAO, and commissions also support  Congress’s oversight on China-WTO trade issues. In addition to the  executive branch and congressional structures, multiple private sector  advisory committees exist to provide federal agencies with policy and  technical advice on trade matters, including trade agreement monitoring  and enforcement.
section_title: Scope and Complexity of China’s WTO Commitments Present Challenges for Ensuring Compliance
paragraphs: China’s accession agreement is the most comprehensive of any WTO  member’s to date, and, as such, verifying China’s WTO compliance is a  challenging undertaking for two main reasons. The first reason is the  scope of the agreement: The more than 800-page document spans eight  broad areas and sets forth hundreds of individual commitments on how  China’s trade regime will adhere to the organization’s agreements,  principles, and rules and allow greater market access for foreign goods  and services. The second reason is the complexity of the agreement:  Interrelated parts of the agreement will be phased in at different times,  and some commitments are so general in nature that it will not be  immediately clear whether China has fully complied with its obligations in  some cases.
subsections: section_title: Scope of Commitments Poses Inherent Compliance Issues
paragraphs: The comprehensive scope of China’s WTO accession agreement represents  a challenge for the U.S. government’s compliance efforts. The  commitments cover eight broad areas of China’s trade regime, including  import regulations, agriculture, services, and intellectual property rights.  Within these eight broad areas, we identified nearly 700 individual  commitments that China must implement to comply with its WTO  obligations. China has also committed to lower a variety of market access  barriers to foreign goods. These obligations include commitments to  reduce or eliminate tariffs on more than 7,000 products and eliminate  nontariff barriers on about 600 of these products. Additionally, China  made commitments to allow greater market access in 9 of 12 general  services sectors, including banking, insurance, and telecommunications.
The scope of compliance problems raised in the first year of China’s  membership reflects the scope of the agreement itself. Although the  executive branch’s first-year assessment of China’s implementation of its  WTO commitments acknowledged China’s effort and progress in some  areas, the assessment also noted compliance problems in all eight broad  areas of China’s trade regime. In particular, the executive branch  emphasized problems in agriculture, services, and intellectual property  rights, as well as a crosscutting concern about transparency. Some  preliminary assessments of China’s second-year implementation from the  private sector suggest that many of those problems persist and that  concern about the number and scope of compliance issues continues to  increase.
section_title: Complexity of Agreement Presents Additional Challenges for Assessing Compliance
paragraphs: While many of China’s commitments were due to be phased in upon  China’s accession to the WTO in 2001, a number of interrelated  commitments are scheduled to be implemented over extended time  frames. For example, commitments on trading rights and distribution are  not scheduled to be fully phased in until the end of 2004 and 2006,  respectively.  As a result, foreign businesses will be unable to fully  integrate import, export, and distribution systems until that time.  Additionally, although market access for most goods and services will be  phased in by 2007, some tariffs will not be fully liberalized until 2010. (See  fig. 1.)
The varying nature of China’s commitments also complicates U.S.  government compliance efforts. On the one hand, some of China’s WTO  obligations require specific actions from China, such as reporting  particular information to the WTO, or lowering a tariff on a product.  Assessing compliance with these specific types of commitments is  relatively easy. On the other hand, a significant number of commitments  are more general in nature and relate to systemic changes in China’s trade  regime. For example, some commitments of this type require China to  adhere to general WTO principles of nondiscrimination and transparency.  Determining compliance with these more general types of commitments is  more difficult and can complicate the dialogue over achieving compliance.
It is useful to note that many private sector representatives told us that  implementing these general types of commitments, such as those that  relate to the rule of law, was relatively more important than carrying out  specific commitments to increase market access and liberalize foreign  investment in China. Specifically, China’s commitments in the areas of  transparency of laws, regulations, and practices; intellectual property  rights; and consistent application of laws, regulations, and practices  emerged as the most important areas of China’s accession agreement in  our September 2002 survey of and interviews with U.S. companies  operating in China.  However, private sector representatives also  indicated that they thought these rule-of-law-related commitments would  be the most difficult for China to implement.
section_title: Sustained Effort from Key Players Required to Ensure China’s Compliance, but First- year Experience Demonstrates Challenges
paragraphs: Because China is such an important trading partner, ensuring China’s  compliance with it s commitments is essential and requires a sustained  effort on the part of the executive branch, Congress, the private sector,  and the WTO and its other members. (See fig. 2.) For example, the  executive branch has extensive involvement in monitoring and enforcing  China’s commitments, and additional resources and new structures have  been applied to these tasks. However, the U.S.’s first-year experience  showed that it takes time to organize these structures to effectively carry  out their functions and that progress on the issues can be slow. In addition  to the executive branch’s efforts, Congress has enacted legislation,  provided resources, and established new entities to increase oversight of  China’s compliance. The private sector also has undertaken a wide range  of efforts that provide on-the-ground information on the status of China’s  compliance efforts and input to the executive branch and to Congress on  priorities for compliance efforts. Finally, the WTO has existing  mechanisms as well as a new, China-specific mechanism created as a  means for WTO members to annually review China’s implementation of its  commitments. Nonetheless, despite the involvement of all of these players  in the first year, the United States will need a sustained—and cohesive—  approach to successfully carry out this endeavor.
subsections: section_title: Key Executive Branch Agencies Have Increased Focus on China’s Compliance, but First-Year Efforts Demonstrate Challenges
paragraphs: China’s accession to the WTO has led to increased monitoring and  enforcement responsibilities and challenges for the U.S. government. In  response to these increased responsibilities, USTR and the departments of  Commerce, Agriculture, and State have undertaken various efforts to  enhance their ability to monitor China’s compliance with its WTO  commitments. Agencies have reorganized or established intra-agency  teams to improve coordination of their monitoring and enforcement  efforts. Additionally, the agencies have added staff in Washington, D.C.,  and overseas in China to carry out these efforts. For example, estimated  full-time equivalent staff in key units that are involved in China monitoring  and enforcement activities across the four agencies increased from about  28 to 53 from fiscal years 2000 to 2002, with the largest increases at the  Department of Commerce. On a broader level, USTR has established an  interagency group to coordinate U.S. government compliance activities.  The interagency group, which utilizes the private sector to support its  efforts, was very active in monitoring and responding to issues during the  first year of China’s membership. Nevertheless, it took some time for  agencies to work out their respective roles and responsibilities in the  interagency group.
Monitoring and enforcing compliance with WTO requirements is a  complex and challenging task, as shown by our 2002 assessment of the  U.S. government’s efforts to ensure China’s compliance with commitments  regarding administration of tariff-rate quotas (TRQ) for certain bulk  agricultural commodities. TRQ implementation problems in 2002 included  concerns about Chinese authorities missing deadlines for issuing TRQs on  certain bulk agricultural commodities; disagreement over whether China’s  interpretation of its commitments met WTO requirements; and questions  about whether China’s administrative practices were in keeping with its  obligations. The United States has undertaken both bilateral and  multilateral efforts to settle these complex issues. The large number of  U.S. government activities on these issues alone, which still are not fully  resolved, included at least monthly engagements with China and illustrates  the extensive effort agencies must undertake to identify problems, gather  and analyze information, and respond to some issues.
section_title: Congressional Focus on China Compliance Issues Has Increased Substantially
paragraphs: Congress has had an active role in overseeing trade relations between the  United States and China and in setting expectations for vigilant monitoring  and enforcement of China’s WTO commitments. In the U.S.-China  Relations Act of 2000, Congress found that for the trade benefits with  China to be fully realized, the U.S. government must effectively monitor  and enforce its rights under China’s WTO agreements. To accomplish this,  Congress authorized additional resources at USTR and the departments of called for an annual review of China’s compliance in the WTO; established the Congressional-Executive Commission on the People’s  Republic of China to monitor China’s compliance with human rights and  the development of the rule of law in China; established a Task Force on the Prohibition of Importation of Products of  Forced Prison Labor from China; authorized a program to conduct rule of law training and technical  assistance in China; and enacted legislation implementing China’s WTO commitment allowing WTO  members to apply a product-specific safeguard when increases in Chinese  imports threaten or cause injury to domestic industry.
Congress also required that the executive branch issue several China  trade-related reports to assist its continuing oversight. These requirements  included USTR’s annual report on China’s compliance, which is based in  part on input from the general public. In addition, this Committee,  together with the Senate Finance Committee (on a bipartisan basis),  requested that we continue our work on China-WTO issues and report on  China’s compliance, executive branch efforts, and U.S. business views  over 4 years. Finally, congressional committees and commissions have  held at least 35 China-focused hearings since 2001—a further indication of  congressional involvement in U.S.-China issues.
section_title: Private Sector Plays Key Role in Monitoring China’s Compliance
paragraphs: U.S. businesses operating in China provide valuable assistance in  monitoring the status of China’s implementation of its WTO commitments,  and, as such, effective coordination between the U.S. government and the  private sector is essential. For example, industry-specific expertise and  input from within the private sector are indispensable components for  determining whether the scores of highly technical laws and regulations  that the Chinese government issues are WTO compliant and being  implemented. Further, private sector industry and business associations  are active in conducting their own analyses and issuing reports on China’s  WTO compliance, providing input to congressional committees and  commissions, engaging the Chinese on specific WTO issues, and  representing their members’ interests to the U.S. government in order to  inform the U.S.’s compliance priorities.
section_title: WTO Has General and China-specific Mechanisms to Ensure Compliance
paragraphs: The WTO’s framework of more than 20 multilateral agreements covers  various aspects of international trade and sets forth the rules by which  China and other members must abide. Notably, the WTO’s dispute  settlement mechanism is intended to give all WTO members access to a  formal mechanism for pursuing and resolving WTO-related compliance  issues with other members, including China. Thus far, no WTO member  has initiated a dispute settlement case against China, although some  Members of Congress and private sector groups have urged the U.S.  government to initiate a case related to China’s administration of TRQs.
Another WTO mechanism relates specifically to China. China’s accession  commitments created a Transitional Review Mechanism (TRM), as a  means for WTO members to annually review China’s implementation of its  commitments for 8 years, with a final review in the 10th year following  China’s accession. Just as establishing the TRM was one of the more  challenging issues to negotiate with China, implementing the TRM process  during the first year (2002) also proved challenging. Disagreement among  WTO members, including China, over the form, timing, and thoroughness  of the TRM led to a limited initial review of China’s trade practices. The  review did not meet U.S. expectations and illustrated the challenges of  gaining consensus with China and other members within this multilateral  forum over implementation issues. Although U.S. officials cited benefits  from participating in the initial review, they expressed disappointment  over the first-year results. U.S. officials are hopeful that future reviews will  be more comprehensive. The second-year TRM is under way, but it is still  too early to determine if the current review will meet U.S. and other WTO  members’ expectations.
section_title: Concluding Observations
paragraphs: In assessing China’s first-year implementation efforts, the executive  branch, other WTO member government officials, and many private sector  representatives observed that, despite several first-year compliance  problems, China had demonstrated a willingness to implement its WTO  commitments. For example, the executive branch noted China’s progress  in revising the framework of laws and regulations governing various  aspects of China’s trade regime. In the second year of China’s  membership, however, concerns about the number of compliance  problems have grown, as well as the number of events that have  potentially interfered with China’s implementation of its commitments.  Specifically, some observers have noted events such as changes in China’s  central government leadership, reconfigurations of key ministries, a  growing concern about unemployment and labor unrest, and the SARS  outbreak as possibly temporarily interrupting progress on implementation.
In closing, Mr. Chairman, the theme of my testimony is that a cohesive and  sustained approach is necessary to monitor and enforce China’s  commitments to the WTO. I believe that this hearing that focuses on the  key elements of the U.S.-China economic relationship and brings together  three of the key players is exactly the kind of oversight that is necessary to  ensure that a cohesive and sustained approach is actually carried out.
Mr. Chairman and Members of the Committee, this concludes my prepared  statement. I would be happy to answer any questions on my testimony that  you may have.
section_title: Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact Adam  Cowles at (202) 512-9637. Matthew Helm, Rona Mendelsohn, Richard  Seldin, and Kim Siegal also made key contributions to this testimony.
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