RS20139 -- China and the World Trade Organization Updated August 3, 2004 China has been one of the world's fastest growing economies over the past several years (real GDP growth averaged 9.3% annually from 1979 to 2003), andmany trade analysts argue that China could become a potentially large market for a wide variety of U.S. goods andservices. A World Bank report estimatesthat China's share of world trade could triple from 3.0% in 1992 to 9.8% by the year 2020, making China the world'ssecond-largest trading nation after theUnited States. (2) The growing importance of Chinain the world economy was an important factor in the heightened interest among WTO members in bringingChina into the WTO and thereby subjecting its trade regime to multilateral trade rules. U.S. trade officials insisted that China's entry into the WTO had to be based on "commercially meaningfulterms" that would require China to significantlyreduce trade and investment barriers within a relatively short period of time. Many U.S. trade analysts viewedChina's WTO accession process as anopportunity for gaining substantially greater access to China's market and to help reduce the large and increasingU.S.-China trade imbalance. Other U.S.proponents of China's WTO membership contended that it would advance the cause of human rights in China byenhancing the rule of law there for businessactivities, diminishing the central government's control over the economy and promoting the expansion of theprivate sector in China. China completed all of its WTO bilateral agreements on September 13, 2001 (it concluded an agreement with the United States on November 15, 1999) andcompleted negotiations with the WTO Working Party handling its accession bid on September 17, 2001. China'sWTO membership was formally approved bythe WTO on November 10, 2001, and on the following day, China informed the WTO that it had ratified the WTOagreements. As a result, China officiallyjoined the WTO on December 11, 2001. Under the WTO accession agreement, China agreed to: Bind all tariffs. The average tariff for industrial goods will fall to 8.9% and to 15% for agriculture, with most tariff cuts to occur by 2004and all cuts by 2010. Limit subsidies for agricultural production to 8.5% of the value of farm output and will not maintain export subsidies on agriculturalexports. Within three years of accession, grant full trade and distribution rights to foreign enterprises (with some exceptions, such as for certainagricultural products, minerals, and fuels). Provide non-discriminatory treatment to all WTO members. Foreign firms in China will be treated no less favorably than Chinese firmsfor trade purposes. Duel pricing practices will be eliminated as well as differences in the treatment of goodsproduced in China for the domestic market asoppose to those goods produced for export. Price controls will not be used to provide protection to Chinesefirms. Implement the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement upon accession. Accept a 12-year safeguard mechanism, available to other WTO members in cases where a surge in Chinese exports cause or threaten tocause market disruption to domestic producers. Fully open the banking system to foreign financial institutions within five years. Joint ventures in insurance and telecommunication willbe permitted (with various degrees of foreign ownership allowed). China's implementation of its WTO commitments has been closely followed by U.S. officials and various business groups. On December 11, 2002, the USTRreleased its first annual China WTO compliance report. (3) Although stating that China had made significant overall progress in meeting its WTO obligations,the report raised serious concerns over China's compliance with its commitments on agriculture, services, IPRprotection, and transparency of trade laws andregulations. The USTR's second annual China compliance report (issued in December 2003) (4) again emphasized that China had made significantoverallprogress in meeting its WTO obligations, but raised concerns over China's compliance with its commitments onagriculture, services, IPR protection, taxpolicies, transparency of trade laws and regulations, and trading rights and distribution services. (5) U.S. business groups have raised similar concerns. The U.S.-China Business Council (USCBC) mid-year 2003report on China's WTO implementation statedthat there were "growing concerns" among U.S. firms over China's ability to deliver on key commitments on timeand in full. (6) Finally, a survey of U.S. firmsdoing business in China conducted by the General Accounting Office in 2003 found that a majority of thosequestioned felt that China had implemented most ofits WTO obligations only to some or little extent. (7) U.S. officials have raised a number of WTO implementation issues with Chinese officials over the past year: Soybeans. U.S. soybean exporters have faced uncertainty and, in some instances, disruption in their soybean sales to China, stemmingfrom China's announcement in 2001 that it would seen implement new rules on bio-engineered foods (effective in2002). China initially failed to providedetails of these rules, which led to a disruption in U.S. soybean exports to China from January-March 2002. President Bush personally raised the issue withChinese officials, which led China to agree to the interim use of U.S. and foreign safety certificates until Chinaimplements its new biotechnology regulations. On October 18, 2002, China issued regulations applying this policy through September 2003; the USTR's officestated that the regulation "should remove thethreat of an interruption of U.S. soybean sales to China." (8) In July 2003 China further extended the policy through April 2004. However, U.S. exporters havecomplained that the regulations require each GMO shipment have an interim biotech safety certificate and a Chinesegovernment import license. Additionally,in January 2003, the Chinese government indicated that it might delay permanent approval of various GMO cropsand might require another round of foodsafety studies, a move that led the U.S. to issue an official protest. Some analysts charge that China may beattempting to use such regulations to limit biotechimports in order to protect its domestic producers as well as its own biotech industries. U.S. officials have warnedthat they make take this issue to the WTO forresolution. Despite these problems, U.S. soybean exports to China more than tripled in 2003 (over 2002 levels),making China the largest market for U.S.soybean exports in 2003. (9) Tariff-rate quotas. In November 2001, the Chinese government developed new rules on tariff- rate-quotas on certain agriculturalproducts that the U.S. charged were discriminatory and violated WTO rules because they created two categories ofimport quota licenses: one for domesticconsumption and one for "processing" trade. The U.S. further charged that China has failed to provide adequateinformation on the administration of itstariff-rate quotas (TRQs) for farm commodities. In July 2002, the U.S. Department of Agriculture (USDA) reportedthat China's TRQ licenses had authorizedrelatively small levels of imports, making their use impractical. (10) U.S. firms charge that this allocation policy violates WTO rules on national treatment. Inother instances, China announced TRQs for various agriculture and manufactured products several months after theirrequired implementation date. InDecember 2002, USTR Robert Zoellick sent a letter to the Chinese government expressing U.S. concern overChina's administration of TRQs. In January2003, Zoellick was quoted in the press as saying that the TRQ issue was "one of the areas we're most frustratedwith" in terms of China's WTO compliance,and warned the United States was considering bringing a dispute resolution case to the WTO. In October 2003,China reportedly issued new regulations(effective January 2004) eliminating sub-quotas and restrictive license procedures, and improving transparency inidentifying quota allocation recipients.However, problems appear to remain. For example, China has failed to publish the details of its 2004 TRQallocation, (11) and in March 2004, the NationalCotton Council charged that China continues to maintain two categories of import quota licenses for cotton. (12) Export subsidies and discriminatory taxes. U.S. officials charge that China has subsidized grain exports (mainly corn) and cotton, anduses its tax system to discourage imports and encourage foreign firms to produce domestically, contrary to its WTOcommitments. For example, Chinacontinues to give rebates on value-added taxes (VAT) for certain industries, especially for high tech. In someinstances, China imposes higher VAT rates oncertain imported products (such as fertilizers and various agricultural products) than it does for similar productsproduced domestically. On March 18, 2004,the USTR announced that it had filed a WTO dispute resolution case against China over its discriminatory taxtreatment of imported semiconductors, chargingthat China applies a 17% VAT rate on semiconductor chips that are imported into China but gives a substantialrebate of the tax if the semiconductors areproduced or designed in China. On July 8, 2004, China agreed to this policy. IPR. While China has enacted a variety of new IPR laws and periodical crackdowns on IPR violators, the piracy rate in China forcopyrighted products is estimated to be at 90%. The Chinese government estimates the value of pirated goods madein China at $19 to $24 billion. U.S.industry officials estimate that IPR piracy in China cost U.S. firms $2.6 billion in lost sales in 2003.