I was surprised by the overall tone of the report. There was a lot of optimism towards future bilateral cooperation in helping China fulfill its obligations. Also, the language was often less damning than it could have been relying on many "appears to be's" when referring to possibly protectionist tools and motives.
MY COMPLAINT
I was really disappointed that there was not a more substantial look at the results of the AML review with regards to the InBev and Anheuser-Busch merger. Anheuser-Busch is still an American company despite foreign ownership, and MOFCOM did restrict AB's ability to compete in China through InBev ownership restrictions in various Chinese breweries. In a single sentence, without naming the parties, the USTR did say that the AML decision did suggest that China might use the AML to restrict the competitive ability of foreign companies, as it did with InBev, as opposed to preventing monopolies, which the US DOJ did when it forced InBev to sell off its Labatt USA division. Of course, the line between anti-competitive and anti-monopoly is thin, and it is unclear if Labatt USA and AB together would've been a monopoly outside of upstate New York, but the AML looms large in the future of M&A in China. Certainly larger than a couple of paragraphs.
SUMMARY
Trading Rights
Trading rights covers the right to import goods into China, and the right to export goods from China, and does not cover the right to sell goods within China.
The USTR concludes that China is complying with its WTO trading rights commitments in most areas, except for the right to import "copyright-intensive products such as books, newspapers, journals, theatrical films, DVDs and music, which China still reserves for state trading." The report does not comment on why the state retains the sole right to distribute foreign sourced media, but the reason is easily inferred.
Distribution Services
Distribution services are the rights to sell goods within China.
The USTR concludes that China has made "substantial progress" in fulfilling its WTO obligations, but that there are significant concerns in the areas of wholesale services, retail services, franchising services, and direct selling services.
Concerns for wholesale services:
- Restrictions ont he distribution of copyright-intensive products.
- Foreign automobile dealerships face restrictions that may not be applied to domestic dealerships.
- Significant restrictions in the pharmaceuticals sector still prevent foreign companies from fully realizing their potential in China.
- Despite commitments to permit foreign wholesale distribution of crude oil and petrol in China, China has issued regulations resulting in significant impediments to the profitable wholesale of crude and petrol by foreign companies within China.
- When expanding operations, foreign retailers are faced with onerous and lengthy licensing requirements that are not faced by domestic competitors. However, China is implementing a new licensing process.
- MOFCOM has issued a notice refusing approval for foreign retail stores in cities that have not finalized their urban commercial network plans.
- Despite committing to allowing WOFE retail gas stations, China has treated retail gas stations "as falling under the chain store provision in its Services Schedule, which permits only joint ventures with minority foreign ownership."
- Despite committments allowing foreigner enterprises to provide franchising services in China without "market access or national treatment limitations," MOFCOM issued and continues to enforce rules regarding high capital requirements, and broad and vague information disclosure with uncertain liability.
- However, China has eased rules regarding eligibility for providing services.
- MOFCOM appears to have ceased issuing direct selling licenses in May 2007.
- When MOFCOM was issuing direct selling licenses, the requirements were vague and excessively burdensome for SMEs.
Tariffs
China has timely implemented its tariff commitments.
Customs and Trade Administration
China's regulations for clearance procedures and making customs valuation determinations comply with WTO rules, but implementation is inconsistent by port.
China has complied with the rules of origin requirements.
China has complied with WTO rules on import licensing, but there are a few concerns:
- China is apparently using licensing requirements that restrict the trade of iron ore. Licensed iron ore traders have decreased, and China may have suspended the issuance of licenses to Australian importers to limit price increases in on going negotiations. The USTR is worried that this could set a precedent for the restriction of trade in other raw materials.
- Various import licensing issues related to fertilizer, cotton, SPS measures, soybeans, meat, and poultry.
China realized its commitment to eliminate its non-tariff measures in January 2005.
Tariff-rate Quotas on Industrial Products
A tariff-rate quota is a measure designed to allow a set quantity of imports at a low tariff rate, and imports above that quota are subject to a higher tariff rate. The idea is to provide significant market access.
The US was granted tariff-rate quotas for the importation of three industrial products into China, but China appears to not be fulfilling its obligations with respect to fertilizer tariff-rate quotas in an effort to promote homegrown fertilizer production. US fertilizer exports to China have fallen from $676 million in 2002 to $97 million in 2007. At the same time, China has restricted the export of phosphate rock, a key fertilizer ingredient, which has driven down the in China production price of fertilizer.
Other Import Regulation
Points on Anti-Dumping:
- Largely in compliance with WTO obligations.
- China is one of the most prolific users of AD provisions, but they don't have regulations establishing rules and procedures for reviews on the expiration of their anti-dumping duties.
- Despite bilateral cooperation, China's AD procedures lack transparency, and the responsible government administrations have failed to turn over documents, have inadequately disclosed essential facts, and have failed to adequately address critical arguments and evidence presented by those affected by AD duties
- China has yet to implement any CVDs, but, as with AD duties, China does not yet have expiry review rules and procedures.
- China has conducted only one safeguard proceeding which resulted in tariff-rate quotas on steel products, and this measure was terminated in 2003.
- There are some inconsistencies with WTO rules on safeguards, but it is unclear how China will use safeguards.
China maintains export restrictions that appear to violate WTO rules:
- Export quotas
- Export licensing and bidding requirements
- Minimum export prices and export duties
VAT and micromanagement of the size of the export rebate "have caused tremendous disruption, uncertainty and unfairness in the global markets for some products." The goal appears to be the same as with China's export regulations: lower production prices for China's industry and higher costs for foreign importers. Additionally, China appears to use fluctuating VAT rebates to inhibit domestic expansion in certain sectors.
Internal Policies Affecting Trade
Non-discrimination
China has largely complied with rewriting their rules in favor of non-discrimination between domestic and foreign business, but some concerns remain:
- Evidence of dual-pricing schemes by SOEs working with domestic and foreign enterprises.
- The ACFTU has been stepping up recruitment efforts in FIEs, and their interests appear to be principally monetary with little regard for the workers' rights.
- Application of the VAT appears to be discriminatory between imported and domestic goods.
China is using its tax system to discriminate against certain imports:
- Fertilizer VAT for imports, and partial VAT rebates for domestic producers of urea, a nitrogen fertilizer.
- Again, VAT discrimination is huge.
- Apparent preferential treatment for border trade, particularly with Russia.
- Difference in consumption taxes between domestic products and imports.
Substantial subsidies are provided to China's domestic industries. General concerns:
- China issues incomplete subsidy notification reports.
- Significant use of subsidies outside China's taxation system provided by provincial and local governments.
China continues to use price controls and pricing guidance. An industry of particular interest to the USTR is the medical device industry. There are state mandated price limits on the allowable mark-ups on medical devices leading to concerns of reduced competition, and the impact on patient and physician choice.
Standards, Technical Regulations and Conformity Assessment Procedures
China maintains and develops its own unique national standards "apparently as a means for protecting domestic companies from competing foreign technologies and standards." The most well-known is the telecommunications squabble over 3G neutrality.
Rules governing China's regulators should be in compliance, but regulators don't appear to enforce requirements against domestic products as strictly as against foreign products.
Rather than turning to the international trend of accepting foreign test results, China is turning more towards in-country testing.
China has made progress towards transparency, but they apparently are still not notifying interested parties of revisions to their standards which is against WTO rules.
Other Internal Policies
Concerns over government intervention in the investment decisions of SOEs in certain sectors:
- "Strategic Industries": civil aviation, coal, defense, electric power/grid, oil and petrochemicals, shipping, telecommunications."
- Pillar Industries": automotive, chemical, construction, equipment manufacturing, information technology, iron and steel, nonferrous metals, surveying and design, and others.
China's state trading enterprises lack the transparency necessary to even assess their activities.
China's government procurement measures give preference to domestic industry, but China is not yet a signatory to WTO's Government Procurement Agreements.
Investment
Though laws have and regulations have been revised to eliminate many investment restrictions, many of those restrictions are "encouraged." Particularly:
- Technology transfer
- Local content
- Foreign exchange balancing
- Export performance
Many restrictions "appear designed to shield inefficient and monopolistic Chinese enterprise from foreign competition."
Agriculture
The proper tariff measures have been implemented but China uses a variety of non-tariff measures to protect its industry.
A lack of transparency in how China is implementing its agricultural tariff-rate quotas against American bulk agricultural commodities is causing some grumbling from American farmers.
There are concerns about the procedures surrounding China's approval for genetically modified US agricultural products, particularly transparency, but there have been no "major trade disruptions."
China's Sanitary and Phytosanitary measures (detecting and preventing the spread of agricultural epidemics such as mad cow disease or avian influenza) lack transparency and "appear to lack scientific bases." The US beef industry and poultry industry have some pull, and they are rather angry that they can't sell their products in China.
China has not notified the WTO of all of its subsidies as required, and thus it is difficult to tell whether they maintain export subsidies.
Intellectual Property Rights
China's laws and regulations are satisfactory in complying with TRIPS, except in one area: lack of effective criminal punishment for violations.
The US still has concerns that China's legal framework does not effectively deter:
- Squatting on foreign company names, designs and trademarks
- Theft of trade secrets
- Registering TMs as design patents
- Using falsified or misleading license documents in counterfeiting operations
- False indications of geographic origin
China is working towards better enforcement, but their enforcement of IPR violations is bad, particularly in the field of copyright. The USTR suggests that if China stopped limiting market access barriers for copyrighted material, then there might be less incentive to engage in piracy.
Services
Certain service sectors remain severely restricted, and many commitments were only nominally implemented.
The types of problemss:
- Out right refusal of licenses
- Excessive and possibly discriminatory capital requirements
- Branching restrictions
- Lack of transparency in licensing
- Lengthy delays
- Economic needs test
- Banking
- Credit card
- Securities
- Asset management
- Telecommunications
- Construction
- Insurance
- Legal
It is not clear that China is printing all of its trade related regulations in a single official journal.
The laws are not being uniformly applied.
5 comments:
wow thanks for taking the time to do this.
Will, you rock.
To quote the inimitable Aaron Burr:
"The rule of my life is to make business a pleasure, and pleasure my business."
Or was it:
"Never do today what you can do tomorrow. Something may occur to make you regret your premature action."
The thing did come with an executive summary (which is different from an ordinary summary, apparently) which I found fairly uninformative. This was a better effort - USTR here you come?
I had no idea what the executive summary was supposed to convey. I'd say yes to the USTR internship if I was going to be a student next year. I'd say yes to most jobs at this point.
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