The People's Republic of China and the WTO: An Overview Two Years Later

The People's Republic of China and the WTO: An Overview Two Years Later On December 18, 2001, China acceded to the World Trade Organization. As we reach the twoyear mark, it is appropriate to review China's activities as a member of the WTO. In the past two years, the People's Republic of China has been an active member of the WTO. Below, we highlight just some of the events that have occurred since China's accession. WTO Dispute Settlement Activity As of mid-september 2003, there have been no WTO Requests for Consultation filed against China with the Dispute Settlement Body, also known as the WTO Court. The absence of complaints filed against China does not mean that China has amended all of its laws in a manner that would be consistent with its WTO obligations. Nor does it mean that other WTO members are not raising issues of concern with China. On the contrary, many WTO members, including Canada, have raised areas on non-compliance with China. What the absence of filed complaints does mean is that WTO members have been understanding and have exercised patience in China's first two years as a WTO member. However, it is possible that Requests for Consultations will be filed as long as trade irritants remain unresolved, as the second round of transitional review mechanisms take place, and as fall out from the collapsed WTO Ministerial Meeting in Cancun. Though China has not had a case filed against it, China is actively participating in WTO dispute settlement proceedings as a complainant and a third party. China filed a Request for Consultations, becoming a complainant in United States Definitive Safeguard Measures on Imports of Certain Steel Products. This complaint is the first case in which China has taken action to protect the rights it assumed when it acceded to the WTO. China objected to the U.S. treatment of China as a developed country for the purposes of its domestic safeguard measures. China worked closely in a spirit of teamwork with the other seven countries that brought the case against the U.S. Each country took ownership of certain aspects of the case. The Panel found in July that the U.S. safeguard measures against steel were not compliant with its WTO obligations. While China was successful in its first case, the success was diminished for two reasons. First, the Panel exercised judicial economy and did not decide certain issues relating to China's status as a developing country. Second, the U.S. has filed an appeal to the WTO Appellate Body. China's first lesson that the WTO dispute settlement mechanisms can be used by other WTO members as a strategic weapon to prolong restrictive trade practices. Another potential dispute between China and the U.S. looms on the horizon. China, in the future, may file a Request for Consultations if the U.S. Congress passes legislation that was introduced this past September to impose tariffs on all Chinese imports if China does not take steps to float its currency. This debate may turn into a full fledged dispute before it is resolved as the U.S. could be in breach of its obligations under the General Agreement on Tariffs and Trade, 1994 and the Protocol of Accession if it were to impose such tariffs. China is also taking advantage of the opportunity to participate in dispute settlement proceedings brought by other WTO members against WTO members. For example, in India's unsuccessful case, United States Rules of Origin for Textiles and Apparel Products China, as an important manufacturer and exporter of textile and apparel products acted as a third party. This first defeat has not stopped China from participating as a third party in other cases. In the following six

- 2 - cases, China felt that it also had important domestic interests to protect and reserved its third party rights to participate in the Panel's proceedings: Australia Certain Measures Affecting the Importation of Fresh Fruit and Vegetables (brought by the Philippines) European Communities Export Subsidies on Sugar (brought by Australia, Brazil and Thailand, respectively) United States Anti-Dumping Measures on Cement from Mexico (brought by Mexico) United States Antidumping Measures on Oil Country Tubular Goods (OCTG) from Mexico (brought by Mexico) United States Countervailing Duties on Steel Plate from Mexico (brought by Mexico) European Communities Measures Affecting the Approval and marketing of Biotech Products (brought by United States, Canada and Argentina, respectively). As a third party, China can file briefs and participate in meetings of the Panel. The financial costs for participating as a third-party are lower. However, the major submissions are filed by the complaining parties. But it should not be assumed that China is riding the coat tails of other WTO members. China has made a good strategic decision to be involved in these cases. For example, since China's accession to the WTO, China's sugar prices have dropped 35% according to Oxfam Hong Kong as it conforms to its WTO commitments by liberalising its market. However, Oxfam Hong Kong also reports that the drop in price has negatively affected sugarcane growers in Guangxi. To the extent that the alleged subsidies in the E.U. are a cause of the decline in sugar prices in China, participation in this case will be important, as a positive decision by the WTO could result in changes to domestic laws in the E.U. and could eliminate the distortions in the sugar trade. Active Participation in WTO Activities Leading up to the fifth Ministerial Conference of the Doha Round of WTO negotiations that took place in Cancun, Mexico between September 10-14, 2003, China was an active participant in the negotiations, in particular taking part in drafting proposals for revisions of the Draft Cancun Text with other members. On September 10, 2003, China's Minister of Commerce Lu Fuyuan set out China's agenda for the Ministerial Meeting, asking for special treatment as a developing member and as a recently acceded member. China has argued that it should not be required to reduce tariffs and other trade protections in the same manner and with the same expediency as developed countries. A number of developed countries have challenged China, responding that newly acceded members have not been entitled to such special treatment in the past. Given the increasing trade deficits between WTO members and China, WTO members such as the U.S., Mexico, and India will strongly oppose special treatment for China. The future of WTO negotiations changed in Cancun and China is an important reason. The meetings collapsed when the U.S., the E.U. and Japan could not agree to make acceptable reductions in the subsidies provided to farmers. A powerful China supported Brazil's position. China's strength as a trading partner to the developed WTO members enhanced the negotiating powers of the developing countries, who were able to stand their ground, forcing the U.S. and the E.U. to make previously impossible concessions. However, in the end, the U.S., the E.U. and Japan did not move far enough and the meeting ended without agreement.

- 3 - China has also actively exchanged its views within the WTO. China has made a proposal to changes in the WTO Dispute Settlement Understanding. China has proposed that developed countries should exercise restraint in bringing disputes to the WTO against developing countries and limit complaints against a particular developing country to two complaints in one calendar year, as developing countries lack the financial resources and capabilities to participate in the dispute settlement mechanism. China has proposed that should a developing member country demonstrate to its complainant that it is in compliance with its WTO obligations, that the complainant should cover all the legal costs. Trade Review Mechanism China has also been actively involved in the Trade Review Mechanism (TRM), which reviews on an annual basis, China's implementation of WTO commitments in domestic law during the first eight years of China's WTO membership. WTO members are entitled to submit questions to China about its implementations and China must respond. In particular, the U.S. and the E.U. have pressed their issues during the first TRM review. The first TRM report on China's implementation of its obligations was accepted by WTO members, notwithstanding serious concerns in the areas of intellectual property, tariff rate quotas, lack of transparency in the insurance sector, trade in financial services and telecommunications. The second annual TRM review process has begun and questions to China are being submitted. We expect that the second review will be more confrontational as important WTO commitments have yet to be implemented by China. Furthermore, China's display of negotiating strength and role in the collapse of the Cancun meetings after significant concessions had been granted to developing member countries in the elimination of agricultural subsidies may manifest in resentment, "electrifying" the second TRM. It is worth noting that although China has agreed to an annual TRM, China has been pushing for a review every four years instead of one on an annual basis. China has argued that it is too difficult for it to respond to so many questions from so many WTO members in such a short period of time. China Specific Safeguard Actions Brought By Domestic Parties in WTO Member States China's Protocol of Accession established the "China Specific Safeguard" remedy. The safeguard allows WTO member countries to establish domestic laws that would allow domestic industries to file a China Specific Safeguard complaint with a domestic administrative body, when it is alleged that a surge of imports of goods from China have caused or threaten to cause market disruption in the domestic market. In Canada, the Canadian International Trade Tribunal will hear the case. If the domestic body determines this to be true, regardless of whether the Chinese exporter or producer has participated in the investigation, tariffs can be imposed, or a quota can be imposed, or a tariff can be imposed once the quota is exceeded. In Canada, no domestic industries have yet filed China Specific Safeguard complaints with the Canadian International Trade Tribunal. However, in the United States, four China Specific Safeguard complaints have been filed. In two cases, the International Trade Commission (ITC) determined that imports of pedestal actuators and wire hangers from China have injured the domestic industry. In both cases, U.S. President George Bush decided not to accept the recommendation though; nothing further happened. In the third case, the ITC determined that certain brake drums and rotors imported from China had not caused disruptions. A fourth case is ongoing regarding iron waterworks fittings. It is important to note that China has applied

- 4 - significant political pressure on the U.S. Administration not to implement the recommendations in the first two cases. It is also important to note that two of the four cases were extremely weak. Special Sectors - Agriculture A number of trade irritants are in the agricultural sector, which is not surprising given China's large rural population and significant farming activities. One of the most significant irritants is China's failure to allocate agricultural tariffs according to its WTO commitments. China continues to protect its domestic producers of agricultural products by making it difficult or burdensome to import agricultural products into China. Allegations have been made that China is allocating tariff rate quotas in amounts that are too small to be commercially viable. More significant is that China has implemented regulations that effectively lower the volume of imports that China agreed to when it joined the WTO. The regulations divide the agreed upon volume of imports into two categories: (i) for domestic consumption and (ii) for processing and re-export. In the second category, China is tying permissions to import to use in processing for reexport. Agricultural goods can be imported into China only if they are processed and reexported, and thereby do not enter the Chinese market to compete with domestically produced goods. If the goods imported under the processing for re-export quota are not exported after processing, fees will be levied. In addition to these problems, allegations have been made that China has not been transparent, failing to provide the names of persons with import quotas. As a result, exporters to China have little information on who is entitled to act as a purchaser/importer. Special Sectors Automotive Tariff Rate Quotas As it entered the WTO, China agreed to import autos and parts valued at US$7.94 billion in the first year after China's accession to the WTO. In the second year after accession, the quota is to be increased by US$1.2 billion. Japan and the E.U. have alleged that China has failed to import enough autos and parts, importing only US$3.85 billion worth. Both Japan and the E.U. have submitted questions to the WTO Committee on Import Licensing for China to answer. Interestingly, Canada and the U.S. have not submitted questions as of mid-september, 2003. China may respond that it views some quotas as ceilings, not minimum levels that must be imported. This dispute has the potential to turn into a filing of a Request for Consultations against China. Special Sectors Trade in Services Insurance On August 18, 2003, China released its latest draft of "Administrative Regulations on Insurance Companies", which affect foreign-invested insurance companies. Foreign insurance companies have 30 days to provide comments. On a positive note, China lowered capitalization requirements for foreign-invested insurance companies. On a negative side, the new thresholds are still very high at 200 million renminbi for branches and sub-branches, which is increased by 20 million renminbi for each additional branch up to a limit of 500 million renminbi. These capitalization requirements are in addition to solvency requirements. Another negative comment that is being made is that Article 99 of the draft regulations provides the China's Insurance Regulatory Commission too much discretion to change the rules unilaterally. A question still to be resolved is whether domestic and foreign-invested insurance companies will be treated the same or be subject to different rules. Special Sectors Generic Drugs

- 5 - On August 30, 2003, the WTO General Council announced an important agreement so that it will be easier for poorer countries to import cheaper generic drugs made under compulsory licensing where the importing countries are unable to manufacture the drugs themselves. Notwithstanding the ability to take advantage of the benefits under the agreement, Hong Kong and Macao announced that they would use the system only in the case of emergencies or extremely urgent situations. Mainland China did not make such a concession and can take advantage of the agreement. Special Sectors - Textiles The textile and apparel sectors outside China are bracing for an increase in imports from China and other developing countries after January 1, 2005 when tariff rate quotas on textiles will be eliminated under the WTO Agreement on Textiles and Clothing. U.S. textile producers and associations are becoming increasingly vocal about safeguard actions in the U.S. against textiles and apparel goods from China. In fact, numerous safeguard actions have been filed with the U.S. Department of Commerce's Committee for the implementation of Textile Agreements. Time is of the essence if strategic cases are to be brought to effectively keep tariffs and tariff rate quotas in place after the January 1, 2005 expiry date. However, the domestic textile and apparel industries will have to demonstrate a surge in imports from China has caused or threatens to cause serious injury to the domestic industry of like and similar goods. These issues and many others will keep our attention focussed on China as it enters year three as a WTO Member. Cyndee Todgham Cherniak, LL.B., J.D., LL.M. (International Trade Law), is an international trade lawyer (including WTO, trade remedies, customs duties, export controls) with Goodmans LLP, an international law firm with offices in Toronto, Vancouver and Hong Kong. She can be reached by e-mail at ctodghamcherniak@goodmans.ca or by telephone at (416) 597-4249.