China’s December 2001 accession to the WTO 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. U.S. investment and trade with China has grown significantly over the past 10 years, and trade between China and the United States exceeded $180 billion in 2003, based on U.S. trade data. Consequently, China was the United States’ third largest trading partner in 2003. U.S. goods exported to China increased by 29 percent to $28.4 billion in 2003 from $22.1 billion in 2002. U.S. imports from China are also rising and reached a level of $152.4 billion in 2003. According to 2003 U.S. trade data, the U.S. trade deficit with China ($124 billion) is larger than that of any other U.S. trading partner. 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. USTR has primary responsibility for monitoring and enforcing trade agreements. Among other things, USTR is required by law to identify any foreign policies and practices that constitute significant barriers to U.S. goods and services, including those that are covered by international agreements to which the United States is a party. At least 16 other agencies are involved in these monitoring and enforcement activities, but USTR and the Departments of Commerce, State, and USDA have the primary responsibilities regarding trade agreement monitoring and enforcement. Each of these four key agencies we reviewed has within its organizational structure a main unit that focuses on China or the greater Asian region. These main units have primary responsibility for coordinating the agencies’ China-WTO compliance activities, although numerous other units within the agencies are also involved. The main units routinely draw on assistance from experts in these other units to obtain information and expertise as needed. Additionally, the key agencies have units in China or at the WTO, and staff in those overseas units are also involved in the agencies’ compliance activities. Table 1 lists the main units with China-WTO responsibilities, as well as examples of other offices with which the units coordinate on an intra-agency basis. In its 2002 and 2003 reports to Congress on China’s WTO compliance, USTR reported that China had successfully implemented many of its numerous WTO commitments, including rewriting hundreds of trade-related laws and regulations and making required tariff reductions. Nevertheless, USTR’s reports identified over 100 individual compliance problems concerning China’s implementation of its WTO commitments, according to our analysis. These problems spanned all commitment areas and ranged from very specific, relatively simple problems— such as late issuance of particular regulations—to broader concerns over transparency in China’s rule-making process, which are more difficult to implement and assess. Most compliance problems identified in 2002 persisted into 2003. U.S. officials noted this continuation was an indicator that China was able to address the more easily resolvable problems during 2002 but that the remaining issues had proven to be more difficult for China to address. USTR reported that China had mixed success in resolving compliance problems in 2002 and 2003. Additionally, new problems emerged in 2003, with many of them arising from phased-in commitments that China was due to implement in 2003. In 2004, USTR and the other key agencies continued to pursue resolution of problems and noted many positive developments in resolving a number of these outstanding compliance issues. USTR noted several areas in which China has successfully implemented its commitments since joining the WTO in December 2001. China’s WTO commitments, which are described in over 800 pages of legal text, are broad in scope and range from general pledges for how China will reform its trade regime to specific market access commitments for goods and services. In 2002, USTR reported that China reviewed more than 2,500 trade-related laws and regulations for WTO consistency, repealed or amended nearly half of these, and issued many new laws and regulations. China also restructured government ministries with a role in overseeing trade, embarked on an extensive educational campaign on the benefits of WTO membership, and made required tariff reductions. USTR reported that, in 2003, China also took steps to correct systematic problems in its tariff-rate quota regime for bulk agricultural commodities, reduced capitalization requirements in certain financial sectors, and opened up the motor vehicle financing sector (see table 2). During this period of reform in China, U.S. exports to China rose 48 percent between China’s WTO accession in 2001 and 2003. Although China made progress in realizing many of its WTO commitments, USTR reported over 100 compliance problems in 2002 and 2003, according to our analysis. These problems spanned all areas in which China had made commitments, and many problems identified in 2002 persisted through 2003. We found USTR’s annual reports to Congress to be the most complete official U.S. source of information with which to analyze China’s WTO compliance in 2002 and 2003. In conjunction with China’s 2001 accession to the WTO, USTR was mandated to identify compliance with commitments and annually report these findings to Congress. These annual reports incorporate a broad range of input from key federal agencies and the business community. We systematically cross-checked the reports with industry testimony, industry association reports, and other U.S. government documents and found the reports to be fair and complete representations of industry concerns. Further, USTR officials stated that these reports represented the most complete public summary of China- WTO compliance problems that the U.S. government is monitoring and the actions taken to resolve the issues. As a result, we relied extensively on the narrative descriptions of compliance problems set forth in the USTR reports to analyze the number, type, and disposition of the problems that the U.S. government was working to resolve. Our analysis of USTR’s 2002 and 2003 reports to Congress identified 106 individual compliance problems. China’s compliance problems can be the result of several factors, from political resistance to lack of technical capacity to problems of resources and coordination among Chinese ministries. These compliance problems fell within all nine broad areas of China’s trade regime and varied from import regulation to export regulation (see table 3 and app. II for descriptions of these nine areas). China’s WTO commitments are broad and complex, and compliance problems also ranged in scope from specific issues to more general concerns. For example, some commitments require a specific action from China, such as reporting information about China’s import-licensing requirements to the WTO. Other commitments are less specific in nature, such as those that confirm China’s general obligation to adhere to WTO principles of nondiscrimination in the treatment of foreign and domestic enterprises. Accordingly, compliance problems identified as of 2003 also ranged from specific, relatively simple issues, such as the late issuance of regulations, to broader and more crosscutting concerns, such as concerns about judicial independence, which are more difficult to implement and assess. It is important to note that not all problems equally affect U.S. exports to China and that some problems are more easily resolved than others. For example, weak intellectual property right enforcement, which may entail industry losses of nearly $2 billion according to some industry estimates, could impact more trade than the late issuance of regulations. Thus, while USTR’s reports identify priority areas, the economic importance of many individual problems cannot be easily quantified and cannot be reported, nor did we attempt to calculate the importance or otherwise prioritize or rank the problems in our analysis. In addition, our analysis of business views on China’s implementation shows that the business community expected intellectual property rights commitments to be the most difficult to put into practice, whereas they expected tariff reductions to be relatively easier to implement. We found that about two thirds of the USTR-identified compliance problems persisted from 2002 through 2003. U.S. officials noted that this continuation might have been attributed to the fact that China resolved the more easily implemented commitments during the first year, and the remaining “holdover” issues proved to be more difficult to address. Other U.S. officials and industry representatives cited both Severe Acute Respiratory Syndrome (SARS) and major political and bureaucratic transitions in China as contributing to the apparent slowdown in implementation. However, USTR stated that these factors did not excuse the apparent deceleration in China’s implementation in 2003. In addition to the problems that persisted from 2002, about a quarter of all compliance problems were new in 2003, with many of these problems arising from phased-in commitments that China was due to implement in 2003. China has had mixed success in resolving compliance problems. Based on our assessment of USTR’s 2002 and 2003 reports, we found that China had resolved or made some progress on just under half of the individual problems described by U.S. officials. We also found that China’s progress in resolving compliance problems also varied widely by area. For example, among the key areas that USTR identified as priorities, China resolved or made progress on well over half of the various problems in agriculture and services, while progress on intellectual property rights was limited to less than a quarter of the individual problems reported as of December 2003. Since USTR’s December 2003 report, the U.S. government has continued to pursue resolution of China’s WTO compliance problems. Notably, the United States and China reached agreements in several key areas through the Joint Commission on Commerce and Trade (JCCT). As discussed in more detail later, the JCCT is a high-level government-to-government consultative forum for China and the United States to discuss key trade issues. The April 2004 JCCT meeting resulted in the formation of working groups, several memoranda of understanding and letters of intent, and several more specific agreements to improve China’s implementation.