Chapter 1


Introduction: Trade, Politics, and Development of the Law in China

Twenty years ago, China was one of the world's poorest countries, with 80 percent of its population having a daily income of less than one dollar per day and an adult literacy rate of one-third.1 Under Maoist China, the system was based upon communist ideology—totalitarian, egalitarian, and poor. Relatively speaking, China in the late 1970s had virtually no legal system and few laws and regulations in comparison with developed countries at that time. Commencing with its economic reforms in 1978, the country's average annual growth rate has been approximately 8 to 10 percent per year, and in several peak years, the economy grew by 13 percent.2

When Deng Xiaoping came to power in 1978, he set into motion reforms to privatize agriculture and industry, welcomed foreign investors on a restricted basis, and attempted to decentralize economic and political decision making. Today, illiteracy has dropped to below 10 percent, consumption has more than doubled, and the poverty rate has declined by 60 percent.

China's growth has been fueled by foreign direct investment (FDI), which continues to increase annually. FDI in China has increased at a rate of 18 percent each year for the past sixteen years. FDI topped at $2 billion in 1986, $52.7 billion in 2002, and over $57 billion in 2003. By the end of 2003, China had approved almost 400,000 foreign-invested enterprises (FIEs) with a contractual value of over $750 billion from 180 countries, including FIEs from 400 of the world's 500 largest multinational enterprises.3 The value of new contracts in 2003 rose only 7.3 percent per year compared to 2002, but the number of contracts has increased by 23.3 percent, which indicates that projects are smaller in value than in previous years.

U.S. exports to China have also risen significantly in the past few years, particularly with respect to telecommunications, power generation, oil and gas exploration, chemicals, aircraft, fertilizer, wheat/cereal products, and construction machinery.4 China's airport infrastructure construction is anticipated to reach an estimated sum of $8.4 billion, and aircraft sales are estimated at $10–15 billion over the next ten years.5 U.S. firms are pursuing a number of untapped markets in China, including pharmaceuticals, automotive components, automotive production machinery, medical equipment and devices, and transportation.

In addition to relaxing the standards for FDI, the government is encouraging the growth of the private sector and has taken steps to reform its state sector. In December 2003, the PRC government unveiled an anticipated proposed constitutional amendment that provides that the “lawful private assets” of citizens are “inviolable.”6 Under the amendment, the government would be committed to protecting both private wealth and inheritance rights. While the amendment will grant the government the right of expropriation of private property rights, the amendment also requires that compensation be provided to private property owners. In contrast, the current version of the Constitution emphasizes that public property is not only inviolable but “sacred.” The amendment is designed to provide legal basis for the protection of private property for the first time in China since the commencement of the Communist era in 1949. The protection of private property is considered essential to continuing to push forward with China's economic reforms. Such changes are meant to bring China's legal framework in line with its increasingly capitalist economy and in response to its WTO obligations. Entrepreneurs who are playing an increasingly critical role in job growth have been lobbying for the constitutional protection. However, the amendment does not elevate the status of private property to the same status as state-owned property, which will continue to maintain a dominant role in the economy.

China continues to dismantle its cradle-to-grave system that has financially stifled the state sector for years. In this regard, the government issued a joint opinion in April 2002 designed to improve the competitiveness and financial standing of state-owned enterprises (SOEs) by reducing their social service obligations.7 The basic national policy continues to concentrate on economic reform so as to raise the living standard of the Chinese people.8 As a result of economic reforms, large Chinese companies have expanded aggressively in the global markets.9

In November 2001, the 140 member countries of the World Trade Organization (WTO) agreed to a set of documents that outline the terms pursuant to which China would be admitted as a member of the WTO (the “China/WTO Agreement”). China accepted the WTO's membership invitation by filing its Notice of Accession on November 11, 2001, and formally became a WTO member on December 11, 2001.10

China's WTO membership confirms China's policy of ongoing economic reform and is indicative that China has no intention of returning to the once planned economy that dragged the country to economic stagnation. The China/WTO Agreement, which subjects China to the WTO's rule-based system of international trade and commercial dealings, is the result of over twenty years of economic and legal reform that commenced in 1979.

Membership in the WTO is a reciprocal arrangement. While China must grant national treatment and nondiscrimination to foreign suppliers of goods, WTO member countries like the United States are prohibited from placing an embargo on Chinese goods, discriminating with regard to tariff rates, or imposing unilateral sanctions. Thus, a foreign investor in China need not fear the impact of the annual ups and downs of political relations between China and the United States.11

After World War II, China, by and through the Nationalist Government, was an original party to the 1947 General Agreement on Tariffs and Trade (GATT). When the Communist Government in China came to power in 1949 (after the Nationalist Government fell and sought refuge in Taiwan), it withdrew from GATT because it was no longer willing to honor the tariff concessions and open trade obligations of the trade agreement. In 1986, the People's Republic of China applied to reactivate its membership. In 1995, after being informed that it could not resume its membership, China notified the WTO that it would apply for accession to World Trade Organization under Article XII of the Marrakesh Agreement Establishing the WTO and, as a result, China was required to go through the time-consuming process applicable to new WTO members.

The WTO entry process first required that China prepare and submit a memorandum covering all WTO-related criteria of its trade and economic policies. From 1995 to 2001, China provided the WTO with detailed information concerning its policies, which was submitted to a Working Party of WTO member country representatives.12

The purpose of the WTO Accession Working Party (hereinafter the “Working Party”) was to draft and negotiate a Protocol of Accession (POA), which includes the binding terms and conditions applicable to China's accession to the trade organization.13 The Protocol of Accession contains commitments and clarifications as to matters that may be covered by WTO Agreements. The Protocol of Accession also includes a Report of the Working Party in which the Working Party addresses how China's laws and regulations and rules conform to the WTO agreements and obligations. The Report of the Working Party includes specific “commitment paragraphs,” which are concessions made by China to gain admission to the WTO and Market Access Schedules for agricultural goods, manufacturers, and services sector.14

The Market Access Schedules, which comprise a comprehensive set of schedules setting forth timetables for market entry, are based upon the bilaterally negotiated agreements between China and various WTO members. If one country negotiates favorable terms, such terms apply to all member countries and, in the event of a conflict, the most favorable concession terms apply to all members. The key bilateral agreements include the November 15, 1999, U.S./China Agreement15 between the United States and China and the May 19, 2000, EU/China Agreement between the European Union and China.16 The various bilateral agreements have been compiled into two schedules: China's Schedule of Concessions and Commitments on Goods17 and China's Schedule of Specific Commitments on Services.18


WTO Agreements

Protocol of Accession

Report of the Working Party

Market Access Schedules

WTO China Annexes

Annex 1A: Information to be Provided by China in the Context of the Transitional Review Mechanism

Annex 1B: Issues to be addressed by the General Council in Accordance with Section 18.2 of China's Protocol of Accession

Annex 2A1:Products Subject to State Trading (Import)

Annex 2A2:Products Subject to State Trading (Export)

Annex 2B:Products Subject to Designated Trading

Annex 3:Non-Tariff Measures Subject to Phase Elimination

Annex 4:Products and Services Subject to Price Controls

Annex 5A:Notification pursuant to Article XXV of the Agreement on Subsidies and Countervailing Measures [i.e., List of Subsidies]

Annex 5B:Subsidies to be Phased Out

Annex 6:Products Subject to Export Duty

Annex 7:Reservations by WTO Members

Annex 8:Schedule of Concession and Commitments on Goods

Annex 9:Schedule of Specific Commitments on Services

 

A. China/WTO Agreements

In addition to being a Geneva-based international organization, the WTO is a compilation of over sixty separate trade agreements, protocols, and understandings that bind the member countries which, in general, set forth a rule-based system for international trade, intellectual property protection, and foreign direct investment. Of most critical importance are the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).19

China's accession to the WTO requires that it adhere to all of these agreements in force on the date of accession (December 11, 2001), each of which constitutes a legally binding international obligation and supersedes any conflicting domestic (national or local) legislation. The Protocol further states that the China/WTO Agreements are to be registered under the provisions of Article 102 of the Charter of the United Nations, which represents its binding nature as an international obligation of all member countries.

The China/WTO Agreements set forth three types of commitments required for China's membership to the WTO including specific tariff reductions, market access for services, and commitments outlining the steps China will take to comply with its treaty obligations.

1. China's Commitment: Tariff Reductions

The tariff reduction commitments are set forth in China's Schedule of Concessions and Commitments on Goods.20 As agreed upon in the China/ WTO Agreements, industrial tariffs will decrease from an overall average of 24.6 percent in 1997 to an overall average of 9.4 percent by 2006. For industrial products, tariffs will decrease to 7.1 percent with the majority of tariff cuts fully implemented by 2004. For agricultural products, tariffs will be reduced from an overall average of 31.5 percent to 14.5 percent by January 2004. With a reduction of tariffs, foreign goods manufacturers will be able to import goods into China more cost-effectively.

2. China's Commitment: Market Access for Services

With respect to market access for services, China agreed to open various services sectors based upon a timetable of commitments. Under the Marrakesh Agreement of 1994, WTO member countries are required to commit to gradual opening of services through negotiations every five years under the General Agreement on Services (GATS). The negotiations between the member states and China in regard to market access to the services industry were contentious. While most developed countries, including the U.S. and EU countries, demanded greater access to China's services industry, China's negotiators had requested developing country status, which would have allowed China to keep its services industry effectively closed to foreign participation.21 After years of debate, member countries conditioned their respective bilateral agreements upon specific commitments from China to open its telecommunications, insurance, banking, securities, audio-visual, and professional services sectors.22

Tariff Reductions: Industrial Commodities

Commodity Pre-WTO Tariff after Accession
• Aerospace 10.5% 7.5%
• Agriculture 31% 14%
• Automobiles 80–100% 25% by 2006
• Chemicals Up to 35% 0%, 5.5%, or 6.5%
• Elec/IT Products Up to 35% 0% (select)
• Films/Videos 9–15% 5–10%
• Steel 7.5% average 6%
• Wood and paper 12–18% 5–7.5%
  15–25% 5–7.5%

Tariff Reductions: Agricultural Products

Commodity Pre-WTO Tariff after Accession
• Beef 45% 12%
• Grapes 40% 13%
• Wine 65% 20%
• Cheese 50% 12%
• Poultry 20% 10%
• Pork 20% 12%

China's Schedule of Specific Commitments on Services in Annex 9, Part II of the Working Party Report (“Access Schedule”) contains specific commitments in regard to the opening of various services sectors and outlines the phase-in period with regard to how and when the sector will be opened. The following briefly outlines the market-access commitments made by China:

a. Automobiles and Automotive Industry

All restrictions on the types and models of cars produced locally will be lifted two years after accession. Motor vehicle joint ventures will be able to have provincial level approvals if under $60 million after one year, $90 million after two years, and $150 million after four years from accession. China agreed to allow nonbank, foreign financial institutions to be able to provide financing for all forms of motor vehicles. Upon accession, the 50-percent maximum foreign ownership for engine joint ventures will be lifted and allows wholly foreign-owned production of engines.23

b. Banking and Financial Institutions

China committed to imposing only “prudential” measures in regard to the licensing of foreign-invested banks; namely, that there will be no economic needs test or quantitative limits on licenses. Within five years of accession, all nonprudential measures restricting ownership and operation of foreign financial institutions will be phased out. Upon accession to WTO, China agreed to eliminate all geographic or customer restrictions for foreign currency business, and that the local RMB currency business will be phased in on a regional basis, and will be free from all geographic restrictions five years after accession. Foreign operators will be permitted to provide local currency services to Chinese enterprises two years after accession, and to all Chinese customers five years after accession (2006).24

c. Construction and Engineering

China has agreed to allow for majority foreign-owned joint ventures in the construction industry upon accession, and wholly foreign-owned construction enterprises after three years (December 2004).25

d. Distribution, Trading Rights, and Retail Services

Prior to entry into WTO, China jealously guarded trading rights issued to state-run import/export companies, which stifled competition for imports, as well as reduced domestic companies' access to export markets. In recent years, trading rights have gradually been extended to a much wider range of companies, including Chinese domestic companies, as part of China's market reforms. But the law currently prohibits individuals from undertaking foreign trade (i.e., import and export activities). Under the amendment to the Foreign Trade Law adopted in 2004, all individuals, legal entities, and organizations may participate in foreign trade.26

Within one year after accession (December 2002) foreign investors will be allowed to establish joint ventures with minority interests to engage in the wholesale business of most imported and domestically produced goods (with the exception of certain commodities listed in Annex 2 such as books, newspapers, magazines, pharmaceuticals, pesticides, chemical fertilizers, processed oil, and crude oil). Two years after accession (December 2003) foreign majority ownership of joint ventures with trading rights will be allowed, and wholly foreign-owned enterprises will be allowed three years after accession (December 2004). After five years (December 2006), foreign enterprises may begin to distribute certain restricted products such as chemical fertilizers, processed oil, and crude oil.

In June of 2003, the Ministry of Commerce and General Administration of Customs jointly issued a notice allowing free-trade zones (FTZs) in Shanghai (Waigaoqiao), Shenzhen (Futian, Shatoujiao, and Yantian), Tianjin, and Xiamen (Xiangyu) to grant trading rights to enterprises in those zones.27 Under the FTZ Trading Rights Notice, enterprises in the four FTZs are authorized to enjoy the same treatment as the non-FTZ enterprises in the same regions with respect to the right to freely import and export goods. The provisions are designed to provide FTZ enterprises with more freedom to trade goods with non-FTZ entities and to dispense with the need to use a trade agent for transactions with domestic companies outside the zones.

Effective June 1, 2004, the Ministry of Commerce (MOFCOM) promulgated regulations addressing the activities of FIEs in the commercial and distribution sector.28 The FIE Commercial Sector Regulations specify the standards by which foreign-invested commercial enterprises may conduct retail, wholesale, franchise, or commission agency business.

e. Health Care: Medical and Dental Services

Upon accession in December 2001, China agreed to allow qualified foreign operators the right to provide medical and dental services through foreign majority-owned joint venture hospitals or clinics “with quantitative limitations in line with China's needs.” However, China provides that the majority of medical personnel of JV hospitals or clinics be Chinese nationals, although foreign doctors are permitted to provide “short-term medical services” after obtaining authorization from the relevant government authorities.29

f. Insurance Services

China's WTO obligations provide that China will allow foreign insurers selling nonlife insurance to establish joint ventures with 51-percent ownership upon accession, and, after two years (December 2003), they will be allowed to establish wholly foreign-owned branches with “no form of establishment restrictions.” Foreign life insurance companies are permitted to establish joint ventures with 50-percent ownership upon accession.

Foreign insurance brokerage firms of large-scale commercial risks (including reinsurance and international marine, aviation, and transport insurance and reinsurance) are allowed to establish joint ventures with foreign equity to a maximum of 50 percent upon accession; 51 percent after three years; and after five years, wholly owned subsidiaries will be authorized. China has further committed to seven new insurance licenses, five for life insurance and two for nonlife insurance companies, and an additional two foreign insurance companies will be allowed to establish in a second city.30

g. Foreign-Produced Films

Pursuant to its WTO commitments, China will increase the quota on imports of foreign films to forty films per year (up from ten per year in 2001). In three years after accession (December 2004), China will further raise the import quota to fifty films per year, of which twenty will be on a revenue-sharing basis.31

h. Pharmaceuticals

Foreign investors will be allowed to engage in the wholesale distribution and retail sales of pharmaceutical products within three years of China's accession to WTO (December 2004). However, China has reserved the right to exercise price controls over certain imported and domestically produced pharmaceuticals.32

i. Professional Services: Law Firms and Accounting Firms

Upon accession to WTO, foreign-owned accounting firms are authorized to provide taxation and management consulting services, and are no longer required to have a local Chinese partner. Foreign-owned law firms are allowed to provide expanded legal services and to establish a presence in multiple cities.33

j. Telecommunications Services

Pursuant to the Access Schedule, foreign investors may hold a maximum 25 percent share in mobile voice and data services communications upon accession, 35 percent stake after one year, and 49 percent after three years. With respect to value-added services such as Internet, paging, and other services, foreign operators may hold 30 percent ownership in companies located in Beijing, Shanghai, and Guangzhou upon accession. Two years after accession, geographic restrictions are lifted and foreign ownership interest may be up to 50 percent. Foreign operators in fixed line and long distance services can hold a 25 percent stake after three years and 49 percent after six years.34

3. China's Commitments: Treaty Obligations

In addition to China's agreement with respect to tariff reductions and market access for services, the China/WTO Agreement also addresses China's treaty obligations of WTO membership. The WTO treaty obligations, which consist of sixty separate treaties, agreements, and understandings that create a rule-based system of trade law developed over fifty years since the original negotiations, became applicable to China upon accession. The following are the most important agreements under WTO:

a. Agreements on Trade in Goods

The agreements on trade in goods are numerous and address a variety of trade-related matters including, but not limited to, the following: (a) that WTO member states convert nontariff barriers concerning agricultural commodities to tariffs only (i.e., Agreement on Agriculture); (b) that laws governing food safety, animal or plant health, and similar regulations be based upon objective and scientific data (i.e., Agreement on the Application of Sanitary and Phytosanitary Measures); and (c) that laws governing direct foreign investment afford national treatment and be transparent within two years of accession unless there is a recognized exception (i.e., Agreement on Trade-Related Investment Measures, or TRIMs).

b. Agreements on Trade Facilitation

The agreements on trade facilitation clarify the scope of the General Agreement on Tariffs and Trade and include (a) the Agreement on Implementation of Article VII of the GATT (Customs Valuation);35 and (b) the Agreement on Import Licensing Procedures.36

c. Protocol of Accession: Matters Specific to China

The Protocol of Accession includes the binding terms and conditions applicable to China's accession to the trade body and clarifications as to matters that may be covered by WTO Agreements. Several issues raised in the Protocol include the following commitments:

(1) Administration of the Trade Regime.  Upon accession, China agreed to apply a uniform administration of its trade regime throughout the entire country, including the Special Economic Zones border trade regions, minority autonomous areas, and other special zones.37 China agreed to apply or administer its trade laws in a uniform, impartial, and reasonable manner, and local and provincial authorities will be bound by WTO obligations. China also agreed to establish a mechanism under which individuals and enterprises can bring to the attention of the government instances of “non-uniform application of the trade regime.” China further agreed that only published laws, regulations, and other measures will be enforceable against WTO member countries and that China agreed to establish designated judicial tribunals that are empowered to make a prompt and impartial review of administrative actions affecting trade in goods and services.38

(2) Nondiscrimination.  China agreed that foreign individuals, foreign enterprises, and foreign investment enterprises (FIEs) in China shall receive treatment that is “no less favorable” than domestic individuals and enterprises. The principle is referred to as “national treatment” and prohibits discrimination between foreign products/services and domestic products/services. WTO also prohibits discrimination between trading partners. This principle is also known as most favored nation treatment and applies with respect to (a) the procurement of inputs, goods, and services; and (b) prices and availability of transportation, energy, telecommunications, and utility resources.39

(3) Non-Tariff Barriers.  Non-tariff barriers to trade have been a problem for importers for many years and significantly impact trade. The most prevalent form of such barriers is the import licensing system, quota allocations, and specific tendering requirements. After accession to WTO, China commits to phase out these requirements before or no later than the end of 2006. Annex 3 lists all products subject to licensing, quota, or tendering requirements and lists the timetable for when such barriers will be eliminated. China further agreed to report annually to the WTO's Committee on Import Licensing those commodities that continue to require import licenses, and agreed to justify why such licensing remains necessary.40 Additionally, China agreed that, in accordance with TRIMs, several requirements imposed on FIEs would be eliminated, including all foreign exchange balancing obligations, local content rules, and export performance requirements.41

(4) Price Controls.  Upon accession, China agreed to eliminate most price controls and to continue to implement a system of market pricing, except for those products listed in Annex 4 of the Protocol. Price controls will continue to apply to certain state-controlled commodities such as tobacco, natural gas, and pharmaceuticals. Guidance price controls, whereby the government adopts a suggested or reference price and allows enterprises to price their products within 5 to 15 percent of the guidance price, will continue to apply to certain specified commodities such as grain, vegetable oil, sugar, processed oil, fertilizers, silkworm cocoons, and cotton. Under WTO, China is allowed to continue to use guidance pricing for some services sectors such as transport, commission agents (trademark, advertising, tax, and bidding), financial services, residential housing, and medical services.

(5) Subsidies.  Under the Agreement on Subsidies and Countervailing Measures (SCM Agreement), China is required to notify the WTO of all subsidies granted by the government. Annex 5A of the Protocol of Accession acts as China's formal notification under the SCM Agreement and describes the subsidies granted by the PRC government to domestic producers. Annex 5B (Subsidies to be Phased Out) describes the subsidies which will be eliminated and the timetable.42

(6) Taxes on Imports and Exports.  Upon accession, China agrees that all export taxes other than those listed in Annex 6 of the Protocol of Accession will be abolished. Annex 6 lists products subject to an export tax at the average rate of 20 percent. By agreement, foreign-invested enterprises will eventually be granted the right to receive a rebate on export VAT in a similar fashion as domestic enterprises.43

(7) Technical Barriers to Trade.  As part of its WTO commitments, China agreed to publish all technical barriers to trade including all formal or informal technical regulations, standards, or conformity assessment procedures applied to imported goods. Upon accession, China is required to bring these standards into compliance with the Agreement on Technical Barriers to Trade.44 The technical standards apply to both foreign and domestic products, and all producers are subject to a single inspection organization.

(8) Right to Trade.  Prior to 2001, only a limited number of domestic companies had the right to import and export goods. These companies were divided by industry sector, which bars trading companies in particular industry sectors from importing goods outside their approved industries. With the exception of certain commodities, over a three-year period after accession, such trading rights will be extended to all enterprises in China, allowing them to trade in all goods.45

B. China's WTO Compliance Record

There are many governments and organizations, such as the U.S.-China Business Council and the American Chamber of Commerce China, that are actively monitoring China's compliance with its WTO obligations. In early 2004, after two full years of WTO membership, most observers state that China has made good efforts but still has a long way to go to implement its obligations. In mid-2003, the USCBC reported that the PRC government has been “slow to implement its most significant commitments” and in certain situations appears to have “stalled” in the implementation.46 Specific problem areas in China's first two years of membership include complicated import licensing procedures for agricultural products; cumbersome quota allocation procedures; adoption of new sanitary and phytosanitary measures that target imports of soybeans; high registered capital requirements for foreign services firms (i.e., banking, insurance, logistics, and telecom services) to establish a presence or branch offices; late promulgation of the automobile finance regulations; continued preferential treatment of border trade and domestically produced integrated circuits; failure to enforce intellectual property rights, lack of transparency in enforcement proceedings, and inadequacy of penalties imposed on infringing parties; and problems with China Customs concerning valuation and new emphasis on revenue collection that is precipitated by tariff reductions under WTO.47 However, the government has taken steps to ensure that import laws and regulations be distributed to the public for comment. As an example, MOFCOM issued regulations on November 25, 2003, which provide that any MOFCOM-issued regulation or administrative policy is required to be distributed to the public for comment prior to promulgation if the proposed regulation is important to the interests of citizens, legal persons, and other organizations. With the exception of regulations deemed to be confidential under state secrecy standards, MOFCOM is required to publish the draft regulatory proposals through three channels, namely, the MOFCOM official Web site, the MOFCOM Gazette, and the International Business Daily, which is affiliated with MOFCOM. MOFCOM is also the first PRC government agency to use the Internet for public debate concerning law and policy issues in China.48 More effort must me made to eliminate inefficient bureaucratic procedures and improve transparency in government.49 Furthermore, while the government has adopted or amended many laws to meet its WTO obligations, the leadership must take steps to actually implement and enforce the laws and regulations that are promulgated.

The obstacles to full implementation of WTO obligations are protectionism, lack of understanding of obligations, and lack of resources. If China does not move quickly enough, it is likely that foreign governments will contemplate taking unilateral action against China to safeguard their commercial interests.50 It is left for observation as to whether China will deliver on its important outstanding WTO commitments.51

C. U.S./China Trade and Political Relations

The relationship between the U.S. and China has, since at least 1989, been characterized as difficult at best, and many issues remain ongoing concerns and potential flashpoints in the relationship. Continued tension is created by China's rhetoric threatening to attack Taiwan if the country moves closer to declaring independence, and the lack of restraint is met with consternation by the U.S. government, notwithstanding the U.S. policy agreeing to the “one China” principle.52 Proliferation of weapons and weapons-related technology is an ongoing concern, and various U.S. agencies have sanctioned Chinese companies for violations of a range of proliferation activities. Human rights issues have also been a concern, primarily with respect to arbitrary detentions, crackdown on use of the Internet for benign political dissension, and constraints on religious freedom under the guise of quashing cult activities or terrorism. At the same time, China has played a constructive role in mediating the conflict on the Korean peninsula by hosting trilateral and six-party talks with the U.S., China, North Korea, and other players in Asia.

On the economic front, the trade deficit with China and the value of Chinese currency continue to be a source of tension and debate between the U.S. and China. A few comments on the renminbi value and trade deficit issues are instructive.

1. Valuation of the Renminbi: Chinese Currency Issue

The value of Chinese currency (the Yuan, renminbi, or RMB) is a contentious political issue between the United States and China, especially in 2003/2004. As background, since the mid-1990s China has set the value of the RMB within a narrow range to the dollar which, in effect, acts as a fixed exchange rate (8.3 to 1). For various reasons, the RMB exchange rate has declined against major foreign currencies. PRC policy is to hold the RMB exchange rate steady, which has resulted in large foreign exchange reserves. Many critics believe that China is purposefully undervaluing the RMB to bolster the already competitive position of low-price Chinese goods, and thus to make them even cheaper in overseas markets. Critics in the U.S. believe that an undervalued RMB is a subsidy to Chinese goods exported to the U.S. and are urging China to adjust the exchange rate to push the RMB value higher.53

China has maintained the same monetary policy since 1995 and wants to deter speculators and avoid deflation as experienced in Japan and Hong Kong. China fears (based upon the experience of other Asian economies during the financial crisis of the past) that a floating exchange rate could be manipulated by speculation and international currency fluctua-tions and lead to a financial crisis. A revaluation of the RMB may also accelerate deflation, which has been a historical problem. Moreover, China's banking system is weak and immature and is unprepared to manage a financial crisis that could possibly spiral out of control, with a bad loan portfolio of 35 to 50 percent of the GDP. The China Banking Regulatory Commission was only formed in early 2003 and is still trying to gain the experience as a regulatory agency and to develop the tools to better supervise China's banking system.54

Consumers in the U.S. buy Chinese-made goods because they are low- cost to begin with, and not because of the decline in currency value. The RMB value is really not determined by trade, but by the inflow and retention of foreign capital. What China needs to do is to encourage the use of its foreign exchange reserves.

PRC officials, including both the heads of the People's Bank of China (PBOC) and the Ministry of Finance (MOF), have promised greater flexibility for valuing the RMB for years, and realize that there are advantages to flexibility. However, it is unlikely that they will take any real action other than to encourage more Chinese citizens to spend money overseas (which will have insignificant impact), or possibly either to increase the band around which the RMB fluctuates and allow it to settle within a slightly higher range, or even perform a small one-time revaluation. If the band around the RMB is widened (or a “managed floating rate”), the end result may be an exchange rate of around RMB8.10 to the dollar. But the true value of the RMB is subject to conjecture and cannot be estimated.

As one solution, the PRC government reduced the VAT rebates offered to exporters, which will make the exports more expensive and thereafter increase the competitiveness of U.S. goods. To this effect, the MOF and the State Administration of Taxation (SAT) issued a joint order on October 13, 2003, which lowered the average export rebate by three percent, to 12.11 percent, effective as of January 1, 2004.55 The reduction of export rebates is supposed to make exports more expensive, but this is really not the case because the rebate program is unworkable given that the government in late 2003 had a backlog of some $24 billion in unpaid export tax rebates. Further reform of the VAT rebate system is expected.

To counter the critics, what China needs to do is to provide real market access, and ahead of the WTO timetables agreed upon for accession. Observers are hopeful that the Chinese government will liberalize trade in services and rapidly grant full trading rights for foreign investors and without unreasonable minimum capital requirements. This would indeed open the markets to the sale of U.S. goods and services and level the playing field to some degree.56

2. U.S./China Trade Deficit

The issue of China's trade deficit with the U.S. is a complicated statistical concept that is equally misunderstood, misinterpreted, and used for political purposes.57 While the deficit with China actually increased in 2003, it also declined for other Asian economies such as South Korea and Taiwan. This is because a significant amount of manufacturing has shifted from these countries to China, and the U.S. trade deficit equation is likely to change again as Japan, Singapore, Taiwan, and South Korea continue to shift their production to the Mainland. More and more cars, semiconductors, appliances, etc., are being produced in China at the expense of other former production centers in Asia.

Since 1990, China is one of the fastest-growing export markets for U.S. goods. Annual exports to China from the U.S. have quadrupled since 1990, and stand at $22.1 billion in 2002. The principal exports from the U.S. include aircraft, medical equipment, electrical machinery, and power generation equipment. In addition, while the U.S. has a trade deficit with China for goods, the U.S. has a trade surplus in trade in services (and has for much of the past decade). The trade surplus in services was approximately $2.2 billion in 2001, and is likely to increase as China meets its market access commitments for services.58

Moreover, most imported merchandise from China (90 percent) is substitutes from other low-wage countries such as Mexico, Malaysia, Vietnam, Indonesia, etc. The imports from China include low-tech electrical machinery, toys, apparel, and footwear. Less than 10 percent of imports from China compete directly with U.S.-produced goods. The end result is that U.S. consumers benefit from the ability to purchase low-cost low-tech goods from China.

The only way that China will increase its “imports” from the U.S. is to continue to liberalize trade in goods and services pursuant to, if not before, WTO timetables.

Practice Tips: Rules on China's Ongoing Legal, Economic, and Political Reform

  • Some things relevant in the 80s and 90s may not be relevant today—many of the laws and practices of the past are out of sync with China's new economy, and investors should be prepared to adjust from prior arrangements and understandings
  • Some things that are relevant today may not be relevant in the future—many of the laws and practices in the future will be affected by China's ongoing reform, and it's critical to anticipate and plan for change
  • Some things will always be relevant in doing business in China—such as
    • The drive of China's people to be accepted as respected members of the international community
    • A strong desire to do things in China's own way (or with Chinese characteristics) given the sensitivities stemming from past foreign intervention and a history of unequal treaties and extraterritorial treatment
    • The “rule of law” is a concept that the Chinese people are cautiously embracing in light of cultural acceptance for the “rule by man” that takes its genesis from the autocratic-based systems of Confucianism, feudalism, warlordism, foreign subjugation, and Communism that historically has controlled Chinese society in the past

Practice Tip

There are many new laws or amendments to existing laws in the pipeline. In December 2003, the Standing Committee of the 10th National People's Congress (NPC) released its five-year legislative plan that describes the 76 laws to be promulgated or amended. Business- and trade-related laws listed in the five-year legislative plan include:

Proposed New Laws

Property Rights Law

Futures Transaction Law

Taxation Basic Law

Fiscal Transfer Payment Law

Western Development Promotion Law

Right Infringement Liability Law

Commercial Registration Law

Enterprise Bankruptcy Law

State-Owned Asset Law

Foreign Exchange Law

Antitrust Law

Antidumping and Antisubsidy Law

Enterprise Income Tax Law

Banking Industry Supervision and Administration Law

Labor Contract Law

Proposed Amended Laws

PRC Company Law

Partnership Enterprise Law

Securities Law

Individual Income Tax Law

Audit Law

Foreign Trade Law

Civil Litigation Law

Arbitration Law

Source: NPC Sets Legislative Five-Year Plan, China Market Intelligence, The U.S.-China Business Council, December 17, 2003.

D. Political Reform, Participatory Government, and Law Reform

Many observers believe that as China continues its ongoing economic and legal reform, political or democratic reform must naturally follow. The growing middle class and increase in international communications has placed pressure on the government to be more responsive to the attention of citizens' concerns. While modest in form, there are recent examples of democratic reform in China, such as permitting village elections and establishing a professional staff within the National People's Congress, which are designed to make the government more accountable and representative of the people and not solely the party. At the Chinese Communist Party study session on September 29, 2003, President Hu Jintao stated that China must strengthen “the socialist democratic system” and continue to move toward the rule of law in China.59 Hu's statement is indicative that the survival of the CCP in the long term will depend on whether the system provides for greater citizen participation and a voice in government policy than in the past. In time, the government will need to take steps to allow further citizen participation in government, or risk being alienated from the populace.

China will continue to be an attractive destination of FDI but, in order to bolster the confidence of investors, it must continue to move quickly to make progress with respect to the following challenges:

  • Make progress with respect to the recognition of the rule of law in which property rights are fully respected
  • Promote and enforce corporate governance standards to ensure that company practices are transparent and responsive to investors' interests
  • Take aggressive steps to halt corruption and economic crimes
  • Continue to reform China's banking regulatory system and decrease the high volume of its nonperforming loan portfolio, while moving toward a more flexible policy on the convertibility of the RMB
  • Continue to meet and adhere to full compliance with WTO market access and other trade obligations, and to do so on a uniform basis nationwide

Since 1979, and specifically post-WTO, China has engaged in prolific legislative and regulatory activity and has enacted new laws, and issued regulations, orders, rules, and explanatory circulars that impact a foreign party's operations, including laws affecting foreign investment, securities and corporate governance, financial reform, labor relations, foreign exchange control, and customs and taxation. The PRC leadership is repeatedly promulgating and amending laws and regulations on a reactive basis that leads to compliance questions, regulatory turf wars, and inconsistent application. In addition, many laws and regulatory measures are based upon underlying policy statements that reflect the government's priorities, objectives, and attitudes toward foreign investment and economic development. The continuing legal reform in China adds to the unpredictability of operating in the PRC, and the best protection is to monitor the legal and political environments.

The purpose of the China Law Deskbook is to provide practitioners, corporate counsel, academics, and government attorneys involved in China with a current and concise guide concerning the laws issued by the National People's Congress (NPC) of the People's Republic of China, the NPC's Standing Committee, the State Council, and the various Chinese government ministries that promulgate administrative measures affecting the China operations of foreign investors. The China Law Deskbook is organized by broad topic categories and provides a summary of the critical legal issues for foreign-invested enterprises (FIE), including corporate organizational structure, industry-specific regulatory matters, tax issues, labor and employment, financial regulation, contracts, liquidation and bankruptcy, customs and the importation process, intellectual property protection, land-use, the protection of the environment and natural resources, mediation and arbitration, litigation, and special rules for zones and administrative regions.

Chapter 2 addresses the historical development of China's contemporary legal system. It starts with an analysis of the philosophical influences from Classical China, including Confucian tradition, Daoism, and Legalism. This chapter then analyzes the role the Western powers had on the development of China's legal system. Finally, Chapter 2 explores the impact of political theories of Marxism-Leninism and Mao Zedong Thought on China's legal system.

Chapter 3 is a summary of Chinese legislative and regulatory institutions and their functions, including a discussion of recent institutional reorganization initiated by the Chinese government. Chapter 3 also provides an overview of the Chinese judicial system, as well as a discussion concerning the role and status of the legal profession in the PRC. This chapter concludes with a discussion of the “rule of law” in China and the forces affecting China's ability to develop a legal system that is consistent, precise, and independent from political interference.

Chapter 4 addresses the various organizational structures available to FIEs for establishing a presence in China. It describes the laws and regulations governing representative offices, branch offices, equity joint ventures, cooperative enterprises, wholly foreign-owned enterprises, joint venture trading companies, holding or investment companies, a company limited by shares, a limited liability company, BOTs, service centers, and partnership arrangements. This chapter also summarizes the procedures for establishing an FIE in China, and the proper format for articles of association and feasibility studies.

Chapter 5 addresses the regulatory environment for industry-specific sectors, including services and manufacturing.

Chapter 6 is a summary of the laws and regulations pertaining to the information technology, telecommunications, and software development industries.

Chapter 7 is a summary of the laws and regulations governing contractual relationships in China. It addresses a number of key laws that affect the rights and obligations of contracting parties, including the Civil Law, the Secured Interests Law, and the Contract Law, effective October 1, 1999, which supersedes the Economic Contract Law, the Foreign Economic Contract Law, and the Technology Contract Law. This chapter also analyzes the requirements for specialized contracts including sales of goods contracts, loan contracts, lease agreements, construction contracts, contracts for works of hire, agency contracts, and technology contracts such as technology development contracts, technology transfers, and technical service contracts.

Chapter 8 is a review of China's new tender and procurement systems, which impact foreign contractors and suppliers of goods under government contracts. This chapter analyzes the Tender Law, which governs the public and private bidding process, and the Procurement Law, which governs how government agencies are permitted to purchase goods and services.

The taxation of FIEs in China is covered in Chapter 9. This chapter addresses the rules governing foreign enterprise income tax and turnover taxes such as the business, consumption, and value-added taxes imposed by the Chinese government. Chapter 9 also briefly discusses the enforcement efforts of China's taxation authorities.

China's Labor Law and personnel management rules are addressed in Chapter 10. This chapter addresses the rights and obligations of employers and employees, the wage and hour rules, registration requirements for expatriate employees, worker rights protection, and dispute resolution in the labor context.

Chapter 11 discusses a broad range of issues affecting the regulation of domestic and foreign-funded financial institutions. This chapter analyzes the rules governing the use and control of foreign exchange, including the registration requirements to hold and exchange foreign currency. Chapter 11 further addresses the accounting requirements for FIEs, as well as the auditing laws and joint annual review procedures imposed upon foreign-funded operations. Chapter 12 follows up by addressing the laws and regulations of China's insurance industry.

Chapter 13, entitled “Consumer Protection,” is a summary of the laws concerning product quality, consumer protection, advertising, pricing, and unfair competition. The chapter also addresses the regulatory environment for the food, pharmaceutical, and medical device industries. The chapter describes the administrative sanctions and penalties that may be imposed if a business operator fails to comply with China's consumer protection laws.

Chapter 14 provides an analysis of China's intellectual property laws, including the laws and regulatory measures concerning the protection of copyrights, trademarks, and patents. Chapter 14 also analyzes the enforcement mechanisms and remedies available to the owners of intellectual property, including customs protection against infringing imports and exports.

Chapter 15 provides an analysis of China's customs laws, including classification, valuation, import licenses, inspection and entry, bonded areas and warehouses, and customs enforcement. This chapter also summarizes the standards and administrative procedures under China's trade remedies laws, such as regulations on anti-dumping, anti-subsidy, and import safeguard measures.

Chapter 16 addresses the rules concerning the regulation of securities trading, public offerings, and the control of securities markets. This chapter analyzes the mechanisms and agencies responsible for supervising the Chinese stock market, including the regulations governing domestic (A-shares) and foreign capital shares (B-shares).

Chapter 17 summarizes the laws and regulations governing land-use, commercial land development, and natural resources.

Chapter 18 addresses the environmental protection laws of China, including the laws on the control of solid waste, water, and air pollution; regulations concerning the requirement of environmental impact assessment reporting; and standards for clean production. As China undergoes considerable infrastructure development fueled by foreign investment, the government has adopted standards to control the exploitation of its resources and to minimize the impact on the environment.

Chapter 19 addresses mergers, acquisitions, and divisions, including an explanation of anti-monopoly and competition law issues in Chinese M&A.

Chapter 20 covers China's bankruptcy law, including creditors' remedies and procedural steps for petitioners. This chapter also addresses the liquidation standards for FIEs that terminate and dissolve prior to the expiration of their stipulated term.

Chapter 21 concerns the mediation and arbitration of business disputes in China. This chapter analyzes the procedural rules concerning arbitration before the China International Economic and Trade Arbitration Commission (CIETAC) and the procedures for the enforcement of CIETAC arbitral awards in China and the United States.

Chapter 22 addresses the rules and procedures for litigation in the people's courts in China.

Chapter 23 discusses the criminal liability for officers and directors of FIEs under China's Criminal Law, including crimes involving FIE registration, stock transactions, intellectual property rights, environmental damage, and industrial accidents. This chapter also briefly discusses the prohibitions and penalties under the U.S. Foreign Corrupt Practices Act (FCPA) and China's criminal laws for illegal payment activities in China. Chapter 23 also addresses the standards for the detention of foreigners in criminal and civil matters.

Chapter 24 describes the laws establishing the special economic zones, open cities, and coastal areas, including foreign investment incentives and preferential treatment for FIEs. This chapter also analyzes the Joint Declaration between the PRC and Great Britain and the Basic Law of the Hong Kong Special Administrative Region (HKSAR).

In Appendix A, the Deskbook provides a number of sample contracts and other sample documents for FIEs. Appendix B is entitled the “Bibliography and Electronic Research Guide” and sets forth a selective list of publications, as well as a comprehensive list of current and active Web sites that provide a wide range of information concerning China. Finally, Appendix C outlines contact information for U.S. and Chinese government resources, bar associations, international organizations, and other resources that maintain information concerning China's legal and business environment. For consistency and authority, the China Law Deskbook primarily cites the laws and regulations translated and reprinted in the China Laws for Foreign Business series published by CCH International or the China Law & Practice series published by Euromoney Publications.

The China Law Deskbook is intended to be a general overview of the laws of the People's Republic of China and is not designed as a comprehensive analysis of China's legal system. The Deskbook, including the sample contracts and information in the appendices, is provided to readers as a general guide and cannot and should not be construed as legal advice. Further, the laws and regulations cited throughout the Deskbook are not intended to be an exhaustive list of the laws, regulations, and rules affecting foreign business in China. Readers are advised to consult with legal counsel, tax advisors, and other professionals with respect to China-related transactions. The dynamics of China's legal system require constant monitoring in order to ensure that the laws, regulations, and the practice are current.


1. The People's Republic of China has the highest population of any country in the world. As reported in 2000, China has over 1.26 billion people, which represents one-fifth of the entire world population. China Statistical Press, China Statistical Yearbook 2000, at 96.

2. Z. Hu & M. Khan, Why Is China Growing So Fast?, International Monetary Fund, Economic Issues No. 8 (1997), available on the IMF Web site at http://www.imf.org/external/pubs/ft/Issues8.

3. Many foreign companies are expanding their operations in China, including an increase in research and development investments. A few examples in 2003 include the following investments: Dupont China Holdings Ltd. announced that it would invest up to $100 million in an R&D operation in Shanghai; Honeywell committed an initial $18 million for an R&D center in China; Lucent Technologies committed to invest $50 million to an R&D facility to develop CDMA2000 standards; and Motorola announced a $500 million research facility investment in Beijing. See The U.S.-China Business Council, China Operations 2003, Analysis: Foreign Investment in China, First Half 2003, at 21.

4. DOC China Commercial Guide, at 1.

5. DOC China Commercial Guide, at 3, 15.

6. See generally C. Hutzler, China to Protect Private Property in Constitution, Wall St. J. (Dec. 22, 2003); China Legislature Proposes Amendment For Pvt Ppty Rights, Dow Jones Newswires (Dec. 22, 2003). The official Chinese news agency, Xinhua, states that the proposed amendment would put private property “on an equal footing with public property.” The amendments were adopted at the March 2004 NPC meeting. Another amendment proposed would enshrine in the constitution the Three Represents theories of Jiang Zemin, which provides that the party must represent the interests of the business community and entrepreneurs, as well as the working class. Jiang's theory is accepted as official party policy. See generally Constitution to Embrace “Three Represents” and Private Property, Xinhua News Agency (Dec. 22, 2003), available online at http://www.xinhuanet.com; Constitutional Amendments to Have Far-Reaching Influence, Xinhua News Agency (Dec. 28, 2003), available online at http://www.xinhuanet.com; Amended Constitution Published, available on the Web site of the Supreme People's Court at http://www.chinacourt.org (March 16, 2004). The 2004 amendments to the constitution also confirm state support for human rights; provide that compensation shall be paid to property owners for any expropriation of land by the state; change the references to “martial law” to “state of emergency”; and recognize that delegates to the NPC from special administrative regions (i.e., HKSAR, Macao SAR) may be elected. NPC Concludes: Enacts 14 Amendments, Approves Work Report, China Market Intelligence, The U.S.-China Business Council (March 18, 2004). Article 13 of the Constitution was amended to provide that the “lawful private property of citizens shall not be violated. The state shall protect private property rights and inheritance rights of citizens in accordance with the law. The state may, in the public interest, expropriate or requisition private property of citizens in accordance with the law and shall provide compensation therefore.” Under Article 33, the following clause was added: “The state respects and preserves human rights.”

7. Opinions on Advancing Separation of Social Service Functions from State Owned Enterprises, promulgated April 2002 jointly by the State Economic and Trade Commission, Ministry of Finance, Ministry of Education, Ministry of Health, Ministry of Labor and Social Security, and Ministry of Construction. The order applies only to SOEs owned by governments at the provincial level or below, and not to the larger SOEs, which are under the direct supervision of the central government. The central government plans to devise a separate set of rules for larger SOEs. The order emphasizes that existing subsidies for housing, medical care, and other services are required to be reflected in workers' salaries. The order requires that within three years of promulgation, the social service organizations (i.e., schools, hospitals, housing, and other service departments) owned and operated by provincial SOEs to be separated from the parent enterprises. Social service organizations owned and operated by SOEs in less-developed areas are granted a five-year time period to separate from the parent enterprises. The order does not set deadlines for SOEs located in rural areas. Educational facilities separated from their parent SOEs are to be transferred to local governments. Former parent companies and local governments are required to provide operating funds to separated institutions for the first three to five years. After five years, local governments will provide all funds. SOE hospitals may either operate independently, merge with other existing facilities, or close. Other SOE service departments, such as housing and utility maintenance services, must form for-profit companies providing services to the public after separating from their parent companies. Though this plan to reform SOEs is a step forward, it will be difficult to implement. Hundreds of thousands of SOE employees will face reassignment, and many of them will lose their jobs. And the plan will not succeed without massive amounts of funding.

8. See News Conference with Xie Feng, Chinese Embassy Spokesperson, Federal News Service, July 22, 2002, available on Lexis, News Library. In 2002, the GDP per capita of China was $800, which is one-fourth of Japan's.

9. Outbound investment by leading Chinese companies continued to increase in 2003 including the following examples: Sinopec Corp. and the State Oil Company of Azerbaijan Republic agreed to a $140 million transaction for the rehabilitation of an onshore oilfield in Azerbaijan; PetroChina Co., Ltd., and the government of Sudan agreed to invest approximately $1 billion to expand Sudan's largest refinery and oil pipeline. See The U.S.-China Business Council, China Operations 2003, Analysis: Foreign Investment in China, First Half 2003, at 21.

10. See generally M. Dudek & A. Wang, China's Long WTO March, China L. & Prac. (April 2001).

11. Prior to membership in the WTO, China's most favored nation (MFN) status with the United States was subject to annual review and renewal by the U.S. government. The annual review process was a source of tension between the pro-China business lobby and those opposed to open trade with China as a result of several sensitive issues such as weapon sales, human rights violations, aggression toward Taiwan, trade imbalances, and other reasons. The Congressional-Executive Commission on China (CECC) has released a number of reports critical of China's human rights practices and security-related issues. For copies of the reports, testimony, and other materials, see http://www.cecc.gov.

12. In 1987, the Working Party for China was first formed to evaluate China's request to resume its GATT membership. In 1995, the original Working Party was converted to a WTO Accession Working Party when China applied for membership under Article XII of the WTO Agreement.

13. The Protocol requires that China is subject to all WTO Agreements on accession (December 11, 2001), unless otherwise noted in the Agreement. Most of the exceptions are outlined in the Annexes attached to the Protocol.

14. In contrast to the Protocol of Accession, which is relatively short and describes how the WTO Agreements will be applied to China, the Report of the Working Party is a detailed examination and evaluation of China's trade and foreign investment system. The Report outlines the questions of the Working Party Member country representatives and China's responses thereto, which explains how China's existing legal system conforms to WTO Agreement obligations. In some situations, China provided information and evidence that its current laws and regulations already conformed to WTO requirements, while in other instances China recognizes the need to change its laws and outlines its formal commitments as to how the system will be amended.

15. The United States played a critical role in negotiating China's accession to the WTO and was the first country to execute a bilateral agreement with China. The U.S./China WTO Agreement covered all agricultural products, industrial goods, and services sectors. The EU/China WTO Agreement covers those specific areas and products that were of key significance to the European Union.

16. The agreement with Mexico was the final bilateral agreement reached with China. In this regard, China agreed to allow Mexico to extend its current countervailing duties on 1,300 Chinese products for six years. A number of the Working Party Member countries were not willing to grant China full WTO rights. These reservations, from countries like Mexico, the Czech Republic, Poland, and the EU, are listed in Annex 8, together with timetables for the phasing out of these restrictions.

17. Document WT/ACC/CHN49/Add.1. See the Web site of the World Trade Organization at http://www.wto.org for copies of all WTO documents.

18. Document WT/ACC/CHN/49/Add.2.

19. The Patent Law, Copyright Law, and Trademark Law have been amended prior to China's accession to WTO, and generally conform to TRIPS. Much work still needs to be done in the enforcement of China's intellectual property laws.

20. Document WT/ACC/CHN49/Add.1. See generally China Begins Cutting Average Tariff Rate to 10.4%, Xinhua News Agency (Jan. 2, 2004), available online at http://www.xinhuanet.com.

21. During negotiations, China requested that it be treated as a developing country, rather than a developed country. The difference would have allowed China to be given greater flexibility if considered a developing country. Although the per capita income of its people justified treatment as a developing country, it was the view of the U.S. and EU that China's strong GDP, foreign trade (over $350 billion in 2000), and successful foreign investment program did not justify treatment as a developing country. The Working Party granted China a measure of developing country status (such as in agriculture and the phase-in of its full WTO compliance), but in most areas, the Working Party asked and expected full compliance as required of developed countries.

22. GATS requires members to open their services sectors, but GATS participation by WTO member countries is not mandatory. As a consequence, many WTO members have not taken the liberty to open their services industries to foreign participation.

23. See generally W. Yi, China's WTO Compliance and Foreign Investment in the Auto Industry, China L. & Prac. (Feb. 2003). For a discussion of the automobile finance rules, see Chapter 11, Financial Regulation, § D.3.

24. See generally C. Wei, M. De Sombre, and H. Zhang, China Post-WTO Reforms in Financial Services: Achievements and Challenges, China L. & Prac. (March 2003).

25. For a discussion of the laws and regulations concerning the construction industry, see Chapter 5, Foreign Investment Guidelines and Industry-Specific Regulations, § B.5; Chapter 7, Contract Law, § B.7; and Chapter 8, Tender Law and Government Procurement.

26. For an analysis of the foreign trade law, see Chapter 5, Foreign Investment Guidelines and Industry-Specific Regulations, § B.12.

27. Notice on Trial Work Granting Import and Export Rights to the Enterprises in the Four FTZs (issued by MOFCOM and GAC in June 2003) (hereinafter the “FTZ Trading Rights Notice”). See generally W. Fu, Establishment & Operation of WFOEs in Free Trade Zones, China L. & Prac. (June 2003).

28. Regulations for the Administration of Foreign Invested Enterprises in the Commercial Sector (issued on April 16, 2004, by the Ministry of Commerce) (hereinafter the “FIE Commercial Sector Regulations”).

29. The Access Schedule defines “short-term service” as six months with the possibility of another six-month extension. For an analysis of the regulations of foreign investments in hospitals and clinics, see Chapter 5, Foreign Investment Guidelines and Industry-Specific Regulations, § B.15.

30. For information concerning China's WTO commitments in the insurance industry, see the Web site of the China Insurance Regulatory Commission at http://www.circ.gov.cn. On December 18, 2002, CIRC issued a press release that outlines the progress made to date concerning market access in the insurance industry. For a discussion of China's insurance laws and regulations, see Chapter 12, Insurance Law and Regulation.

31. For an analysis of the entertainment industry and opportunities for Sino-foreign film production, see Chapter 5, Foreign Investment Guidelines and Industry-Specific Regulations, § B.10.

32. For a discussion of the pharmaceutical industry and drug regulations in China, see Chapter 13, Consumer Protection, § G.

33. For a discussion of the rules governing foreign law firms and accountants in China, see Chapter 5, Foreign Investment Guidelines and Industry-Specific Regulations, §§ B.1, B.18.

34. See also Telecommunications Business Catalogue (issued on February 21, 2003, by the Ministry of Information Industries, and effective April 1, 2003). The Telecom Business Catalogue amends the standards for various telecom-related business and clarifies terms used in prior regulations to be consistent with WTO. See also Chapter 6, Information Technology, Telecommunications, and Software Development.

35. The Customs Valuation Agreement sets forth rules to unify the standards and procedures for customs valuation and recognizes in hierarchical order the five WTO-approved methods to determine the customs value of imported goods. The first method of valuation is the transaction value, and thereafter followed by several other valuation methods such as the identical goods transactions method, similar goods transactions method, the deductive method, and the computed method. To meet its commitments to abide by the Customs Valuation Agreement, China adopted the Measures of the Customs of the People's Republic of China for the Examination and Approval of the Dutiable Value of Import and Export Goods, promulgated and effective on January 1, 2002, by the General Customs Administration (hereinafter the “Customs Valuation Measures”). The Customs Valuation Measures recognize that the dutiable value of imported goods shall be examined and determined by Customs on the basis of the transaction price of the goods and shall include the freight, relevant expenses, and insurance incurred before the unloading of the goods at the port of discharge in the PRC. Also, the transaction price of the import goods shall mean the price actually paid or payable by the buyer for purchasing the goods and have been adjusted according to the following Articles 4 and 5 of the measures. The measures also specify proper methods for the calculation of freight, relevant expenses, and insurance in the dutiable value of import and export goods, and they also discuss legal liabilities and certain supplementary provisions. The Customs Valuation Measures supersede the “Measures of the Customs of People's Republic of China for the Examination and Approval of Dutiable Value of Import and Export Goods” implemented as from September 1, 1992, and the “Measures of the Customs of People's Republic of China for the Examination and Approval of Dutiable Value of the Goods Imported for Processing Trade” implemented as from October 1, 1999. For a discussion of customs rules and regulations, see Chapter 15, Customs and Trade Regulations.

36. The Agreement on Import Licensing is designed to simplify import licensing procedures by providing for transparency of regulatory standards and procedures, application submission timetables, and standards for the protection of confidential information. Member countries may elect to have either automatic or non-automatic licensing.

37. The licensing organizations and the licensing procedures for services industry participants are required to be published in an official publication. The policy of allowing an application only after an applicant is notified that it may apply will terminate. Fees charged to issue licenses will be based on administrative costs of providing the license, and not the value of the license itself. Applicants will be provided with written notice of the reasons for a rejection of their application, and reapplication will be allowed. Upon approval of a license, the applicant may commence business operations upon registration with the State Administration of Industry and Commerce and the effective date of a business license may not be postponed without justification. In August 2003, the Standing Committee of the 10th NPC adopted the Administrative Licensing Law, which comes into effect on July 1, 2004. The law is consistent with international practice and addresses the concerns of transparency in the licensing process and the elimination of administrative barriers to trade. See generally New Licensing Law Cuts Through Gov't Red Tape, China Daily Online (Nov. 7, 2003), available online at http://www.chinadaily.com.cn. An unofficial translation of the Licensing Law is available on the Web site of the The U.S.-China Business Council at http://www.uschina.org.

38. Upon accession, China committed to provide translations to member countries into one or more of the official languages of the WTO of all laws, regulations, and other measures pertaining to trade in goods, services, TRIPs, or foreign exchange.

39. With respect to the “no less favorable” language, the WTO Agreements do not require that foreign and domestic enterprises be treated the same. China is only required to treat foreign enterprises “no less favorably” than domestic enterprises. As a result, it is permissible to allow China to provide preferential tax treatment for an FIE, although it would not be permissible to provide a domestic enterprise with a tax break without granting the same treatment to FIEs.

40. See Catalogue of Commodities Subject to Import License Administration (issued by the Ministry of Commerce and the General Administration of Customs effective January 1, 2004), available at http://www.mofcom.gov.cn.

41. See generally N. Leigh, Local Content Requirements After China's WTO Entry, China L. & Prac. (January 2002).

42. China reserves the right to subsidize certain enterprises, while gradually eliminating the subsidies. China has listed its subsidies in Annex 5A of the Agreement, and they vary from elevation of poverty programs to the encouragement of high-technology projects.

43. Adjustment of the Rates of Export Tax Rebate Circular (promulgated jointly by the Ministry of Finance and the State Administration of Taxation on Oct. 13, 2003). See generally Supplementary Notice of the State Administration of Taxation Concerning the Management of Tax Refunds and Exemptions for Export Goods According to Enterprise Classification (issued on August 2, 2001, by the SAT), reprinted in China Laws for Foreign Business (CCH), Taxation ¶ 31-813.

44. See generally Z. Huanxin, Technical Standards Updated to Suit WTO, China Daily (April 2, 2004) (quotes Li Zhonghai, director of China's Standardization Administration, who states that “[a]ny Chinese national compulsory standards that fail to conform with the legitimate objectives stated in the WTO/TBT will be either abolished or revised.”). The Standardization Administration maintains its own Web site and solicits comments for national standards. See http://www.sac.gov.cn.

45. The exceptions to the right to trade are outlined in Annex 2, where China reserves the right to control imports of grain, vegetable oil, tobacco, crude and processed oil, and chemical fertilizers and the export of tea, rice, corn, tungsten, processed oil, silk, cotton yarn, and antimony. During the three-year transition period of 2001–2004, certain products may be traded only by approved import/export companies, including commodities such as natural rubber, timber, acrylics, and steel. Crude and processed oil will be liberalized so that 15 percent per year over current levels of imports are added to quotas and assigned to independent enterprises. For a discussion of trading rights, see Chapter 5, Foreign Investment Guidelines and Industry-Specific Regulations, §§ B.13.

46. See China Operations 2003, China's WTO Membership in the Second Year, Written Testimony by the U.S.-China Business Council, September 10, 2003, Submitted in Response to the Office of the USTR's Request for Comments and Notice of Hearing Concerning China's Compliance with World Trade Organization (WTO) Commitments, at 67. See generally R. Murphy, Filling the Glass Half Full: The WTO and Structural Reform in China, China L. & Prac. (Oct. 2003); J.Walton, WTO: China Enters Year Three, China Bus. Rev. (January 2004).

47. See China Operations 2003, China's WTO Membership in the Second Year, Written Testimony by the U.S.-China Business Council, September 10, 2003, Submitted in Response to the Office of the USTR's Request for Comments and Notice of Hearing Concerning China's Compliance with World Trade Organization (WTO) Commitments, at 63–65. For a discussion concerning the ongoing problems with counterfeiting in China and lack of effective remedies to stop infringement of IP rights, see E. Iritani, Bootleggers Raise Stakes in China's Piracy Fight, Los Angeles Times (July 20, 2003), available online at http://www.latimes.com. The U.S. Government initiated the case against China at the WTO on March 18, 2004, alleging that China's value-added tax (VAT) refund policy unfairly discriminates against imported semiconductors and integrated circuits. For a press release and copy of the WTO petition, see the Web site of the USTR at http://www.ustr.gov.

48. See Meet MOFCOM Officials Online, China Market Intelligence, The U.S.-China Business Council (March 3, 2004). For a schedule and transcript of the question sessions, see http://www.mofcom.gov.cn.

49. In an interesting development concerning transparency, the Ministry of Public Security ordered police officials to issue press releases and to hold frequent news conferences with the media to “promote transparency in police affairs.” Traditionally, police officials would ignore the media, and especially the foreign media. The new rule is effective in January 2004, and police are required to issue their first press release before January 22, 2004, the first day of the Chinese New Year. See generally Chinese Police to Open up to Media Questions, Xinhua News Agency (January 2, 2004), and China Orders Police to Issue News

Releases, Talk to Media, Dow Jones Newswires (January 2, 2004). Another interesting example of transparency is the announcement by the Beijing Municipal People's Congress seeking public comments with respect to its legislation proposals for 2003. The announcement listed 58 municipal regulations on a broad range of topics including, but not limited to, regulations concerning labor disputes, rules for management of franchise operations, enterprise liquidation standards, etc. Information concerning the announcement is available on the Web site of the Beijing Municipal People's Congress at http://www.bjrd.gov.cn.

50. The U.S.-China Bilateral Agreement with respect to China's entry into the WTO provides as a protective measure that if imports from China surge at any time for a particular product, there are mechanisms for trade consultations to resolve the issue and, if negotiations are unsuccessful, the U.S. may impose restrictions on importation of the product to prevent market disruption.

51. China maintains that it has complied with its obligations under WTO. In August 2002, the Chinese government claimed that it had finished review of 2,300 laws and regulations of which 830 laws were abolished and 325 were amended. The government also claimed that it was in compliance with its tariff reduction obligations and that the average tariff was approximately 12 percent, and that Customs had reduced tariffs for 5,332 items. The government also noted that it had established the WTO Notification & Enquiry Center, which has received over 350 inquiries in its first six months of operation and has sent out over 200 notices in response to the inquiries on various trade-related issues. Chinese Embassy Spokesperson Xie Feng, July 22, 2002.

52. As the threatening rhetoric increases, so does the ongoing economic integration between Taiwan and the Mainland. In 2002, the bilateral trade exceeded $30 billion and a cumulative investment from Taiwan to China exceeded $50 billion. It is also estimated that over 70,000 Taiwanese are living in China (including management personnel, workers, and retirees). It is left for observation as to whether the increased economic linkages will ease the political stalemate.

53. The currency issue has led to the introduction of a series of legislation in the U.S. Congress designed to counter the impact of the RMB value. Two proposals would require that the U.S. unilaterally assess an across-the-board tariff against Chinese products unless China floats or revalues the RMB to an acceptable level (H.R. 3058 (Rep. English); S. 1586 (Sen. Schumer)). A third proposal would require the U.S. to negotiate an end to currency manipulations by various Asian countries, including China. If negotiations failed, the U.S. would be required to initiate unilateral or multilateral trade remedies (S.1592 (Sen. Lieberman)).

54. For a discussion of China's banking system and the role of the China Banking Regulatory Commission, see Chapter 11, Financial Regulation.

55. Adjustment of the Rates of Export Tax Rebate Circular (promulgated jointly by the Ministry of Finance and the State Administration of Taxation on Oct. 13, 2003). See generally PRC Government Cuts Export Tax Rebate, China Market Intelligence, The U.S.-China Business Council (October 13, 2003), available online to members at http://uschina.org; S. Xiangman and M. Roos, Export Tax Rebates: China's Approach to Reforming the System, China L. & Prac. (Dec. 2003).

56. WFOEs allowed full trading rights in December 2004 and JVs with majority ownership allowed full trading rights in December 2003. The chief concern is that, although China will open the market based upon the WTO timetable, the government will also impose registration and capital barriers that are counterproductive.

57. In 2002, the U.S. Department of Commerce reported that the trade deficit between the U.S. and China was $103.1 billion. This figure is based upon FAS (free-alongside ship) value and U.S. imports' General Customs Value. The USCBC reports that a more accurate figure is $88.5 billion. See The U.S.-China Business Council, China Operations 2003, Understanding the U.S.-China Balance of Trade, at 39.

58. Services account for 78.8 percent of the U.S. economy.

59. The U.S.-China Business Council, China Operations 2003, China Analysis: Chinese Politics Update, at 44.

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