china protocol and working party report with a view … · prospect of wto entry stimulates further...

FOREIGN TRADE BARRIERS42

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TRADE SUMMARY

The United States trade deficit with Chinareached $83.8 billion in 2000, an increase from$68.7 billion in 1999. U.S. exports in 2000were $16.3 billion, up 23.9 percent from theprevious year. Corresponding U.S. importsfrom China were $100.1 billion, up 22.4percent. China is currently the 11th largestexport market for U.S. goods.

U.S. exports of private commercial services(i.e., excluding military and government) toChina were $3.9 billion in 1999, and U.S.imports were $2.7 billion. Sales of services inChina by majority U.S.-owned affiliates were$888 million in 1998, while sales of services inthe United States by majority Chinese-ownedfirms were $62 million. The stock of U.S.foreign direct investment (FDI) in China in 1999was $7.8 billion, up from $6.5 billion in 1998. U.S. FDI in China is concentrated largely in themanufacturing, petroleum and finance sectors.

OVERVIEW

With a population of 1.3 billion people, Chinaoffers a potentially lucrative market for foreigngoods and services. Over the past twenty years,Beijing has made much progress in opening itsmarket to foreign products and investment. Economic and financial reforms are graduallyremoving the privileges accorded state-ownedfirms, and introducing market forces. China’saccession to the WTO, based on the U.S.–ChinaBilateral Market Access Agreement ofNovember 15, 1999, will further open China’smarket to U.S. goods and services. Thecommitments China has undertaken in itsbilateral negotiations with the United States andother WTO members will encourage structuralreform and the rule of law. Accession to theWTO will also support China’s own domesticreform process.

China completed its bilateral WTO negotiationswith all WTO members formally requestingthem, except Mexico. The WTO Working Party

on China’s accession resumed drafting of aProtocol and Working Party Report with a viewtowards completing the accession process assoon as possible. WTO membership will buildon and strengthen China’s implementation of itscommitments to the United States in the 15trade agreements negotiated since 1979.

The Chinese Government has recognized for anumber of years that economic reform andmarket opening are essential components ofsustainable and balanced economic growth. China’s shift away from the planned economymodel to a market economy has been difficultbut is being rewarded by sustained strongeconomic growth and improving livingstandards. Reforms have been particularlydifficult in sectors that traditionally relied uponheavy state subsidies. The aging state-ownedindustrial sector and the heavily protectedagricultural sector are now under significantcompetitive pressure. In the short term afterWTO accession, these pressures may intensify.

While China has a more open and competitiveeconomy than 20 years ago, there are stillsubstantial barriers in place that have yet to bedismantled. The Chinese government hasundertaken a massive effort to revise its lawsand regulations in a manner consistent withWTO rules. Understanding of these provisionsremains limited, however, particularly outside ofBeijing and Shanghai. The central governmentcontinues to protect noncompetitive or emergingsectors of the economy. Provincial and localgovernments have strongly resisted reforms thatwould eliminate protection of local enterprisesor reduce government receipts. This inhibits thecentral government’s ability to implement tradereforms. Import barriers, an opaque andinconsistent legal system, and limitations onmarket access combine to make it difficult forforeign firms to compete in China. Businessinterests must be realistic about the impact ofWTO accession. It will bring enormous changes– both economically and socially – but theprocess will take time.

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FOREIGN TRADE BARRIERS 43

The Chinese Economy in 2000

China officially estimated GDP growth at 8.0percent in 2000, reversing the deceleration ineconomic growth since the early 1990s.Burgeoning exports, increased governmentinfrastructure investment, and stronger urbanconsumer demand were the chief factorsstimulating growth. The improved economicconditions, however, were largely concentratedin a few coastal and urban areas. Rural incomegrowth and consumption – affecting roughlytwo-thirds of China’s population of 1.3 billion –continued to stagnate. Deflation, based on theconsumer price index, eased in 2000, primarilyas the result of higher costs for petroleum andservices. Retail prices for manufactured goodsand agricultural products, however, continued tofall. New bank lending accelerated onlymarginally over 1999, continuing to reflect thegovernment’s efforts to stem the flow of badloans which has supported the predominantlystate-owned sector.

Prospect of WTO Entry Stimulates FurtherReform

China continued unilateral reforms of its foreigntrade sector in 2000 in preparation for entry tothe World Trade Organization. A “proposal”for the 2001-2005 Tenth Five-year Planapproved by the Communist Party CentralCommittee in October notes that China will seekto improve its foreign trade system in waysconsistent both with international norms and“China’s national characteristics.” The“proposal” also calls for an improved legal andregulatory framework and increasedtransparency. For example, the Patent Law wasrevised and a concerted effort is underway toensure that revisions of the Trademark andCopyright laws are completed in time forapproval by the March 2001 session of theNational People’s Congress. Bringing these

laws into consistency with WTO rules,including Trade Related Aspects of IntellectualProperty Rights (TRIPS), will have positiveimplications for foreign and Chinese businessesalike. These revisions were part of the Chinesegovernment’s effort to revise its laws andregulations consistent with its WTO obligations.

Problems Continue Despite Progress

While China’s trade liberalization effortsrepresent a step forward, there were also anumber of new regulations introduced thaterected new or worsened existing trade barriers. Examples of special concern in 2000 included:

Cosmetic Testing and RegistrationRequirements. China requires quality licensesfor manufacturing goods before granting importapproval. Testing assesses conformity tostandards and specifications often unknown orunavailable to foreigners and not appliedequally to domestic products. In 2000, theMinistry of Health further tightened conformityassessment procedures for imported cosmeticsproducts and required expensive testingprocedures. Cosmetic companies complain thatthey have also been required to pay between$1,200 to $9,600 per product for productregistration. The conformity assessment andregistration process takes as long as a year tocomplete and represents the de-facto creation ofa new import barrier.

Educational Testing Service. U.S. companiesproviding testing services in China have facedproblems with the illegal copying, distributing,and selling of their testing materials. Forexample, one Chinese tutoring company hascontinued to infringe copyrighted productdespite repeated raids and confiscation of suchmaterial. The lack of adequate copyrightsafeguards threatens the credibility of the resultsof these tests.

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Chain Store Regulations. Regulations on chainstores implemented in March 2000 imposeminimum branching and space requirements andwill limit the number of entrants to the market tovery large firms. In addition, they underminethe intention of the bilateral Market AccessAgreement between the United States and Chinasigned on November 15, 1999 by placing limitson the scope of operations and type of businessthat chain stores and franchises may undertake.

Restrictions on the Import of Chicken Meat. Rules promulgated in December 2000 placestrict controls on the import of chicken meat. Chinese government authorities claim themeasures were implemented as a means ofcontrolling smuggling and in the interests offood safety, but in effect these regulationscaused a serious disruption in the flow ofpoultry imports into China. In addition, they areinconsistent with commitments in the bilateralAgriculture Cooperation Agreement (ACA)signed in April 1999.

Implementation of Agreements on TilletiaContraversa Kuhn (TCK) in Wheat and Barley. In early December 2000, State Administrationfor Entry-Exit and Quarantine (CIQ) officialsprevented the offloading of a shipment of U.S.origin barley because they claimed it containedunacceptably high concentrations of TCK moldspores. This action took place despite the factthat the shipment carried documentationcertifying it was TCK-free in accordance withconditions outlined in the bilateral AgricultureCooperation Agreement (ACA) signed in 1999. The incident reflects continuing resistance byCIQ to full implementation of China’scommitments under the bilateral ACA.

Registration of Internet Content Providers. OnNovember 7, 2000, the Chinese governmentissued rules governing Internet-based newsproviders. The regulations, jointly drafted by

the Information Office of the State Council andthe Ministry of Information Industries (MII),specify that the Information Office willsupervise the management of all websitesengaged in news dissemination in China. Internet sites run by media organizations at thecentral government and provincial governmentlevels may publish news, but only afterobtaining approval from the Information Office.Other media organizations may not set upindependent news sites, but they may, uponapproval, set up news pages at the websites runby the above-mentioned approved mediaorganizations. If commercial portal sites run bynon-news organizations wish to carry news, theymay do so only after obtaining permission. Aftergaining approval, they may only publish newsprovided by officially approved newsorganizations. The rules stipulate that suchcommercial portals may not carry any newsitems based on their own interviews or fromother sources. Other commercial sites run bynon-news organizations are not allowed to carrynews of any kind. The regulations furtherstipulate that no China-based websites will beallowed to link to overseas news websites orcarry news from overseas news media orwebsites, without separate approval by the StateCouncil. Besides further inhibiting the free flowof information, the regulations will negativelyaffect the quality of information provided bylegitimate Internet content providers.

IMPORT POLICIES

China, at present restricts imports through avariety of means, including high tariffs andtaxes, non-tariff measures, trading rightsrestrictions, and other barriers. Chineseofficials are increasingly aware, however, thatsuch protective measures contribute to endemiceconomic inefficiencies and encouragesmuggling. To address these problems, theChinese Government has undertaken measures

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to reduce these barriers. The number of firmswith trading rights is continuing to increase;after WTO accession foreign entities will gainfull trading rights after three years. China isreforming its tax system to minimizedistinctions between domestic and foreignentities according to the principle of nationaltreatment. In addition, China has substantiallyreduced the number of goods subject to importquotas and will phase-out other quotas afteraccession. China also is clarifying its licensingprocedures in accordance with the WTO’stransparency requirement. Finally, as part of itsongoing preparations for WTO accession, theChinese Government again cut tariffs onJanuary 1, 2001.

TARIFFS AND TAXES

Tariffs

Under the terms of its bilateral WTO agreementwith the United States, once China accedes tothe WTO it will cut industrial tariffs from anoverall average of about 17 percent at present to9.4 percent by 2005. Tariffs for U.S. priorityagricultural products will fall from an average of31 percent to 14 percent by January 2004. Tariffs on all goods covered by the InformationTechnology Agreement – such assemiconductors and computer hardware – are tobe eliminated by January 1, 2005.

An analysis of China’s tariff schedule showsthat import tariffs for products that competewith those of domestic industries the ChineseGovernment seeks to protect remain especiallyhigh. Tariffs for some motor vehicles, forexample, are over 100 percent.

Several U.S. exporters have expressed concernwith the tariff rates that currently exist onparticular products. Some of these productsinclude wine and spirits (65 percent), large

motorcycles (60 percent), beef (45 percent),raisins (40 percent), canned peaches and peachpulp, canned fruit mixtures and frozen peaches(25-30 percent), certain steel products (10-40percent), avocados (25 percent), paper andpaperboard products (15-45 percent), potato andpotato products (13-25 percent), wood products(0-21 percent), fiber glass and auto glass (20percent), soda ash (12 percent), semiconductors(6-9 percent), pulp and recovered paper (2percent), and restaurant equipment. Althoughmany of these tariffs will be reduced oreliminated upon China’s accession to the WTO,U.S. exporters of several of these goods wouldwelcome further cuts.

Exporters of potato flakes from the UnitedStates have also reported an instance in whichChina’s customs authorities have incorrectlyclassified this import item, resulting in a highertariff. As a result, according to the industry,potato flakes are assessed a 40 percent tariffinstead of 30 percent.

The U.S. wine industry has expressed itsconcern about certain customs taxes and theapplication of a minimum invoice value of $2.70per 750 ml on all imported wine. This appears tobe inconsistent with the WTO CustomsValuation Agreement.

Tariff rates significantly lower than thepublished MFN rate may be applied in the caseof goods that the Chinese Government hasidentified as necessary to the development of akey industry. This has been particularly true ofhigh technology items. These products benefitfrom a government policy to encourageinvestment in high technology manufacturing bydomestic and foreign firms. Under the terms ofinvestment policies announced in 1999, foreigninvestment firms who produce certain types ofhigh technology goods, or who are export-oriented, will no longer have to pay duty on

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imported equipment which is not manufacturedin China and which is for the enterprise’s ownuse. China’s Customs Administration also hasoccasionally announced preferential tariff ratesfor items that benefit other key economicsectors, in particular the automobile industry.

In August 1998, the Customs Administrationlaunched an ambitious program to standardizeenforcement of customs regulations throughoutChina as part of a larger campaign to combatsmuggling. The program was introduced tocontrol and ultimately eliminate “flexible”application of customs duty rates at the port ofentry. While foreign businesses selling goodsinto China might at times have benefitted fromlower import duty rates, lack of uniformity madeit difficult to anticipate in advance what theapplied duty would be. The scale of thesmuggling problem itself is illustrated by theprosecution of China’s largest ever smugglingcase, in which US $10 billion in automobiles,oil, and other goods were brought in illegallyover several years. The anti-smugglingcampaign has successfully reduced theflexibility of the local customs officials to“negotiate” duties.

Anti-dumping and Countervailing Duties

As trade barriers come down, China’sbeleaguered state-owned enterprisesincreasingly are resorting to anti-dumpingmeasures to address allegedly unfair imports. For example, an internal Sinopec Journal carriedan article on “Suggestions for Protecting ourPetrochemical Industry by Applying the WTO’sAnti-dumping Agreement.” Press articles havecommented on how Chinese industries shouldbegin filing anti-dumping cases to protect theirmarkets after WTO-mandated tariff cuts. SinceChina first promulgated Anti-dumping and Anti-subsidy Regulations in 1997, China has appliedanti-dumping measures to imports of newsprint,

steel, and chemical products. Withoutexception, the Chinese complainants in thesecases have been large state-run firms, employinglarge numbers of workers, suddenly facingpressure from both domestic reform andimports.

WTO accession – and the accompanyingcompetitive pressure on some outmodedChinese suppliers – seems set to amplify thisnew interest in anti-dumping measures. Chinawill need to substantially modify its anti-dumping regulations (as well as its anti-subsidyregulations) to bring them into compliance withWTO rules. Likewise, China’s anti-dumpingregime lacks the transparency called for by theWTO. Trade officials responsible forinvestigating dumping allegations have beenworking to increase transparency and addressother technical issues.

Taxation

China made several improvements in its taxsystem during the year 2000. In January 2000,China Customs announced that it was cuttingimport taxes on a number of products by asmuch as 2 percent, effective as of the beginningof the year. The cuts covered several hundredproducts in the textile, raw material, andproduction machinery and parts sectors. TheState Council has submitted amendments to thenational tax law designed to standardize taxcollection rates and mechanisms.

Management of the Chinese authorities’ singlemost important revenue source – the value-added tax (VAT) – is, however, weak. Importsare sometimes subject to discriminatoryapplication of the VAT, which ranges between13 percent and 17 percent, depending on theproduct. In addition, while the VAT is collectedon imports at the border, domestic producersoften fail to pay the VAT. For example, when

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China re-imposed a 17-percent VAT on soybeanmeal in July 1999, soybean imports fell by over50 percent. Allegedly, domestic producers ofcrushed soybean meal apparently avoided thetaxes and passed on the price advantage tobuyers.

Tax rebates for exporters, which increased 29percent in 2000, are also subject to significantabuse. In December, Premier Zhu Rongji held aspecial work conference to mobilize theauthorities to combat false claims for export taxrebates. The State Council – China’s cabinet –has organized a group specifically to attack theproblem.

Non-tariff Measures

Non-tariff barriers (NTBs) to trade and tradedistorting measures persist. NTBs in Chinainclude quotas, import licensing, importsubstitution and local content policies, andunnecessarily restrictive certification andquarantine standards. For example, foreign-invested enterprises (FIEs) continue to reportdemands for export performance requirementsin investment contracts, adding that failure tomeet these requirements can result in loss oflicenses for foreign exchange or contracttermination. Similarly, some firms report beingforced to accept contracts mandating increasedcontent from domestic suppliers; governmentagencies strongly encourage firms to “buyChinese”.

Non-tariff barriers to trade are primarilyadministered at the national and subnationallevel by the State Economic and TradeCommission (SETC), the State Developmentand Planning Commission (SDPC), the Ministryof Foreign Trade and Economic Cooperation(MOFTEC), the Ministry of InformationIndustries (MII), and the State Administrationfor Entry-Exit Inspection and Quarantine of the

PRC (CIQ). Specific non-tariff barriers resultfrom negotiations between the centralgovernment and its various ministries, state-owned corporations, and trading companies.

Firms along China’s borders can receive anexemption from quota and licensingrequirements based on a regulation issued in1996. This exemption is intended to allowsmall-scale traders to operate in bordercommunities. However, larger operators may betaking advantage of this system to trade largershipments over China’s land borders.

Import Quotas

At present, quotas limit imports of over 40categories of commodities, including watches,automobiles, grains, edible oils, fertilizers, steel,and certain textile products. Quotas on some ofthese products are scheduled to be phased out aspart of China’s WTO accession. China’s centralgovernment sets annual quotas throughnegotiations held at the end of each year. Officials at local and central levels evaluate theneed for quantitative restrictions on particularproducts. Once demand has been determined,the government allocates a quota to provincesand special economic zones who in turndistribute it to the end-users. Quota amounts areoften unannounced and allocation remainsopaque to outsiders. Monopoly importers, suchas exist for theatrical film imports, are able toestablish de facto quotas that maximize theirmonopoly rents.

China has gradually reduced the number ofproducts subject to quotas and other quantitativerestrictions, and will be required to eliminatemost of them once it accedes to the WTO. Specifically, the bilateral agreement with theUnited States requires China to eliminateexisting quotas for the top U.S. priority productsupon accession and phase-out remaining quotas,

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generally in two years but no later than January1, 2005. Quota levels will grow at an annualrate of 15 percent from levels at or abovecurrent trade, and will be administeredconsistent with China’s WTO commitments.

Import Licenses

Many products that are subject to import quotasalso require import licenses. Since the early1990s, China has eliminated many importlicense requirements, a process that is likely tocontinue as preparations are made for China’sWTO accession. Licenses are still required,however, for a number of items important to theUnited States, including grains, vegetable oil,cotton, iron and steel products, commercialaircraft, passenger vehicles, hauling trucks, andrubber products. China is considering addingmore license requirements in an effort to combatsmuggling.

Although issuance of licenses may be labeled“automatic,” the license applicant must provethat there is “demand” for the import and thatthere is sufficient foreign exchange available topay for the transaction. These requirements willbe eliminated upon China’s accession to theWTO.

Tariff-Rate Quotas

In 1996, China introduced tariff-rate quotas(TRQ) on imports of wheat, corn, rice,soybeans, cotton, barley, and vegetable oils. The regulations governing TRQ Administrationhave not been made public and TRQ quantitiesare not announced, inhibiting trade in thesegoods. Out-of-quota rates are currently as highas 121.6 percent. These issues were addressedin the bilateral market access agreement onChina’s accession. Once it accedes to the WTO,China will establish large and increasing tariff-rate quotas for these commodities, with low in-quota duties ranging from 1 to 10 percent. A

portion of each TRQ will be reserved forimportation through entities other than statetrading entities. To maximize the likelihoodthat TRQs will fill, China agreed to specificrules for administration of the TRQs, includingincreased transparency and reallocation ofunused quota to end users that have an interestin importing.

Export Licenses

Export licenses discourage foreign investment inthe manufacturing sector and slow the flow oftrade. China has progressively reduced thenumber of products requiring export licenses butstill occasionally imposes them on strategicallysensitive commodities. For example, China in1999 imposed export license requirements ontungsten ore to favor the export of semi-processed products. Products still requiringlicenses include raw materials, lethal chemicals,and food products. Some manufactured goods,certain types of textiles, electric fans,computers, black and white televisions, andbicycles also require export licenses.

Transparency

Finding information about economic and traderegulations in the print and electronic media hasbecome much easier in recent years. The 1992bilateral market access Memorandum ofUnderstanding (MOU) laid the foundation forChina to improve the transparency of its traderegime. Pursuant to this Agreement, Chinadesignated the MOFTEC Gazette as the officialregister for publication of all laws andregulations relating to international trade. TheGazette is updated as new regulations areannounced and is available on a subscriptionbasis. In December 2000, a Chinese tradeofficial stated that China planned to expand theMOFTEC gazette and begin publishing agovernment journal – somewhat like the federal

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register – where all local, provincial, andnational laws and regulations related to foreigntrade and investment would be printed. He alsosaid the Trade Ministry (MOFTEC) willestablish an Inquiry Office to provideinformation on commercial, investment, andtrade laws and regulations. Economicnewspapers now routinely carry the texts ofgovernment circulars, announcements andregulations. Most government ministries alsopublish digests or gazettes containing the textsof related laws and regulations, both in hardcopy and on their websites. The State Counciland MOFTEC websites, cei.gov.cn andmoftec.gov.cn, respectively, are particularlygood examples of this trend. In addition, therehas been a proliferation of online news andinformation services such as chinaonline.com,sinolaw.com, and sohu.com that routinely offerup-to-date news about and texts of new laws andregulations.

Despite this progress, access to information isstill a problem. Chinese ministries routinelyimplement policies based on internal “guidance”or “opinions” that are not available to foreignfirms. Authorities are often not willing toconsult with Chinese and foreign industryrepresentatives before new regulations areimplemented.

Experimental or informal policies and draftregulations are regarded as internal matters andaccess to them is tightly controlled. It can beextremely difficult to obtain copies of draftregulations, even when they have a direct effecton a particular industry or investment. Theopaque nature of customs and other governmentprocedures also complicates the ability ofbusinesses to take full advantage of commercialopportunities in China. Despite this, someChinese ministries occasionally circulateunofficial copies of draft regulations toconcerned industry representatives for comment. Face-to-face consultations between government

agencies and industry representatives on the textof new regulations are also becoming morecommon. The Chinese government isconsidering a system to solicit input frominterested parties before promulgatingcommercial laws or regulations. However,government officials have not provided detailson the mechanism for soliciting input.

TRADING RIGHTS AND OTHERRESTRICTIONS

Trading Rights

China restricts the types and numbers of entitieswith the right to trade. Only those firms withtrading rights may import goods into or exportgoods out of China. In addition, some goods,such as grains, cotton, vegetable oils, petroleum,fertilizers, and related products are importedprincipally through state trading enterprises.

Restrictions on the type and number of firmswith trading rights contribute to systemicinefficiencies in the trading system and createsubstantial incentives to engage in smugglingand other corrupt practices. The restrictionsalso inhibit Chinese firms’ ability to export theirproducts into foreign markets. Liberalization ofthe trading system had been proceeding at agradual pace since 1995. The pace picked up in1999 when China’s Ministry of Foreign Tradeand Economic Cooperation (MOFTEC)announced new guidelines allowing a widevariety of Chinese firms to register to conductforeign trade. The guidelines allow, for the firsttime, both manufacturing and “nonproduction”firms with annual export volumes valued inexcess of $10 million to register for tradingprivileges. Firms with trading rights mustundergo an annual qualifications test andcertification process.

As part of its bilateral WTO accessionagreement, China committed to phase out

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restrictions on trading rights within three yearsof its accession. This tracks with China’scommitment to phase out restrictions ondistribution services for most products withinthree years of accession. To meet thesecommitments, MOFTEC is working onguidelines to allow foreign-invested companies,subject to certain restrictions, to engage directlyin trade. Early descriptions of these regulationsindicate that MOFTEC intends to impose onforeign companies registration and capitalrequirements similar to those specified in theregulations for domestic firms. While theproposed expansion of trading rights to foreignfirms would represent a degree of liberalization,it would not address the issue of how firms orindividuals who are not established in Chinacould import products. Additional details onhow China will implement its commitments ontrading rights are being discussed in the WTOaccession negotiations.

Local Agents Requirements

China severely limits the ability of foreign firmsto market their products effectively. Restrictions have also retarded the developmentof a functional nationwide distribution system inChina. In general, foreign firms are onlyallowed to distribute products that theymanufacture in China. Foreign firms are forcedto engage local agents to distribute importedgoods. At present, most domestic distributorsoperate only within a small geographical area. China agreed to eliminate such distributionrestrictions as part of its WTO accession.

Import Substitution Policies

Foreign businesses in China face importsubstitution policies, both informal and formal. While there have been improvements in thisarea since the early 1990’s, instances whereChina’s Government has continued to encourage

import substitution still occur. Recent examplesinclude:

Chemical Inputs. A U.S. investor reported inearly 2000 that a contract to build an insecticideproduction facility in central China was held updue to local government requirements that allproduct inputs be produced in China.

Generic Medicines. In an effort to protect thedomestic pharmaceutical industry whilelowering prices, China banned the import ofnine generic medicines in 1999.

Telecommunications Equipment. There havebeen continuing examples of China’s Ministryof Information Industries (MII) and ChinaTelecom adopting policies to discourage the useof imported components or equipment. Forexample, MII has still not rescinded an internalcircular issued in 1998 instructingtelecommunications companies to buycomponents and equipment from domesticsources. Pharmaceutical Pricing. State Councilregulations set pricing formulas for importedpharmaceuticals based on whether domesticsubstitutes exist. The regulations also imposerestrictions on profits earned on sales ofimported medicines based on whether adomestic substitute exists.

Power Generation. The Chinese Governmentannounced in 1998 that power generationfacilities of 600 MW or smaller could not useimported equipment.

As part of its accession to the WTO, China hadagreed to eliminate local content requirementsand said it will not condition import orinvestment approvals on whether there arecompeting domestic suppliers or performancerequirements, such as local content, offsets,technology transfer, or the conduct of researchand development in China.

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STANDARDS, TESTING, LABELING ANDCERTIFICATION

It is often difficult to ascertain what inspectionrequirements apply to a particular import, asChina’s import standards are not fullydeveloped and often differ substantially fromrequirements imposed on domestic goods. TheUnited States and other countries havecomplained that safety and inspectionprocedures applied to imports are more rigorousand expensive than those applied to domesticproducts. Furthermore, standards testing andinspection for domestic and imported goods arecarried out by separate entities, whichsometimes overlap. Once an imported productis on the market in China, it is subject to theconformity assessment requirements of thedomestic standards and conformity assessmentagency, China State Bureau of Quality andTechnical Supervision. Imported goods –especially medical equipment and devices – alsooften face “double checking”: they must betested (at a price) by both the CIQ and bydomestic testing entities. Foreign suppliers havealso had difficulty in learning exactly by whomand how inspections are conducted.

The U.S. processed food industry has registeredits concerns on a number of standards andlabeling requirements that exist for its exports toChina. These include restrictive shelf life, foodadditive and microbiological standards, as wellas burdensome production registration andapproval regimes. In particular, the U.S.industry has cited China’s implementation of alabel approval law last year that will likelyresult in delayed shipments to China. Similarly,the distilled spirits industry is concerned that itsproducts will be required to comply with allexisting food labeling regulations, which itbelieves would be inappropriate to apply to itsproducts. Other U.S. industries, such as the solidwoods industry, are similarly concerned thatChina’s decision not to recognize U.S. standards

or testing methods hinders their ability to exportgoods to the Chinese market.

Inspection Standards

Chinese law provides that all goods subject toinspection by law or according to the terms of acontract must be inspected prior to importation.China maintains statutory inspectionrequirements known as “conformity assessmentprocedures” on about 800 imported goods andan even greater number of exported products.Chinese buyers or their purchase agents mustregister for inspection of imported goods at theport of entry. The scope of inspection includesquality, technical specifications, quantity,weight, packaging, and safety requirements.

Quality Licenses

For manufactured goods, China requires that aquality license be issued before the goods can beimported into China. Obtaining quality licensesis a time-consuming process, sometimes takingover a year. The delays are sometimes afunction of excessively detailed inspection andregistration requirements. Often, the agency incharge of the licensing process has devotedinsufficient resources to obtaining qualifiedinspection and licensing personnel or officeequipment, leading to backups and delays. While requirements vary according to theproduct, U.S. exporters have complained thatthey contravene the principles of nationaltreatment.

Safety Licenses

China also imposes safety licensingrequirements on certain products under theterms of the “Import and Export CommodityInspection Law” of 1989. In addition, nationalhealth and quarantine regulations require aproduct safety sticker on imported (but notdomestic) food items. Importers are charged

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between five and seven cents for each of thesestickers.

Major problems with China’s safety licensingsystem include the lack of transparency andnational treatment, and the difficulty ofdetermining relevant standards. Examplesinclude:

Electronic Products. On January 1, 1999, Chinaimposed mandatory safety inspections forimports of electronic products, includingpersonal computers, monitors, printers,switches, television sets, and stereo equipment. As of January 1, 2000, an additional safety testfor electromagnetic compatibility (EMC) wasadded for these same products. Starting January1, 2001, China will also require an importcommodity safety license. CIQ would like toexpand the list of electronic products subject toEMC testing.

Phytosanitary and Veterinary ImportQuarantine Standards. China’s phytosanitaryand veterinary import standards are sometimesbased on dubious scientific principles and arenot always evenly applied. For instance, Chinacurrently prohibits access for U.S. exporters ofsoftwood lumber for packaging, fresh potatoes,avocados and peaches for phytosanitary reasons. Nonetheless, China has made some progress inrecent years. China has signed several bilateralprotocols with the United States governing theimport of agricultural items including livehorses, apples, ostriches, bovine embryos,swine, cattle, cherries, bovine and swine semen,and grapes. However, for grapes, the U.S.industry remains concerned that China’s medflytrapping requirements for such products fromCalifornia require more than existing U.S.government trapping programs. As part of itsbid to join the WTO, China lifted itslongstanding barriers on imports of U.S. grain,citrus, and meat and poultry with the signing ofthe Bilateral Agricultural Cooperation

Agreement (ACA) in April 1999. The majorprovisions of the agreement are as follows:

Meat. China agreed to recognize the U.S.certification system for meat. China will acceptU.S. beef, pork, and poultry meat from allUSDA-certified plants.

Citrus. China lifted its ban on imports of citrusfrom the United States allowing imports ofcitrus from most counties in Arizona, California,Florida, and Texas. China recently added morecounties in the four states mentioned above tothe list of approved export origins.

Wheat. China lifted its ban on imports of U.S.wheat and other grains from the PacificNorthwest and now allows the import of U.S.wheat that meets specified tolerances for TCKfungus.

In 2000, China began implementation of theACA; results have been mixed. Citrus importsproceeded from the approved counties, butChina delayed before adding additional fruit-flyfree counties, as required in the ACA. CIQapproved Pacific Northwest barley imports, butimporters reported that quarantine officialsapplied unnecessary requirements to shipments. Adding new burdens for importers, Chinaintroduced a number of new importrequirements for poultry. Trade officials havecommitted to resolving these issuesexpeditiously in order to demonstrate China’sdedication to upholding its internationalcommitments.

GOVERNMENT PROCUREMENT

China is not a member of the WTO Agreementon Government Procurement (GPA), but hasexpressed an interest in reviewing the possibilityfor GPA membership sometime after accessionto the WTO. Government procurement in Chinahas for many years been an opaque and

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noncompetitive process. Even whenprocurement contracts have been open toforeign bidders, such suppliers have often beendiscouraged from bidding by the high price ofparticipation. The Chinese government hasroutinely sought to obtain offsets from foreignbidders in the form of local contentrequirements, technology transfers, investmentrequirements, countertrade, or otherconcessions. For example, regulatory officialshave on occasion advised foreign equipmentsuppliers that they need to transfer technology,establish a joint venture with a local partner,and/or establish manufacturing facilities if theywish to supply equipment to China for certainnew telecommunication services. Sometimes,regulatory officials have gone so far as todemand the commercial terms of suchtechnology transfer agreements, which is totallyoutside the purview of their statedresponsibilities. These informal requirementsserve as administrative barriers to trade. Inaddition, payment in foreign exchange is notalways guaranteed.

Many Chinese officials are beginning torecognize that by not allowing an open andcompetitive bidding process for governmentcontracts, China is paying too much. The“Provisional Procedures for the Administrationof Government Purchases” – issued by the StateCouncil in 1999 – China’s first national lawregulating government procurement practices –contained language aimed at relaxingrestrictions on foreign participation. It isintended as an interim measure; work on apermanent law is ongoing in the FinancialCommittee of the National People’s Congress. The “provisional procedures” are intended toestablish a regulatory framework while work onan omnibus law continues. The interimregulations appoint the Ministry of Finance(MOF) and the provincial and municipal financebureaus as the governing agencies in theadministration and supervision of government

procurement. The new regulations call on allgovernment procurement offices to “follow theprinciples of openness, fairness, equality,effectiveness, and safeguarding of the publicinterest.” The new regulations establishedrudimentary criteria for the qualification ofdomestic and foreign suppliers and variouscategories of procurement, including opentenders, tenders by invitation, competitivenegotiation, and sole sourcing. The regulationalso set broad standards for publicity,notification, bid scheduling, sealed bidding andbid evaluation. Existing contracts will begrandfathered under the new regulations.

On January 9, 2001, the Ministry of Finance(MOF) issued a document titled “ProceduresConcerning Public Bidding for ProcurementCompanies in Foreign Government LoanProjects.” According to the document, the MOFpromises to investigate any procurementcompany suspected of monopolizing the biddingprocess. The procedures stipulate that financialdepartments must release all pertinentinformation regarding qualified foreigngovernment loan projects to procurementcompanies. Companies responsible forimplementing a project must tender bidinvitations to more than three procurementcompanies within 10 working days. If fewerthan three companies end up applying for bids,the project must begin again and tender newbids. The entity responsible for offering bidsmust keep all information that appears in theapplication forms submitted by procurementcompanies confidential until after the results ofthe bidding have been announced.

The procedures stress that noncompetitive orprotectionist ploys are strictly prohibited whileselecting a procurement company for a loanproject. Within any given calendar year, anymidlevel company that wins more than 50percent of that year’s loan-project bids may beconsidered to have “monopolistic inclinations.”

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Similarly, any local company that wins morethan 60 percent of a year’s bids in a province,autonomous region, municipality directly underthe central government, or in a city withindependent planning where the biddingcompany happens to be located, will be regardedby authorities as having “monopolisticinclinations.” The MOF will regularly examinebids put out for loan projects and promises torestrict procurement companies with“monopolistic inclinations”.

However, as written, the provisional proceduresoffer insufficient protection to foreignparticipants in government procurementprojects. Among other requirements, foreignsuppliers must still obtain permission from theMinistry of Finance before bidding on a project. There is no similar requirement for domesticsuppliers. Adding to the problem, the StateEconomic and Trade Commission (SETC) in1999 issued regulations requiring state-ownedenterprises (SOEs) to purchase all capitalequipment from either domestic manufacturersor foreign-invested enterprises in China exceptwhere the equipment is not availabledomestically.

Discrimination in government procurement hasa larger effect on trade in China because of theincomplete reform of China’s state-ownedsector. Many enterprises that would, in othereconomies, be in private hands are still SOEssubject to government procurement restrictions. For example, a significant share of trade inelectronics (often by identified “nationalchampions”) is conducted by state-owned firms. In general, the SOEs are bound by China’sgovernment procurement practices. However,China has agreed that, after accession to theWTO, commercial transactions conducted bystate-owned enterprises will not be deemedgovernment procurement. Accordingly, WTOrules will apply to these transactions.

EXPORT SUBSIDIES

China officially abolished direct budgetaryoutlays for exports on January 1, 1991. Nonetheless, it is widely believed that many ofChina’s manufactured exports receive othertypes of export subsidies. These other exportsubsidies are difficult to identify and quantifysince they are most often the result of internaladministrative measures and not publicized orthey may be provided through mechanisms suchas credit allocations or low-interest loans. Otherforms of export subsidies involve guaranteedprovision of energy, raw materials or laborsupplies. U.S. industry has expressed itsconcern that China is subsidizing such goods assoda ash, fiber glass, auto glass, steel, and flatglass through export and other subsidies. MOFofficials claim that the government’s financialsituation is such that it can no longer affordlarge-scale export subsidies. China has agreed tostop all industrial export subsidies once itbecomes a member of the WTO.

Exports of some agricultural products, such ascorn and cotton, still benefit from direct exportsubsidies. However, China substantiallyreduced the level of corn export subsidies in1999 and 2000. Some provincial leaders arepressing the central government to raisesubsidies again, but tighter domestic suppliesmake substantial export subsidies before WTOentry unlikely. After WTO entry, China isprohibited from subsidizing agricultural exports. Export requirements. Export requirements areimposed on state trading companies and foreign-invested enterprises. This practice has tended toencourage trading companies to over-export,even if doing so is not viable on purelycommercial grounds. The ensuing financiallosses are often covered by state commercialbanks when loans are not repaid.

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Tax incentives. Preferential tax incentives areanother example of export subsidies. China isattempting to harmonize the system of taxes andduties it imposes on enterprises, domestic andforeign alike. As a result, preferential tax andduty policies that benefit exporters in specialeconomic zones and coastal cities have beentargeted for revision. A weakening domesticeconomy during the late 1990s delayed some ofthese revisions, since the government wasunwilling to impose measures that might reduceexports. An early 1999 experiment ineliminating certain tax rebates for exporterslocated in special economic zones wasabandoned after protests from domestic andforeign export firms.

INTELLECTUAL PROPERTY RIGHTSPROTECTION

China has made substantial progress in someaspects of intellectual property rights (IPR)protection since it signed agreements with theUnited States on IPR in 1992, 1995 and 1996. However, significant problems remain. In 2000,China improved its legal frameworkconsiderably, and is further revising itscopyright and trademark laws to bring them intofull compliance with TRIPS (Agreement onTrade-Related Aspects of Intellectual PropertyRights).

A major nationwide anti-counterfeitingcampaign was initiated in October 2000. Furthermore, there is a new focus on IPR as afactor in domestic growth. Over the past severalmonths, books, television talk shows, mediaarticles, and government and academic reportshave highlighted the importance of IPRprotection to China’s economic development. Recent speeches by China’s leaders and paperson economic strategy stressed the importance ofintellectual property. China’s highest executivebody, the State Council, issued a strategy paperon high-tech development at the end of June.

The paper repeatedly admonished organizationsagainst the use of unauthorized software. TheBeijing International Book Festival featured anentire section of books on IPR-related issues.

Inadequate procedures for registering patents,trademarks, and copyrights continue to hinderforeign companies attempting to operate inChina. Moreover, poor enforcement of existinglaws and regulations, combined with weakpunishments, mean that IPR violations are stillrampant. Pirating is sophisticated andwidespread: pirates find ways to get digitalcopies of blockbuster films and computerprograms into the Chinese market almostimmediately after they are released in the UnitedStates. Knock-off consumer products arereadily available almost everywhere in China,and consumers are often unaware that they arepurchasing IPR-infringing goods.

Patents

On August 25, 2000, China’s National People’sCongress passed a revision of China’s patentlaw. The revised law strengthens patentprotection, simplifies patent examination andissuance procedures, and adjusts the law tomake it conform more closely to TRIPSprovisions. Patent administrations may nowconfiscate income from infringing products andfine violators. State-owned and non-state-owned enterprises have the same patent rights. TRIPS-related modifications include aprohibition on advertising or marketing ofinfringing products, judicial review of patentrevocations, and a provision allowing a patentholder to request immediate suspension ofpotentially infringing acts before requesting aformal legal determination. Chinese patentoffice officials believe the revised law is in fullcompliance with all TRIPS requirements. U.S.legal experts are still studying the revised law.

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Despite the revision, U.S. pharmaceuticalcompanies continue to experience difficulties inobtaining protection for their products. It cantake months for an application foradministrative protection of a foreignpharmaceutical in China to be approved. Underregulations enacted in 1994, domestic imitationor similar pharmaceuticals can legally beregistered while a foreign manufacturer’sapplication for administrative protection ispending. In some cases, administrativeprotection is never forthcoming. In July,China’s State Drug Administration turned downapplications for administrative protection fortwo “blockbuster” pharmaceuticals. Somecompany executives assert the drugs weredenied protection because of their huge marketpotential. They claim the State DrugAdministration used a new and questionableinterpretation of regulations to justify the denial.

Trademarks

Counterfeiting, especially of brand nameproducts, remains prevalent; according toChinese Government and U.S. industry reports,the problem is growing worse. An executive ofa large U.S. consumer products companyrecently complained that in the first five monthsof 2000 it had seized more fake product than inthe preceding two years. Another U.S.executive noted that China had become a majorexporter of counterfeit products to Russia,Europe, North America and South America. While regional and interagency cooperation onIPR protection has improved, it is stillinadequate. Insufficient administrativesanctions and infrequent use of criminalsanctions remain major enforcement problems.

On June 30, 2000 the State CouncilDevelopment and Research Center (DRC)publicized a report highlighting the seriousnessof trademark violations in China. The reportestimated that counterfeiters flooded China with

over US $16 billion of fake goods in 1998, andclaimed the problem was getting worse. Of the146 Chinese and foreign firms surveyed, 80percent said counterfeiting had a negative effecton their investment plans. The report attributedthe worsening counterfeiting problem to slacklaw enforcement, inadequate punishments, andlack of respect for the law. The report receivedwide media coverage – more than 30 articlesappeared in the Chinese press.

One of the report’s authors claimed it led to themid-June revision of China’s product qualitylaw. The revision allows for tougherpunishment against producers and sellers of fakeand shoddy goods. Enforcement agencies cannow order inspections, demand businesstransaction documents, and confiscatecounterfeit products. To stop local officialsfrom obstructing enforcement actions, the lawadded detailed provisions on the responsibilitiesof local government officials. The law,however, does nothing to facilitate criminalprosecutions of counterfeiters. GuangdongProvince’s anti-counterfeiting law providestougher economic sanctions than the nationallaws.

In a further strike against counterfeiters, onOctober 26 Vice Premier Wu Bangguo called onall provincial leaders to conduct an intensivethree month campaign against counterfeitproducts. In response to IPR industry praise forthe campaign, together with recognition of theneed for a more sustained effort, China extendedthe anti-counterfeiting campaign. A newnational anti-counterfeiting coordinationcommittee will report directly to Vice PremierWu. The State Council circular announcing thecampaign specifically identified cases reportedby foreign-invested enterprises as a major targetof the campaign. Initial U.S. business reactionwas positive, with the proviso that the campaignshould continue and that China should continue

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legal reforms and make more use of criminalsanctions.

A shortage of agents authorized to accepttrademark applications from foreign companiesmakes it difficult for foreigners to registertrademarks. The lack of clear procedures toprotect well-known unregistered trademarks alsomakes it extremely difficult to oppose or cancelwell-known marks registered by an unauthorizedparty. In addition, criminal and civil penaltiesfor most kinds of counterfeiting remain too lowto deter counterfeiting. At present, there are noprocedures that allow aggrieved parties to takecivil action during criminal prosecution of acounterfeiter, delaying opportunities to seekcivil redress. Enforcement has also been aproblem.

Internet domain name piracy is a new IPRproblem. In November 2000, a Chinese courtruled that China’s trademark law also protectstrademarks on the Internet. However, currentstandards for resolving these disputes areinadequate and must be revised to allow for thecancellation of a trademarked name.

Copyrights

China is gradually recognizing the threatcopyright infringement poses to economicdevelopment. In September 2000, a Ministry ofInformation Industry (MII) research grouppublished the results of a year-long review ofChina’s software industry. Over one-fourth ofdomestic Chinese software companies identifiedpiracy as the main obstacle to their futuredevelopment. They singled out “end-usercopyright infringement” as the domesticsoftware industry’s main enemy, followed by“pirated software production” and “piratedsoftware sales.”

State Council Document Number 18, Article 34,called for a concerted anti-piracy crackdown

effort in the second half of 2000, led by publicsecurity authorities and including all relevantministries. As part of this campaign, MIIreleased new regulations in December 2000allowing $600 to $6,000 in compensation foreach piece of infringed software. In one ofChina’s first actions against end-user piracy ofbusiness software, an IPR court in Shanghaiordered a surprise software audit at a Chinesecompany that had been warned previouslyagainst using unauthorized software. The casewas later settled out of court.

Likewise, China is taking action against musicand video piracy. On July 12, 2000 Chinese andforeign record companies jointly issued a“declaration on protecting copyright andopposing piracy.” The 12 record companiesannounced a campaign against violations ofmusic copyrights on the Internet and listedoffending websites in China. In late July, some630 Anti-Pornography and Piracy officials – inthe largest anti-piracy operation in China to date– destroyed seven illegal optical disk productionlines and arrested 23 suspects who will becharged under China’s Criminal Law. Individuals who assisted in uncovering theseunderground operations received cash awards. The raids confirmed the presence of DVDproduction lines in China, a development longfeared by the U.S. film industry.

China’s growing interest in copyrightenforcement aside, there are still profoundproblems. The software industry lacks clearprocedures for addressing corporate end-usersoftware piracy, which continues to cost U.S.companies millions of dollars each year. U.S.software companies have asked the CopyrightAdministration to issue guidelines foradministrative enforcement against thisproblem.

There is also no noticeable improvement in themarket for books and journals in China, with

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piracy hampering development of the legitimatemarket. Industry remains concerned that despitethe small, but growing number of publicizedactions and fines, piracy of U.S. workscontinues unabated. According to industryfigures, U.S. publishers lost an estimated $130million to book piracy in China in 2000,continuing a trend of increasing losses over thepast few years.

Beyond the piracy problems all contentproviders in China face, foreign companies aresaddled with additional burdens. Whiledomestic copyright owners can deal directlywith local copyright bureaus, foreign copyrightowners wishing to pursue copyrightinfringement issues must go through theNational Copyright Administration in Beijing. This procedure results in lengthy delays andgoes against the principal of national treatment. China has agreed to eliminate thisdiscriminatory requirement when it becomes aWTO member. Regulations on the use ofcopyright agents by foreign companies have notbeen finalized; this effectively prevents foreigncompanies from using agents to licensecopyrighted works. In addition, U.S. companiesreport that, to get copyrights enforced, theyoften must provide resources to China’s under-staffed, under-funded enforcement agencies.

ELECTRONIC COMMERCE

China has experienced noticeable growth inInternet usage and e-commerce. The number ofpeople with access to the Internet exceeded 22million in 2000. Worldwide, Chinese is now thesecond most used language on the Internet afterEnglish. A fall in personal computer prices andthe arrival of information appliances tailored forthe Chinese market will further expand Internetaccess.

A government-sponsored nationwide surveyfound that China had more than 1,100

consumer-related e-commerce websites in early2000. More than 800 are shopping websites;100 are auction websites; 180 are distanceeducation websites; and 20 are distance medicaland health-related websites. Among theshopping sites, 34 percent also had traditionalretail businesses, while 66 percent were pureonline shops.

The Chinese government recognizes thepotential of e-commerce to promote exports andincrease competitiveness. However, the lack ofa comprehensive regulatory framework,including laws clarifying online obligations and“rules of the road,” has inhibited online growth.In 2000, China made some progress towardestablishing such a regulatory environment. Thegovernment promulgated the Procedures for theExamination and Approval of SecuritiesCompanies for Engaging in Online BrokerageActivities, the Telecommunications Regulationsof the PRC, and the Measures for ManagingInternet Information Systems. In addition,China is drafting the China E-CommerceStrategic Development Framework and otherregulations related to online advertising, e-commerce taxation, online banking, and Internetcontent.

Some of the Chinese ministries withresponsibility for e-commerce have been tooenthusiastic about regulating the Internet,thereby stifling the free flow of information andconsumer privacy needed for e-commerce toflourish. Content is still controlled, andencryption regulated.

A number of technical problems also inhibit thegrowth of the industry. High connection ratescharged by government-approved Internetservice providers make Internet accessunaffordable for most Chinese. Slowconnection speeds are another major barrier. The lack of a safe and secure payment systemrequires that Internet transactions in China be

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conducted on a cash-on-delivery basis ordelayed by a ten- to fifteen-day verificationperiod.

SERVICES BARRIERS

China’s services sector has been one of the mostheavily regulated and protected parts of thenational economy. At present, foreign serviceproviders are largely restricted to operationsunder the terms of selective “experimental”licenses. Strict operational limits on entry andrestrictions on the geographic scope of activitiesseverely constrain the growth and profitabilityof these operations.

Since China’s services sector remainsunderdeveloped and current foreignparticipation in the market is minimal, it isdifficult to estimate how much such barriers tomarket access represent in lost U.S. servicesexports. In some service sectors, such asinsurance, even the most conservative estimatespredict that total premiums will reach $15-30billion in the next few years. If China were tolift completely barriers to market access in thissector, U.S. industry estimates that U.S.insurance providers could be expected tocapture a portion of the Chinese market thatcould easily exceed $1-2 billion. In otherservices sectors, such as legal services,accountancy, and consulting, where potentialrevenues are likely to be more modest, thelifting of barriers to market access would stillresult in significant increases in U.S. exports ofservices.

The service commitments included in thebilateral WTO accession agreement wouldprovide meaningful access of foreign businessesto the full range of services sectors. Thosecommitments address many of the barriersidentified below.

Financial Services (Banking and Securities)

Foreign banks and securities firms continue toface a restrictive, opaque regulatoryenvironment. The market access of foreignbanks remains inadequate. The Bank of Chinaenjoys a monopoly on forward foreign exchangecontracts. Foreign banks’ ratio of customerdeposits to domestic loans may not exceed 40percent. Foreign banks must place 3-5 percentof deposits in non-interest bearing deposits withthe People’s Bank of China (PBOC). Foreignbranch current assets (cash, local bank demanddeposits, and PBOC deposits) must be greaterthan 25 percent of customer deposits. Finally,China calculates prudential ratios and limitsbased on the local capital of foreign bankbranches rather than on the capital base of theentire bank. On the securities front, foreignfirms continue to be barred from underwriting ortrading domestic stocks or bonds.

The year 2000 brought no dramatic changes inmarket access for foreign banks. China hadbeen expected to include Tianjin Municipalityamong the jurisdictions where foreign banksmay carry out local currency business, butaccess to Tianjin remains restricted. Theregulations that limit the local currency businessof foreign bank branches to Shanghai andShenzhen remained unchanged. Although localbanks may lend medium-term local currencyfunds to foreign banks, foreign banks are stillrestricted to taking local currency deposits from,and making local currency loans to, foreigninvestors registered in the specified geographicarea. The liberalization of interest rates on theforeign currency loans and deposits of domesticbanks had little impact on the business offoreign banks, but did signal China’s continuedcommitment to gradual reform of its state-controlled financial system.

China has agreed to allow foreign banks toconduct local currency business with Chinese

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companies two years after its WTO accessionand with Chinese individuals five years afteraccession. During the first year of WTOmembership, China will open two additionalcities to foreign banks conducting Renminbi(RMB) business. Every year thereafter it willopen four new cities to foreign banks. All non-prudential restrictions on foreign banks are to beremoved five years after China’s entry to theWTO.

Distribution

Distribution in China is largely reserved fordomestic companies. Existing restrictions ondistribution services limit the ability of foreignfirms and importers to market to, service, andsupport their customers. In general, foreignimporters have limited trading rights, cannotown or operate trucks or warehouses, and mustsell and distribute their goods through state-sanctioned foreign trade corporations or import-export agents, who often impose huge markupson the final price.

Current law prohibits foreign companies withmultiple operations in China from consolidatingshipping and other distribution-related activities.Domestically-manufactured products must besold, delivered and serviced separately fromimported products. These regulations preventforeign enterprises from selling products fromother domestic sources, even when the productsconcerned are related. These requirementscreate redundant systems and increase costs forforeign firms. The Chinese have promised toopen the distribution sector to foreign firms aspart of their WTO accession package. After aphase-in period of three years, foreignenterprises will be able to engage in the fullrange of distribution services for almost allproducts.

Retailing

Regulations broadening the scope for foreigninvestment in the retail sector were announcedin June 1999. The regulations aimed atencouraging the development of large retailchain stores along the Wal-Mart model. It waswidely believed they were intended as a solutionto the moribund condition of many state-owneddepartment stores. The regulations encouragethe entry of large international retailers into theChinese market.

The regulations require foreign investors to havemaintained an average annual volume ofmerchandise sales of at least $2 billion duringthe three years prior to the application forpermission to operate in the Chinese market. They also require the foreign investor to have$200 million in assets. These requirementseffectively eliminate medium- and small-sizedretailers from participation in the Chinesemarket. The regulations require chain storeswith fewer than three outlets to have minimumlocal equity ownership of 35 percent; chainswith more than three outlets are required to havelocal equity ownership of no less than 51percent.

Pyramid schemes operated by a number of directsales companies, both domestic and foreign, ledto a government ban in 1998 on direct saleretailing in China. This severely affected severallegitimate U.S. companies that had substantiallyinvested in this sector in the early 1990s. In1999, some activities were resumed and Chinahas agreed to permit direct selling within threeyears after accession to the WTO.

Telecommunications

China has made significant progress inincreasing competition in telecommunicationsservices over the past few years. China hasseparated post and telecommunications

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services, separated policy and regulatoryfunctions from operator functions, developed atelecom law, and lowered connection costs. Thegovernment has split the former state-ownedmonopoly telecommunications servicesprovider, China Telecom, into separate nationaltelecom services providers. There are currentlyseven national basic telecommunicationscompanies: China Telecom, China Unicom,China Mobile, China Satellite, Jitong, ChinaNetcom, and Railcom. Reports in the officialmedia state that China Railway Telecom(Railcom) also received a license to providefixed-line voice and data transmission servicesin January 2001.

China’s new telecommunications regulations,passed this year, allow for interconnection, cost-based pricing, universal service, and foreigninvestment, and stipulate licensing authority andprocedures. However, these regulations aregenerally vague and lacking in specific andnecessary details. For instance, there is nomention of basing prices on long-runincremental costs for interconnection. Rulescovering foreign direct investment are pending. At present, except for a few “experiments”,there is no direct foreign investment or equitycontrol in telecom services. However, this isexpected to change after China joins the WTO.

Progress in opening the market for value-addedservices – such as Internet service and contentproviders – has been less clear. The Ministry ofInformation Industry (MII) has taken an activistposture in updating existing policies. This yearthe MII announced moves towards convergencein voice, video and data services. China,however, considers communications andinformation content sensitive, so foreigncompanies face significant barriers in theInternet services sector. For example, last yearChina issued a total ban on foreign capitalinvestments in Internet Content Providers(ICPs). The definition of websites as “value-

added telecom service” hinders foreigncompanies from owning China-based websites,even if only for the sole purpose of promotion oftheir own businesses. The requirement thatInternet Service Providers (ISPs) must provideuser log-in information and transaction recordsto authorities upon request, without clearguidelines as to the circumstances and situationsthat warrant such actions, raises concerns aboutconsumer privacy and prevention of the misuseof data.

Foreign equity investment limitations for ISPsand ICPs will mirror the timetable for value-added services in the WTO agreement (30percent upon accession, 49 percent within oneyear after accession and 50 percent within twoyears after accession). However, ICPs must stillwin the approval of the MII before they canreceive foreign capital, cooperate with foreignbusinesses, or attempt domestic or overseasstock listings.

Insurance Services

The need for a sound regulatory environmentand improved solvency among insurance firmshas led to gradual reforms in China’s insuranceindustry. The Chinese government passed a newinsurance law in 1993 and formed the ChinaInsurance Regulatory Commission in 1998 tooversee the development of the industry inChina. The domestic insurance market wasopened on an experimental basis to foreigninsurers in 1992.

Currently, 16 foreign insurers are licensed tooperate in China, mainly in Shanghai orGuangzhou. Decisions on whether to grantadditional licenses to foreign insurers have beenarbitrary. Foreign insurers are at present notpermitted to participate in the group, health,pension, and insurance brokerage markets.

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China has indicated that, after WTO accession,it will allow foreign firms to access the Chineseinsurance market based solely on prudentialcriteria, with no economic needs test orquantitative limits on the number of licensesissued. Foreign participation will be allowed inlife and non-life sectors, and eventually pension,health, group, reinsurance, and brokeragemarkets, among others. China has agreed toopen the Shanghai and Guangzhou marketsupon its WTO accession, add 12 additionalmajor cities within two years after accession,and to eliminate all geographic restrictionswithin three years of accession. Internalbranching will be permitted, consistent with thephase-out of geographic restrictions. China hascommitted to allow life insurers 50 percent jointventure partnerships upon WTO accession, andnon-life insurers 51 percent joint ventures. Non-life insurers will be allowed 100 percentownership within two years of accession.

Transportation and Logistics

Foreign transportation and logistics serviceproviders face severe regulatory restrictions,high costs, dominance by government-investedagents, and limitations on the scope of activitiesthey are permitted to undertake. The multiplegovernment bodies responsible for this industryinclude: the State Domestic Trade Bureau,Ministry of Communications, Ministry ofRailways, Ministry of Foreign Trade andEconomic Cooperation, State Economic andTrade Commission, State Development PlanningCommission, and Civil Aviation Administrationof China. Overlapping jurisdictions, multiplesets of approval requirements, and opaqueregulations hinder market access. Furthermore,government-approved transportation agents,many of which are also government-invested,use their connections to monopolize theindustry. Current rules require that a wholly-owned foreign enterprise can only open a branchin another location if it has provided regular

services to that city. This makes it impossiblefor shipping companies to open subsidiaries ininland ports.

Audiovisual Services

China’s concerns about politically sensitivematerials, and the desire to keep the monopolyrents earned by the state-owned importers anddistributors, have led to restrictions inaudiovisual services. The websites of foreignnews organizations are often blocked forextended periods of time and news servicesremain wary that the government will imposenew restrictions on their activities. Distributionof sound recordings, videos, movies, books, andmagazines is highly restricted. Inconsistent andsubjective application of censorship regulationsfurther impede market growth for foreign anddomestic providers alike.

China began importing foreign films on arevenue-sharing basis in 1994. There iscurrently a de facto quota of ten foreign filmsthat can be imported on this basis each year. China’s WTO commitments include allowing atleast 20 foreign films annually into China on arevenue-sharing basis. China also agreed toopen theaters and distribution to foreigninvestment. Imported films must be 35mm andinclude Chinese subtitles; all imported filmsmust be reviewed and approved. Foreign filmsare banned during holidays and peak viewingseasons. Pirates find ways to get VCDs andDVDs of blockbuster films into the Chinesemarket almost immediately after the films are released theatrically in the United States.

Education and Training

China faces a shortage of qualified teachers andclearly needs educators in inland regions. However, the Ministry of Education (MOE)continues to restrict participation by foreigneducators and trainers. China permits only non-

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profit educational activities, and only activitiesthat do not compete with the MOE-supervisednine years of compulsory education, therebyinhibiting much-needed foreign investment inthe education sector. In April 2000, the MOEbanned foreign companies and organizationsfrom offering educational services via satellitenetworks. Universities may set up non-profitoperations, but foreign universities must have aChinese university host and partner to ensurethat programs bar subversive content andlocalize imported information. China’s trainingmarket is unregulated, which discouragespotential investors from entering the market.

Legal Services

Foreign law firms are permitted to practice inone city only. Chinese law firms, on the otherhand, have been able to open offices freelythroughout China since 1996. Unlike theircounterparts in other professional services –such as accounting, architecture and insurance –foreign law firms are not permitted to jointventure with Chinese law firms. Foreignattorneys may not take China’s bar examination,and they may not hire registered members of theChinese bar as attorneys. Foreign law firms arenot allowed to perform any legal servicesinvolving Chinese law. They may only engagein legal services related to the laws of theirhome country and to international law.

The year 2000 brought some small changes. The State Administration of Taxation (SAT) forthe first time permitted foreign law firmrepresentative offices, unlike representativeoffices in other industries, to provide fee-basedservices to their clients. The SAT allowedforeign law firm representative offices toprovide official tax invoices, allowing clients toclaim legal expenses as tax deductions. WTOentry may provide some additional relief. Chinahas agreed to lift the quantitative andgeographical restrictions on the establishment of

representative offices by foreign law firmseffective within one year after China’s accessionto the WTO and to clarify the type and durationof the contractual relationships between foreignand Chinese law firms.

Accounting and Management ConsultancyServices

Over the past year, the Chinese Institute ofCertified Public Accountants (CICPA), agovernment body under the Ministry of Finance,has made significant progress inprofessionalizing accounting in China. TheCICPA has delinked Chinese accounting firmsfrom government agencies and acknowledgedthe preference to have the CICPA function morelike a professional organization than agovernment agency. It has committed toimproving the transparency of regulatory rulesand rule making and promised to establish anadvisory committee, with participation byinternational accounting firms. In an effort toraise the quality of accounting reports producedin China, CICPA launched a series of traininginitiatives, moved to close substandard firms,and reexamined existing licensing procedures.

Despite these positive changes, pervasiveproblems remain. China’s accounting andreporting standards are not harmonized withinternational accounting standards (IAS).Furthermore, there are different accountingstandards for state-owned enterprises, publiclylisted companies, and foreign-investedenterprises. Chinese authorities do not yetpermit qualified foreign individuals to becomepartners in domestic CPA firms or Chinesemember firms of international organizations. Representative offices of foreign accountingfirms are limited to providing consultancyservices. Significant tax and foreign exchangedisadvantages force firms that want to provide afull range of services to operate in China as joint

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ventures with domestic firms. Such firms areoften not managed to international standards.

China’s entry into the WTO will remove therestriction on representative offices engaging inprofit-making activities. For new entitiesproviding taxation, management consulting,computer-related and software implementationservices, operations must be conducted throughjoint ventures. Majority foreign ownership ispermitted. Wholly-foreign owned operationswill be permitted five years after accession.

Travel and Tourism Services

At present, foreign travel and tourism serviceproviders are prohibited from operating full-service travel agencies in China. Permittedactivities are subject to geographic restrictions. There are also a number of restrictions in placeregarding the hiring of guides and tourist agents.

Out-bound individual tourism to the UnitedStates is banned because the United States hasnot signed a bilateral “Authorized Destination”agreement with the Chinese government. Therestriction on out-bound tourism is estimated todeter travel by as many as 100,000 people peryear. Group travel is tightly controlled by theChinese National Tourism Administration(CNTA), a government organization, andchanneled through government-owned travelagencies. All travelers originating in Chinamust purchase tickets through a CNTA-licensedtravel agency. U.S. carriers are not allowed tosell tickets directly to passengers. Even U.S.government travelers departing China on officialorders must be ticketed by a CNTA-licensedagency.

Holders of Chinese quasi-official and officialpassports, approximately 80,000 of whomapplied for U.S. visas in FY-2000, are requiredto use China’s state-owned airlines. Most ofthese individuals (whose itineraries often consist

largely of tourism) would not be consideredgovernment employees in most countries. Thisrepresents a significant loss of business for U.S.airlines.

Advertising

The State Administration of Industry andCommerce (SAIC) enforces China’s 1995Advertising Law. Among other things, the lawbans messages “hindering the public or violating. . . social customs.” The law is subject tointerpretation by the SAIC, which must approveall advertising campaigns.

Foreign firms are restricted to representativeoffices or minority ownership of joint-ventureoperations. After its WTO accession, Chinawill allow majority foreign ownership of jointventure advertising companies within two yearsand wholly-foreign owned subsidiaries afterfour years.

Construction Services

U.S. engineers, architects and contractors haveenjoyed a relatively more cooperative and openrelationship with the Chinese government. These professionals operate in the Chinesemarket through joint venture arrangements andare less affected by regulatory problems thanother service sectors. Nevertheless, they alsoface restrictions. Lack of clear guidelinesmakes it difficult for foreign architecture andengineering firms to obtain licenses to performarchitecture and engineering services except ona project-by-project basis. China sets extremelylow design fees, rather than letting the marketset prices. Currently, Chinese architecture andengineering firms must approve and stamp alldrawings prior to construction. Foreign firmscannot hire Chinese nationals to practicearchitecture and engineering services as licensedprofessionals. Foreign contractors face severepartnering and bidding restrictions. In addition,

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China does not have adequate lien laws toprotect the rights of engineers, architects,contractors, and material suppliers from non-payment.

INVESTMENT BARRIERS

Foreign investors show interest in China despitesignificant obstacles. These barriers toinvestment include opaque and inconsistentlyenforced laws and regulations and lack of arules-based legal infrastructure. China’sleadership has reaffirmed its commitment to“further open” China to investment and tocontinue movement towards a rules-basedeconomy. In September 2000, State CouncilorWu Yi posited, “We should enrich and improvethe laws, regulations and policies related toforeign investment while enhancing theefficiency and service of government agenciesto create a better environment for foreigninvestment.”

The Standing Committee of the Ninth NationalPeople’s Congress (NPC) approved amendmentsto three laws affecting joint ventures and foreigndirect investment in October 2000. Theamendments expanded the list of “encouraged”sectors for foreign investment, eliminatedprovisions mandating export performancerequirements (e.g., rules that requiredcompanies to export a certain percentage ofproducts), revised “Buy China” policies thatregulated procurement of raw materials andfuels, and removed requirements that companiessubmit production/operation plans to Chineseauthorities.

Investment Guidelines

Foreign investment inflows continue to becontrolled and channeled toward areas thatsupport national development objectives. Chinahas adjusted its investment guidelines a numberof times over the last five years. The revisions

have confused potential investors and added tothe perception that the investment guidelineslack transparency. Uncertainty as to whichindustries are being promoted as investmenttargets, and how long such designations will bevalid, undermines confidence in the investmentclimate. In 2000, China again published revisedlists of sectors in which foreign investmentwould be encouraged, restricted or prohibited.

Nonetheless, China has taken some stepstowards improving the investment climate. Thegovernment announced a series of measures inAugust 1999 that began to decentralizeinvestment approval decisionmaking authorityand create new incentives for investments in keysectors and geographic regions. New guidelinesallow authorities at the provincial level ofgovernment to approve “encouraged” foreign-invested projects.

The Chinese government emphasizes guidingnew foreign investment towards “encouraged”industries and areas that support nationaldevelopment objectives. Regulations relating tothe encouraged sectors were designed to directFDI to areas in which China could benefit fromforeign assistance or technology, such as in theconstruction and operation of infrastructurefacilities. Over the past five years, China hasintroduced new incentives for investments inhigh-tech industries and in the less-developedcentral and western parts of the country.

Investment Restrictions

The Chinese government prohibits or restrictsforeign investment in projects not in line withthe state plan. In many cases, foreign firmsmust form a joint venture with a Chinesecompany and restrict their equity ownership to aminority share in order to invest in the Chinesemarket. There are, in addition, a number ofsectors in which foreign investment istechnically allowed but not “encouraged”.

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China might restrict investment in order to:protect domestic industries, such as the servicessector; guard national and domestic security;limit imports of luxury products; or avoidredundancy or excess capacity.

There are numerous examples of investmentrestrictions. For example, China bansinvestment in many telecommunicationsservices, as well as in the news media,broadcast, and television sectors, citing nationalsecurity interests. The production of arms andthe mining and processing of certain mineralsremain prohibited sectors. Investment in serviceindustries such as banking, insurance, anddistribution are limited because China fears thatforeign suppliers would quickly dominateinefficient local companies. Many investmentsare restricted under the guise of avoiding excesscapacity.

Other Investment Issues

Designated Enterprises: Designation of keystate enterprises in many industries, in particularthe high tech sector, as the exclusive base forthe development of critical technologies, limitsthe choice of joint venture partners. Suchdesignated partners are sometimes unattractivefor various business reasons such as lack ofexperience, inappropriate staffing levels, orweak finances.

Venture Capital: There are currently no laws orregulations that define the legal andorganizational structures for domestic privateequity funds. Chinese laws concerning foreignprivate equity firms set limits on corporatestructure, share issuance and transfers, andinvestment exit possibilities. For example,China has no regulations allowing issuance ofpreferred stock or options. The difficulty oflisting on China’s stock exchanges, coupledwith the bureaucratic approval required to listoverseas, limits interest in establishing China-

based venture capital firms. As a result, mostforeign private equity investments in China areactually housed in offshore investment entities. On October 11, 2000, the Shenzhen municipalgovernment promulgated local interim venturecapital regulations aimed at clarifying foreigninvestors’ legal footing, but there are still nonational-level laws.

WTO Obligations on Investment

Upon accession, China has promised toimplement the WTO Agreement on Trade-Related Investment Measures (TRIMs),eliminate export performance and local contentrequirements on foreign investors and notenforce contractual provisions on these matters,and only impose or enforce laws related to thetransfer of technology if they are in accordancewith WTO rules. China also agreed not tocondition investment or import approvals onperformance requirements of any kind,including: local content requirements, offsets,transfer of technology, or requirements toconduct research and development in China. Notwithstanding the above, concern exists thatthe government may impose more obligations,perhaps unofficially, to continue suchrequirements in exchange for extra-legal, quid-pro-quo decisions by government officials atboth the national and sub-national level. In thepast, these measures have often been used toobtain transfers of technology from foreignfirms.

ANTI-COMPETITIVE PRACTICES

China continues to struggle with economicinefficiencies and investment disincentivescreated by local protectionism, predatorypricing, and preservation of industry-widemonopolies. There are several existingcompetition laws, and China is drafting a newantimonopoly law. However, existing laws areineffective due to poor national coordination

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and inconsistent local and provincialenforcement.

Anticompetitive practices in China take severalforms. In some cases, industrial conglomeratesoperating as monopolies or near monopolies(such as China Telecom) have been authorizedto fix prices, allocate contracts, and in otherways restrict competition among domestic andforeign suppliers. Regional protectionism byprovincial or local authorities often blocksefficient distribution of goods and servicesinside of China. Such practices may restrictmarket access for certain imported products,raise production costs, and restrict marketopportunities for foreign-invested enterprises inChina.

OTHER BARRIERS

Legal Framework

Laws and regulations in China tend to be farmore general than in other countries. While thisallows them to be applied flexibly, it also resultsin inconsistency and confusion. Companiesoften have difficulty determining preciselywhether their activities contravene a particularregulation. Agencies at several levels ofgovernment have rulemaking authority,frequently resulting in inconsistent regulation.

This lack of a clear and consistent framework oflaws and regulations is an effective barrier to theparticipation of foreign firms in the domesticmarket. Although China is moving toward a ruleof law, many gaps exist. A comprehensive legalframework, coupled with adequate prior noticeof proposed changes to laws and regulations,and an opportunity to comment on thosechanges, greatly enhances business conditions,promotes commerce, and reduces opportunitiesfor corruption.

In China, regulations are promulgated by a hostof different ministries and governments at theprovincial and local levels, as well as by theNational People’s Congress. As a result,regulations are frequently at odds with eachother. Even though laws and regulations are nowroutinely published in China, they often leaveroom for discretionary application eitherthrough honest misunderstanding or throughselective application or are ignored outright. Officials have sometimes selectively appliedregulations against foreign firms.

Dispute Resolution

Skepticism about the independence andprofessionalism of China’s court system and theenforceability of court judgments and awardsremains high in the international community. There is a widespread perception that judges,particularly outside China’s big cities, are moreinfluenced by local political or businesspressures than they are by written regulations orsigned contracts. Few judges have any legaltraining. This has often caused both foreign anddomestic companies to avoid enforcementactions through the Chinese courts. TheChinese Government is moving to establishconsistent and reliable mechanisms for disputeresolution through the adoption of improvedcodes of ethics for lawyers and judges andincreased emphasis on the consistent andpredictable application of laws. The ChinaInternational Economic and Trade ArbitrationCommission (CIETAC) has become, over ashort time frame, an effective forum for thearbitration of trade disputes. CIETAC’s policiesto approve foreign professionals to act asarbitrators and streamline proceduralrequirements to allow for timely resolution ofdisputes have been well received by the foreignbusiness community. The business communitycontinues to press, however, for improvementsin CIETAC rules, including increased flexibilityin choosing arbitrators and enhanced procedural

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rules to ensure orderly and fair management ofcases.

Even in cases where the judiciary or arbitrationpanels have issued judgments in favor offoreign-invested enterprises, execution of suchjudgments has sometimes been difficult. Officials responsible for enforcement are oftenbeholden to local interests, and unwilling toenforce court judgments against locallypowerful companies or individuals.

Selective Application

Government bureaucracies have sometimes beenaccused of selectively applying regulations. China has many strict rules which are usuallyignored in practice until a person or entity fallsout of official favor. Governmental authoritiescan wield their discretionary power to “crackdown” on foreign or unfavored investors ormake special demands on such investors simplyby threatening to wield such power.

Labor and Benefits

Lack of uniformity and transparency in applyinglabor regulations, and restrictions on labormobility, make it difficult for foreign investorsto plan effectively. The Chinese Government isdeveloping nationwide pension, unemploymentinsurance, and medical insurance systems. However, these new systems are not yet fully orconsistently funded. China is considering, buthas not yet enacted, legislation that mightregulate these systems nationwide. At present,differences in benefit costs and taxationbetween, and even within, regions and localities,complicates investors’ planning. Inconsistentapplication of labor regulations between foreigninvested enterprises and Chinese enterprisespose further difficulties for foreign investors.

The cost of labor is low in much of China, buthigher in the East and Southeast coastal areas

where foreign investment is concentrated. Thisis due in part to the high demand for skilledlabor in these areas, including intensecompetition for a limited supply of technical andprofessional manpower. However, higher laborcosts are also due to artificial limitations onlabor mobility. This is particularly the casewhere regulation and practice make it difficultfor people to resettle outside their home areas. China is gradually easing restrictions on someinternal labor mobility, but many are still boundby a household registration system that severelylimits schooling and housing possibilities forinternal migrants. When government-mandatedbenefits and subsidies are factored in, laborcosts in the coastal areas of China sometimesexceed those for comparable positions in otherAsian countries.

Corruption

Chinese officials admit that corruption is one ofthe most serious problems the country faces. China arrested hundreds of government officialsin an ongoing anti-corruption campaign. Theexecution last year of a former provincial vicegovernor and a vice chairman of the NationalPeople’s Congress Standing Committee attestedto the extent of the campaign and the severity ofthe problem. One smuggling and corruptionscandal in the southern port city of Xiameninvolved official complicity in approximatelyUS $6 billion worth of consumer goodsavoiding duties. China’s entry into the WTO,which will greatly reduce tariff barriers toimports, will significantly reduce incentives forsmuggling and the attendant corruption. Mostother official graft in China involvesmisappropriation of funds, abuse of power, andembezzlement.

China promulgated its first law on unfaircompetition in December 1993, and thegovernment continues to call for improved self-discipline and anticorruption initiatives at all

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levels of government. However, it remains thecase that contracts are often not awarded solelyon the basis of commercial criteria. U.S.suppliers complain that the widespreadexistence of such practices in China puts them ata competitive disadvantage. This dilemma isless severe in sectors where the United Statesholds clear technological preeminence or costadvantages. Corruption neverthelessundermines the long-term competitiveness ofboth foreign and domestic entities in theChinese market.

Smuggling

Since Beijing implemented an anti-smugglingcampaign in the summer of 1998, more goodshave entered China legally, resulting inskyrocketing customs revenues. China’s tariffrevenues hit a record US $24 billion for the first11 months of 2000, up 36 percent from the 1999figure. Over 10,000 smuggling cases, involvingUS $89 million, were concluded in the first 10months of 2000, with nearly 3,670 suspectscharged under Chinese customs law.

Almost all of the smuggling cases involve localofficials who either enjoy the profits of thecriminal enterprise or are paid by the smugglersto look the other way. Lai Changxing, chairmanof the Yuan Hua Group based in the port city ofXiamen, Fujian, is the alleged mastermind of thegroup responsible for China’s largest smugglingscandal in 50 years. Court documents in Fujianstated that Yuan Hua smuggled a total of US $6billion of goods, costing the state US $3.6billion in revenue. In the Xiamen case, localvice mayors, police and customs officials, andCommunist Party leaders have been underinvestigation since the inquiry began in August1999. Fourteen people have been sentenced todeath.

Land Issues

Constitutional prohibitions against private landownership, as well as complex regulations onland usage, can complicate efforts by foreigninvestors to establish operations in China. Bylaw, urban land is owned by the State, whilerural and suburban land is owned by collectives,i.e., residents of the local village or township. The State and collectives can either “grant” or“allocate” land usage rights to enterprises inreturn for payment. Enterprises that are grantedusage rights are guaranteed compensation if theState or collectives expropriate the land, whilethose with “allocated” usage rights are not. Granted usage rights, of course, cost more thanallocated rights.

The problem for foreign investors is the array ofregulations that govern their ability to acquireland use rights. Local implementation of theseregulations may vary from central governmentstandards; prohibited practices may occur in onearea while they are enforced in another. Mostwholly-owned foreign enterprises seek granteduse rights to state-owned urban land as the mostreliable protection for their operations. Foreignjoint venture companies usually attempt toacquire granted use rights through lease orcontribution arrangements with local partners. The time limit for use rights acquired by foreigninvestors for both industrial and commercialenterprises is 50 years.

china protocol and working party report with a view … · prospect of wto entry stimulates further...

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