China’s Compliance with its obligations under GATT and WTO
The history of China and the General Agreement on Tariffs and Trade (GATT) dates back to 1948, when China became a contracting party after being among the 23 founding members of the organization. In 1950 however, the country under the Kuomintang government pulled out of GATT, but was later granted an observer status in 1982 after pleading that the pull-out was not done by a legitimate government. By 1986, China’s persistence to resume its position in GATT set a platform for talks with other member countries, which continued throughout the 1990’s.
The country only managed to regain its membership in 1999 and joined the World Trade Organization (WTO) in 2001. By Joining WTO, China agreed to be bound by Subsidies and Countervailing Measures Agreement (SCM), GATT and Trade-Related Investment Measures Agreement (TRIMs) trade agreements. The entrance of China to the WTO was of great importance not only to the country, but to other world economies, which had observed the economic expansion of the country with heightened interests in the past decades.
In 2000 for example, China was the world’s eighth largest importer and the seventh largest exporter of goods. The country accounted for $249. 2 billion in exports and $225. 1 billion in imports. In the commercial services sector China ranked twelfth in position at $ 29. 7 billion, while it was it was ranked as the tenth largest importer at $34. 8 billion (WTO news ). It was not however smooth sailing for the country and the other WTO signatories mainly because China is enormous in size and had a set trade regime by the time it joined WTO.
As such, a change of the country’s legal and regulatory system in trade was required in order to ensure consistency with the WTO regulations. Although most countries supported the entrant of China to WTO, many observed that compliance for the country would not only need dedication, but also transparency. Sentiments regarding the hard task ahead for China were for example expressed by the United States’ Trade Representative, Mr. Robert Zoellick in 2002 , who said that since China had freely chosen its WTO obligations freely, other countries expected that the country would comply with all.
Zoellick however agreed that meeting some of the obligations would not be easy for China, but would play a major role in ensuring that China was open to trade with the rest of the world. CHINA’S WTO OBLIGATIONS China took up obligations laid down in GATT, under the WTO by agreeing to non-discriminate and equally treat national trade from WTO member countries and also agreed to a adhere to the national trade policies as set out by WTO. First on China’s list of obligations under GATT/WTO, was the quota’s withdrawal requirement as earlier stated by the People’s Republic of China, under a protocol document.
The country was also obligated to conform to the GATT 1994 agreement and the WTO agreement that addressed procedures involved in import licensing. Another obligation was the right to have enterprises in China trading in exports and imports as authorized under the customs territory of China. As such, China agreed to wipe out state import monopolies earlier maintained in the agricultural sector. In addition, china was required to subject all its imports and exports to rules set out under the WTO. More to this, the country was also subject to varying terms regarding price control restrictions and state trading (Vallera pp 2-3)
GATT obligations included the prohibition of restrictions on imports specifically agriculture related imports. Another requirement under the GATT agreement related to giving imported goods equal treatment with the domestic products. In addition, the GATT agreement spelt out that fees or charges imposed on imports would be approximate to services rendered (Williams, Brett p 3) GATT Requirements GATT was a brain child of the United States, which first floated the idea of regulating 45,000 tariff rates in 1947 during an international conference held in Geneva (econ. iastate. du) . A year later, 22 other countries signed the trade agreement. Under GATT, a member country was to treat other signatory countries as a “Most Favored Nation” (MFN). The MFN treatment assured GATT member countries that non signatory countries would not receive lower tariffs than them. China was at war during the early years of the implementation of GATT, the discussions to rejoin GATT , which started in the 1980’s was further curtailed by the Tiananmen announcement , which marked halted Chinese interaction with the GATT member countries in 1989 (Skanderup p32) .
On resumption of the talks in 1995, WTO had taken over from GATT and with the new identity came stricter requirements, which often led to stalemates of the negotiations. It was however, china’s realization of economic gains in terms of expertise, technology and capital gains from other countries that eventually convinced the country leaders of the importance of joining GATT/WTO. China was petitioning to be recognized as a developing country upon resumption to GATT/WTO. This was rightfully so because despite China being the largest economy among the developing countries, most regions in the country still registered very low GDP.
Being recognized as a developing country allowed the country to enjoy special benefits under the agreement. Such included the elimination or reduction of tariffs on products from the developing countries; developed countries were also encouraged to avoid imposing tariffs and internal taxes on products from the developing countries. More so, the developed countries were alerted not to expect reciprocal trade from the developing countries (econ. iastate. edu). Compliance with WTO By the time that China was re-admitted to the WTO, the organization had 140 countries signed up for membership.
The Bilateral agreement between china and the other member countries was therefore complex and long, such that the entire document was 900 pages and covered every aspect of trade as discussed. It was a consensus that China would implement some of the agreements in the 900 page document immediately, while others would be stretched over a five year period. Others still w ere expected to last the entire decade before China could finally reform its system entirely to match the compliance requirements.
To aid the Chinese government in this, a WTO secretariat was appointed, with an assisting 16 subcommittees being mandated at monitoring the country’s progress and producing annual reports about China over an 8 year period of time (Skanderup, Jane p32). On its part, the Chinese government took up massive public education campaigns that sought to offer insight on what compliance meant. Local universities started offering degrees on international law, finance, foreign trades and trade. By the look of it, China had every intention to stick to the rule of WTO.
Foreign governments, such as the United States government extended a helping hand and offered to create oversight bodies in Chinese state departments with an aim of ensuring that China complied with the WTO agreement. Transparency China did not always operate transparently in its trade dealings, regulations and decision making. As such, the WTO requirement signified a great shift in the country and so far, the country has done well in compliance with the GATT/WTO requirement’s on transparency. In this, China publicized trade related laws to improve how people accessed them.
The most notable efforts were from the Ministry of Commerce, which adopted impressive policies with the aim of complying to the WTO transparency requirements (United States Trade Representative). However, there were complaints that China was not fast enough in its compliance. This was especially the case with short term goals that were supposed to be met within the first two years. In a 2004 review, it was noted that China had challenges with conforming to transparent practices especially with international set standards and value-added tax.
In the six year period ending in 2007, China had eight dispute cases filed against it by other WTO members (Stewart et al p7) . Five of these cases were by the United States, while the European Union, Mexico and Canada had one case each. The eight cases were based on china’s non-compliance on Value added Tax, automobile imports, tax reductions and exemptions, trading rights, distribution services and intellectual rights on publication and audiovisual. The Transitional Review Mechanism is in charge of monitoring China’s progress and has raised these issues.
Because of non-compliance, foreign and domestic business suffers frustrations when establishing businesses and often suffers from systemic uncertainties. Because of the language barrier, China still under the transparency requirement agreed to translate laws and regulations relating to trade into French, English or Spanish. The country also agreed to modify hundreds of its laws and regulations in order to become WTO compliant (USTR. gov) China also agreed to eliminate the local content requirement, foreign currency balancing requirement and export performance requirements from its laws.
Allegations that China still manipulates its currency to date however abound. Intellectual Property rights China has been accused of not doing enough to ensure that the intellectual property rights are upheld in the country. Since joining the WTO, a 2007 TLAG report states that IPR infringement was at its worst in 2005 and 2006. To make it even worse, the report indicates that China had demonstrated no initiatives in trying to reform the criminal code in the country, which is the only way through which the country can enforce the protection of the intellectual properties (Stewart et al p11).
Industrial policies China’s industrialized policies have always sought to protect local industries. This was meant to change after the ratification of the WTO agreement. However, complaints from other countries still abound pertaining to china’s protectionism measures over its auto part industry, export restrictions, regulatory interventions and subsidies on domestic industries. Subsidies China agreed to eliminate subsidies on exports and industrial goods.
This was done under the Agreement on Subsidies and Countervailing Measures (SCM), China further agreed to stop subsidies on state-owned enterprises especially because some of the state owned companies were not profitable and only aided in destabilizing trade. The SCM agreement only prohibited subsidies on a limited range of products, and imposed countervailing duties. Such compliance encouraged Chinese industries to become more competitive especially because they were exposed to market pressures from foreign investors. Discriminatory Safeguard
By acceding to the safeguard agreement China agreed to steer clear of WTO inconsistent tariffs and quotas, except those allowed by the organization on temporary measures. Under this agreement, non-compliance by China would earn her penalties that would see other WTO members imposing tariffs and Quotas on Chinese products, while denying China the ability to counter such actions (Halverson, Karen). Trading and Distribution rights China has scored fairly well in this front. However, the complaints from other member countries allege that the country still impose restrictions to specific products.
Among the cases highlighted are import restrictions on copyrighted materials such as periodicals, books, audio and audio-visual products. The 2007 TLAG report indicates that China is yet to fully comply with the direct selling requirement since it still restricts direct sales from foreign companies (Stewart et al p12). Agriculture China has largely complied with the agricultural requirements but this depends on the market situation. At times, the country employs selective market interventions that cause delays in agricultural shipments.
In addition, the country sometimes applies scientific rationales with the intention of preventing some agricultural commodities from entering her market. Other complaints allude that China lacks a consistent and predictable regulatory administration, which is laden with capricious practices in the customs departments. The Chinese agricultural market also lacks predictability and transparency. China’s agriculture obligations included her commitment to avoid providing export subsidies to the domestic producers. China also was obligated to lift the meat, citrus products, corn and wheat bans.
The country further had to implement some tariff –rate quotas that world provide sufficient market to farmers from signatory countries. Services- Arguably, this is among the sectors where China has scored the least points as far as compliance to the WTO commitments is concerned. Despite the initial promises made under the general Agreement on Trade in Services (GATS), China is yet to lift some of its restrictions in the services sector. As such, other countries still experience limited access to the Chinese services industry.
Areas of concern between 2001 and 2004 remained the financial sub-sectors (insurance and banking), in a 2007report however, the United States lauded Chinas efforts to comply with the obligations (USCBC) . It confirmed that China has indeed complied with the insurance requirements by lowering the total assets to $200 million down from the earlier requirement of $300 million on foreign insurers. In the banking sector, the USCBC report further indicates that China has lifted geographic barriers earlier set on its local currency, which mad business challenging for foreign based financial institutions.
China also allowed her nations to freely choose among foreign or domestic owned financial institutions. In addition, the country removed restrictions that hindered ownership and operations of financial institutions thus allowing more foreign owners to invest in the industry. Telecommunication sector was however dragging behind, with the report stating that although China had committed itself to lift geographic limitations on data services and mobile voice for joint ventures, China was yet to draft regulations on how to meet that commitment.
Another requirement on the telecom sector yet to be met by China is her commitment to expand the geographical capacity of domestic owned telecom services by raising foreign ownership to 35 percent. The engineering, architectural and urban planning requirements were however met between 2003 and 2007 and foreign owned enterprises can now take part in integrated engineering, planning and architecture without the requirement of domestic partnerships. The country is also yet to fully comply with WTO requirements set on the express delivery sub sector (Stewart et al p13).
Foreign owned enterprises can operate in courier services but restrictions on the scope of business that such enterprises can engage in still exist. Obtaining licenses for the foreign based firms remains a big challenge for many. China’s obligation in allowing foreign firms to operate in freight inspection and testing services were yet to be met in 2007 as their were restrictions on the scope of business that a foreign firm could engage in. In a 2005-2006 US-China Business Council’s (USCBC) report, China is said to have complied with the advertising requirements, which allowed foreign-owned enterprises to invest in advertising companies.
China met this requirement in 2005 through the country’s ministry of Commerce Foreign owned business own and operate hotel and restaurant business in China, but have to abide by set regulations. In this sub-sector, China is yet to comply with the WTO requirements since foreign-owned enterprises are restricted on the amount of air cargo space they can book (USCBC). Tariff Reductions China agreed to reduce its tariffs on agriculture products to 15 percent, with average tariff level for industrial goods being set at 8. 9 percent. Tariff reduction obligations were scheduled for immediate, short term and long-term implementation.
Trading Rights Trading rights are two way under the WTO agreement. They include the rights to I) other WTO member countries importing products and services to china, and ii) China exporting its domestic products to other WTO countries. In 2004, China enforced trading rights process that ensured that foreign nationals registering businesses in the country did so without any hindrances. This was a step that was lauded by many signatory countries, most notably the United States. However, some deficiencies in trading rights still existed. Such included commitments on pharmaceutical and books importations.
Another deficiency noted in China’s compliance to the WTO trading rights requirement was the lack of liberalization of agreed trading rights. Such includes wholesaling services, retail services, franchising services, agent’s services and other related services. By 2004, China was yet to open its markets to allow foreign investors to practice direct sales or off-location sales. Among the notable compliances in the trading rights requirements was china allowing importers and exporters to conduct their businesses directly, without using middle men.
Tourism In 2004, China took the first steps to complying with the WTO in the tourism sector by allowing foreign based firms to acquire joint ventures in China. It was expected that by December 2007, wholly foreign-based enterprises would be able to operate in the Chinese tourism industry. It was also expected that all branch restrictions, registered capital restrictions and geographical barriers would be lifted. The WTO requirements for China in the Tourism Industry were initially meant for Xi’an, Shaanxi, Shangai, Guangzhou and Beijing regions.
In a 2004 report to Congress, the US lauded China’s progress in complying with the tourism, professional, education and environmental services (United States Trade Representative ) . CONCLUSION China’s compliance and non-compliance is widely a matter of government and industry protectionism. Whereas the private sector players may intentionally avoid adhering to the WTO rules, the government, which has the capacity to press the private industry players towards compliance does not apply the necessary internal pressure required to move the players.
The spirit of WTO agreement that China exhibited on its entry to the WTO was already running out in the third year of implementation. Other issues that arise in the only communist country as it puts up measures that ensures compliance to WTO is the fear of the China Communist Party of loosing national support. This is especially likely because the income inequalities in China are on a steep incline, something that the locals blame on the market reforms under WTO and the expanded private sector (Halverson, Karen)
Overall, China has received mixed rating for its compliance levels of the WTO requirements. The United States is among the biggest bilateral trader whose public holds mixed reactions on the role of China’s trade to the US under WTO. Some of the notable complaints from US investors include China’s continued protection of its steel and auto producers. Other claims allege that China uses her tax system to discriminate particular imports. Some export regulations in China also contravene the WTO requirements. Such include restrictions placed on raw materials, thus driving up production costs.
Foreigners claim this is discriminatory since foreign investor’s ends up producing at higher costs, while the Chinese nationals operate at lower costs thus giving the former a market advantage. Eight years later after China joined the WTO; many member countries agree that it is the high time that the country took accountability for its obligations. This is especially so because most of its requirements were meant for accomplishment in the first five years. The United States is one such country, which is pursuing dialogue, dispute settlement mechanisms, legal action or a combination of all in order to ensure that China complies.