2018 USTR Report To Congress On China's WTO Compliance
2018 USTR Report To Congress On China's WTO Compliance
TABLE OF CONTENTS
FOREWORD ……………………………………………………………………………………..………………………………………….. 1
TABLE OF CONTENTS
TABLE OF CONTENTS
ABBREVIATIONS
ACFTU All China Federation of Trade Unions
APEC Asia-Pacific Economic Cooperation
AQSIQ State Administration of Quality Supervision, Inspection and Quarantine
BOFT Bureau of Fair Trade for Imports and Exports
CAC Cyberspace Administration of China
CBRC China Banking Regulatory Commission
CFDA China Food and Drug Administration
CIRC China Insurance Regulatory Commission
CNCA National Certification and Accreditation Administration
GAPP General Administration of Press and Publication
IBII Bureau of Industry Injury Investigation
ISO International Organization for Standardization
JCCT U.S.-China Joint Commission on Commerce and Trade
MIIT Ministry of Industry and Information Technology
MOA Ministry of Agriculture
MOC Ministry of Construction
MOF Ministry of Finance
MOFCOM Ministry of Commerce
MOH Ministry of Health
MOST Ministry of Science and Technology
NDRC National Development and Reform Commission
NPC National People’s Congress
OIE World Organization for Animal Health
PBOC People’s Bank of China
SAC Standardization Administration of China
SAIC State Administration for Industry and Commerce
SAMR State Administration for Market Regulation
SAPPRFT State Administration of Press, Publication, Radio, Film and Television
SARFT State Administration of Radio, Film and Television
SASAC State-owned Assets Supervision and Administration Commission
SAT State Administration of Taxation
SCLAO State Council’s Legislative Affairs Office
S&ED U.S.-China Strategic and Economic Dialogue
SPB State Postal Bureau
SPC Supreme People’s Court
WTO World Trade Organization
2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
China at the expense of foreign producers, while changes will do more than simply ease the growing
creating pressure on foreign producers to move trade tensions with its trading partners. These
their operations, technologies and jobs to China. changes will also benefit China, by placing its
economy on a more sustainable path, and will
Any review of China’s trade regime also shows that contribute to the growth of the U.S. economy and
China’s regulatory system is so opaque that it is the global economy.
often difficult for U.S. companies – or even the U.S.
government – to fully understand China’s legal At its core, this approach is based on the following
requirements in a particular area of the economy. assessment: (1) WTO membership comes with
This problem is exacerbated by China’s extremely expectations that an acceding member not only will
poor record of adhering to its transparency strictly adhere to WTO rules, but also will support
obligations as a WTO member. These shortcomings and pursue open, market-oriented policies; (2) China
create their own trade barriers and undermine the has failed to comply with these expectations; (3) in
competiveness of China’s trading partners. recent years, China has moved further away from
open, market-oriented policies and has more fully
To address the unique and very serious challenges embraced a state-led, mercantilist approach to the
presented by China’s trade regime, the economy and trade; and (4) China’s market-
Administration is pursuing the following approach: distorting policies and practices harm and
disadvantage its fellow WTO members, even as
The United States will defend U.S. companies and China reaps enormous benefits from its WTO
workers from China’s unfair trading practices and membership.
will seek to restore balance to the trade relationship
between the United States and China. As part of The United States’ approach to China is more
these efforts, the United States will take all aggressive than in the past. Out of necessity, the
appropriate actions to ensure that the costs of United States is now using all available tools –
China’s non-market economic system are borne by including domestic trade remedies, bilateral
China, not by the United States. The United States negotiations, WTO litigation and strategic
also will continue to encourage China to make engagement with like-minded trading partners – to
fundamental structural changes to its approach to respond to the unique and very serious challenges
the economy and trade consistent with the open, presented by China. But the goal for the United
market-oriented approach pursued by other WTO States remains the same. The United States seeks a
members, which is rooted in the principles of non- trade relationship with China that is fair, reciprocal
discrimination, market access, reciprocity, fairness and balanced.
and transparency. As China should recognize, these
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2018 USTR Report to Congress on China’s WTO Compliance
PART 1
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
contribute to the growth of the U.S. economy and market economy methodologies in antidumping
the global economy. proceedings.
In the past year, the United States has taken decisive The United States also seeks to work with trading
action under domestic law to address a particularly partners that share our vision to take effective
serious manifestation of China’s state-led, action to address market-distorting practices in
mercantilist trade regime. At the direction of China. We urge other WTO members to join us in
President Trump, under the authority of Section 301 this critical effort. Currently, the United States is
of the Trade Act of 1974, USTR conducted a wide- working with the EU and Japan as part of a new high-
ranging investigation into China’s forcible transfer of level trilateral partnership to address directly the
technology. USTR concluded that China was systemic distortions caused by China’s non-market
responsible for: (1) pressuring the transfer of economic system. This partnership coordinates joint
technology through the abuse of administrative actions and examines potential rules where existing
processes and other means; (2) using discriminatory rules are ineffective.
regulations to force non-market licensing outcomes
for U.S. businesses; (3) leveraging state capital to As a result of these actions, it appears that China
acquire U.S. high-technology assets for transfer to may have begun to take our concerns more
Chinese companies in accordance with China’s seriously. During a meeting in Buenos Aries,
industrial policy objectives; and (4) obtaining U.S. Argentina, in December 2018, China’s President Xi
intellectual property and sensitive business agreed with President Trump to begin negotiations
information through cyber theft for the commercial on structural changes in China with respect to forced
benefit of Chinese industry. technology transfer, intellectual property protection,
non-tariff barriers, cyber intrusions and cyber theft,
In response, the United States: (1) imposed duties services and agriculture.
on $250 billion dollars’ worth of Chinese imports;
and (2) initiated dispute settlement at the WTO One final point should be emphasized. As noted
challenging China’s discriminatory technology above, the market-based reforms that we seek in
licensing regulations. The United States also began China will help not only the United States and
implementing the Foreign Investment Risk Review China’s other trading partners, but also China itself.
Modernization Act of 2018 (FIRRMA) to protect Chinese businesses and entrepreneurs will benefit
critical American technology and intellectual from reforms that encourage true market
property from potentially harmful foreign competition. Chinese innovators will benefit from
acquisitions. In addition, the United States brought reforms that protect intellectual property. Chinese
indictments against individuals engaging in cyber consumers will benefit from reforms that allow
and physical theft of trade secrets for or on behalf of improved access to high quality U.S. goods and
China. services. Chinese workers will benefit from reforms
that can lead to improved economic conditions and
Separately, the United States continues to defend higher living standards, both in China and elsewhere.
U.S. trade remedy laws from attack by China in the In short, by promoting market-based reforms the
WTO. These laws are critical to ensure that the costs U.S. government hopes to build a stronger global
associated with China’s non-market policies and economy for everyone’s benefit.
practices are not borne by U.S. companies and
workers. The United States is working closely with In the sections that follow, we make the following
the European Union (EU) to oppose China’s assessments as we more closely analyze China’s
unfounded WTO challenge against the use of non- record as a WTO member: (1) WTO membership
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2018 USTR Report to Congress on China’s WTO Compliance
comes with expectations that an acceding member instead of policies promoting a fairer and more open
not only will strictly adhere to WTO rules, but also multilateral trading system. Rather, it was expected
will support and pursue open, market-oriented that each WTO member would pursue open, market-
policies; (2) China has failed to comply with these oriented policies designed to achieve more efficient
expectations; (3) in recent years, China has moved outcomes. The pursuit of open, market-oriented
further away from open, market-oriented policies policies means not only strictly adhering to the
and has more fully embraced a state-led, agreed rules but also observing in good faith the
mercantilist approach to the economy and trade; fundamental principles that run throughout the
and (4) China’s market-distorting policies and many WTO agreements, which include non-
practices harm and disadvantage its fellow WTO discrimination, openness, reciprocity, fairness and
members, even as China reaps enormous benefits transparency.
from its WTO membership. We then discuss the
bilateral and multilateral strategies pursued by the In the case of China, its protocol of accession to the
Administration and other WTO members to address WTO sets out China’s obligations under the WTO
the unique challenges presented by China’s WTO agreements as well as numerous additional China-
membership. This discussion also highlights the specific commitments made necessary because of
need for new and more effective strategies – China’s incomplete transition to a market economy.
including taking actions outside the WTO where China’s protocol also reflects an understanding that
necessary – to address the problems presented by China would need to, and had agreed to, transform
China’s non-market economic system. its approach to the economy and trade. China itself
acknowledged “the evolving nature of its economy,”
and it confirmed that at the time of China’s
EXPECTATIONS OF WTO MEMBERSHIP accession to the WTO “a socialist market economy
system was applied” in China. Similarly, WTO
For all WTO members, the expectations of WTO members highlighted that “China was continuing the
membership are clearly set forth in the Marrakesh process of transition towards a full market
Declaration issued in April 1994 at the conclusion of economy.” WTO members also noted, for example,
the Uruguay Round negotiations. There, WTO that “the special features of China’s economy, in its
members expressly affirmed their view that the present state of reform, still created the potential
establishment of the WTO ushers in a “new era of for a certain level of trade-distorting subsidization.”
global economic cooperation” that “reflect[s] the
widespread desire to operate in a fairer and more For these reasons, it was agreed that special
open multilateral trading system.” WTO members safeguard-like provisions would be included among
further made clear their determination that their the terms of China’s protocol of accession as
economies would participate in the international protective measures while China completed its
trading system based on both “open, market- transformation into a market economy. For
oriented policies and the commitments set out in example, China’s protocol of accession included a
the Uruguay Round Agreements and Decisions.” China-specific safeguard mechanism, special
(Emphasis added.) antidumping rules and special methodologies for
identifying and measuring subsidy benefits. It also
As this language makes clear, it clearly was not created a unique, 10-year review mechanism
contemplated that any WTO member would reject designed to monitor China’s progress in
market-based policies in favor of a state-led trade implementing its many WTO commitments and to
regime. It also was not contemplated that any WTO secure updated information on the use of industrial
member would pursue mercantilist outcomes plans by China.
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2018 USTR Report to Congress on China’s WTO Compliance
Unfortunately, China has a poor record when it protectionist administration of tariff-rate quotas for
comes to complying with WTO rules and observing key agricultural commodities; and (12)
the fundamental principles on which the WTO discriminatory regulations on technology licensing.
agreements are based. Too often, China flouts the Even though the United States has routinely
rules to achieve industrial policy objectives. In prevailed in these WTO disputes, they take years to
addition, and of more serious concern to the United litigate, consume significant resources and often
States and other WTO members, China has not made require further efforts when China resists complying
sufficient progress in transitioning toward a market with panel or Appellate Body rulings.
economy. China continues to embrace a state-led,
non-market and mercantilist approach to the One conspicuous ongoing example of non-
economy and trade. This approach results in compliance involves electronic payment services.
sophisticated and expansive policies and practices China still blocks major U.S. suppliers such as Visa
that often evade WTO disciplines and cause serious and MasterCard from its market despite the fact that
harm to markets, industries and workers in the (1) it committed to open its market to foreign
United States and other WTO Members. suppliers by 2006 and (2) a WTO dispute settlement
panel confirmed this commitment in a case brought
CHINA’S RECORD OF COMPLIANCE WITH by the United States. As has become clear, China’s
WTO RULES industrial policy objective is to protect its national
champion, China Union Pay, from competition in
While China appeared to revise numerous laws and China so that it can use the revenues from a captive
regulations to bring them into conformity with its domestic market to fund its own global expansion.
WTO obligations in the first few years after its WTO This non-market behavior, which is ongoing, harms
accession, China’s trade regime nevertheless U.S. companies and their workers.
generated many WTO compliance concerns. Too
often, WTO members have had to resort to the China has been a particularly bad actor when it
WTO’s dispute settlement mechanism to change comes to trade remedies. While the use of trade
problematic Chinese policies and practices. The remedies in a manner consistent with WTO rules is
United States, for example, has brought 23 an important tool for protecting domestic industries
challenges at the WTO against China covering a wide from unfair and injurious trade practices, China has
range of important policies and practices. Among made a practice of launching antidumping (AD) and
other matters, these cases have taken on the countervailing duty (CVD) investigations that appear
following WTO-inconsistent activities pursued by designed to discourage its trading partners from the
China: (1) local content requirements in the legitimate exercise of their rights under WTO rules.
automobile sector; (2) discriminatory taxes in the This type of retaliatory conduct is not typical of WTO
integrated circuit sector; (3) hundreds of prohibited members, nor is it a legitimate basis for seeking AD
subsidies in a wide range of manufacturing sectors; and CVD relief. Moreover, when China has pursued
(4) inadequate intellectual property rights (IPR) AD and CVD investigations under these
enforcement in the copyright area; (5) significant circumstances, it appears that its regulatory
market access barriers in copyright-intensive authorities have tended to move forward with the
industries; (6) severe restrictions on foreign imposition of duties regardless of the strength of the
suppliers of financial information services; (7) export underlying legal claims and evidence. The United
restraints on numerous raw materials; (8) a denial of States’ three successful WTO cases challenging the
market access for foreign suppliers of electronic duties imposed by China on imports of U.S. grain-
payment services; (9) repeated abusive use of trade oriented electrical steel (GOES), U.S. chicken broiler
remedies; (10) excessive domestic support for key products and U.S. automobiles offer telling examples
agricultural commodities; (11) the opaque and of this problem. Indeed, China’s poor behavior does
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2018 USTR Report to Congress on China’s WTO Compliance
not always stop after an adverse WTO ruling. In two maintained by China. While those cases involved
of the three WTO cases brought by the United States hundreds of subsidies, most of the subsidies were
on trade remedies, China did not comply with the provided by sub-central governments. The United
WTO’s rulings, and the United States was forced to States was able to bring those cases only because of
bring Article 21.5 compliance proceedings to secure its own extensive investigatory efforts to uncover
China’s compliance. China’s opaque subsidization practices. Of course,
most other WTO members lack the resources to
China’s retaliatory use of trade remedies highlights conduct the same types of investigations.
another unique issue that WTO members face when
dealing with China – the threat of reprisal. It is no Today, China continues to shield massive sub-central
secret that foreign companies are hesitant to speak government subsidies from the scrutiny of WTO
publicly, or to be perceived as working with their members. Together with other non-market
governments to challenge China’s trade policies or practices, these subsidies contribute to the serious
practices, because they fear retaliation from the excess capacity problems that plague industries like
Chinese state. A study by one U.S. industry steel, aluminum, solar panels and fishing and
association noted that foreign companies devastate global markets and foreign competitors.
confidentially have reported receiving explicit or Industrial plans such as Made in China 2025, which
implicit threats from Chinese government officials – reportedly targets 10 advanced manufacturing
typically made orally rather than in writing – about sectors in China with hundreds of billions of dollars
possible retaliatory actions that could have severe in subsidies, inevitably will create a new wave of
repercussions for a company’s business prospects in industries with severe excess capacity, to the
China. At the same time, it also is no secret that detriment of China’s trading partners.
China threatens more vulnerable WTO members to
dissuade them from speaking publicly against China. China also conceals information about state trading
enterprises. Since China’s WTO accession in 2001,
A further persistent problem is China’s inadequate the United States and other WTO members
regulatory transparency. China disregards many of repeatedly have sought information from China on
its WTO transparency obligations, which places its the pricing and purchasing practices of state trading
trading partners at a disadvantage and often serves enterprises, principally through the transitional
as a cloak for China to conceal unfair trade policies reviews at the WTO. However, China only provided
and practices from scrutiny. general information, which did not allow a
meaningful assessment of China’s compliance
For example, for years, China failed to notify its efforts. China also did not make regular notifications
fellow WTO members of any sub-central of its state trading enterprises, as required by the
government subsidies, despite the fact that most General Agreement on Tariffs and Trade 1994 (GATT
subsidies in China emanate from provincial and local 1994). China submitted its first notification in 2003
governments. In fact, it took China 15 years before and then stopped. China did not submit another
it notified its first sub-central government subsidy, notification until 2015, and it did so only because the
and even then its notification was confined largely to United States had submitted a counter notification
subsidies that China had terminated after the United identifying 44 state trading enterprises not
States had challenged them in a WTO case. The previously notified by China. Even so, China’s 2015
magnitude and significance of this problem is notification did not include much of the detailed
illustrated by the five WTO cases that the United information envisioned by the GATT 1994’s
States has brought challenging prohibited subsidies requirement.
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2018 USTR Report to Congress on China’s WTO Compliance
In addition, China often frustrates the intended Although WTO members approved a final HS 2002
functioning of WTO committees and councils and tariff schedule for China in March 2017 after 12
other WTO bodies. These WTO bodies should years of negotiation, China continues to withhold its
provide a forum for monitoring a member’s schedule for certification, claiming that its domestic
compliance with its WTO obligations and for approval process, which so far has lasted 18 months,
discussing and resolving specific concerns that may is not yet completed. China has not even begun the
arise. However, China does not have a record of process of certifying its HS 2007, HS 2012 and HS
taking this type of work seriously, and it frequently 2017 tariff schedules. Accordingly, WTO members
undercuts the utility of these consultative bodies. today do not have accurate, current information on
all of China’s tariff schedules and tariff bindings.
One longstanding example involves the Transitional
Review Mechanism, a special, China-specific When China does take the initiative to engage in
mechanism established by China’s protocol of WTO bodies, it typically is not seeking to find ways to
accession. For the first ten years after China’s further liberalize trade. Too often, China is seeking
accession, this mechanism called for review to move in the opposite direction. In the WTO’s
meetings before each of 16 WTO committees and Council for Trade-Related Aspects of Intellectual
councils. Throughout the 10-year life of this Property Rights (TRIPS Council), for example, China
mechanism and the 16 review meetings that took has pursued discussion topics or has backed
place each year, China refused to respond to WTO proposed amendments to the Agreement on Trade-
members’ written questions in writing in advance of Related Aspects of Intellectual Property Rights
relevant review meetings and confined its (TRIPS Agreement) that would weaken the
participation to oral statements, contrary to the obligations that members took on in the TRIPS
agreed procedures. This behavior made it difficult Agreement.
for concerned members to ask probing follow-up
questions and fully understand the policies and For years, the United States has urged China to
practices under review. change the behaviors described above and become a
responsible member of the WTO. In the future, the
Similarly, in the Subsidies Committee, not only does United States will continue this effort. The United
China have a poor record of adhering to its States also will continue to use the WTO dispute
notification obligations, but it also fails to cooperate settlement mechanism as an enforcement tool as
when other members make requests for information appropriate and will continue working through WTO
pursuant to the rules in the Agreement on Subsidies committees and councils and other WTO bodies to
and Countervailing Measures (Subsidies Agreement). seek effective actions to curb problematic Chinese
For example, China repeatedly has failed to provide policies and practices.
substantive answers to the United States’ requests
for information about China’s subsidy practices. In However, it is unrealistic to believe that actions at
addition, when the United States itself has the WTO alone would ever be sufficient to force or
submitted information identifying subsidies that persuade China to make fundamental changes to its
China apparently has not reported, China regularly trade regime. The WTO system was designed for
does not respond with any additional substantive countries that are truly committed to market
information, contrary to the procedures envisioned principles – not for an enormous country
by Subsidies Agreement rules. determined to maintain a state-led, non-market
system. No matter how many cases are brought at
Remarkably, China has still not completed its update the WTO, China can always find a way to engage in
to its Harmonized System (HS) 2002 tariff schedule. market-distorting practices. Furthermore, as we
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2018 USTR Report to Congress on China’s WTO Compliance
discuss below, given the extent to which China has This situation has worsened in recent years. While
benefited from the current state of affairs, it is not some of the legislative and regulatory changes that
likely to agree to effective new WTO disciplines on China made in the years immediately following its
its behavior. Given these facts, it seems clear that WTO accession offered the potential for China’s
relying solely on the WTO and its mechanisms to fuller embrace of market principles, these efforts
address China’s unfair trade practices is a recipe for stalled and stagnated. Since new leaders assumed
failure. Accordingly, while the United States will use power in China in 2013, the state’s role in the
the WTO where possible – and will continue efforts economy – effectuated by the Chinese government
to encourage other countries to work with us at the and, increasingly, the Chinese Communist Party –
WTO – the United States must also take action has grown. Similarly, the depth and breadth of
outside the WTO to encourage China to move in a concerns facing U.S. and other foreign companies
more open and market-oriented direction. doing business in China – or competing with favored
Chinese companies markets outside of China – also
CHINA’S RECORD IN TERMS OF ITS have increased.
TRANSITION TO A MARKET ECONOMY
Despite this reality, China repeatedly signals that it is
Today, almost two decades after China pledged to pursuing what it calls “economic reform.” For
support the WTO’s multilateral trading system, example, in November 2013, at the Third Plenary
China has not embraced open, market-oriented Session of the 18th Central Committee of the
policies. The state remains in control of China’s Chinese Communist Party, China issued a number of
economy, and it heavily intervenes in the market to seemingly favorable pronouncements, including
achieve industrial policy objectives. calling for making the market “decisive” in allocating
resources and reducing Chinese government
China pursues a wide array of continually evolving intervention in the economy. More recently, in May
interventionist policies and practices aimed at 2018, China reminded WTO members at a General
limiting market access for imported goods and Council meeting that 2018 marks the 40th
services and restricting the ability of foreign anniversary of China’s self-described “reform and
manufacturers and services suppliers to do business opening up” policy. However, China’s use of the
in China. At the same time, it offers substantial term “economic reform” differs from the type of
government guidance, resources and regulatory change that a country would be pursuing if it were
support to Chinese industries. The principal embracing open, market-oriented principles. For
beneficiaries of China’s policies and practices are China, “economic reform” appears to mean
China’s state-owned enterprises and numerous perfecting the management of the economy by the
other significant domestic companies, sometimes Chinese government and the Chinese Communist
referred to as “national champions,” that are Party and strengthening the state sector, particularly
attempting to move up the economic value chain. state-owned enterprises.
The benefits that Chinese industry realizes largely China’s Non-market Economic System
come at the expense of China’s trading partners and
their companies and workers. As a result of China’s To fully appreciate the challenges presented by
industrial policies, markets all over the world are less China’s non-market economy, it is vital to
efficient than they should be, and the playing field is understand the extent to which – almost two
heavily skewed against foreign companies that seek decades after China joined the WTO – the Chinese
to compete against Chinese companies, whether in state still maintains control over economic decision-
China’s market or markets outside of China. making in that country. A thorough examination of
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2018 USTR Report to Congress on China’s WTO Compliance
China’s Constitution, relevant directives and This past year, China indicated that it has no plans to
pronouncements by China’s leadership, legislative significantly change its basic approach to the
and regulatory measures issued by the Chinese economy. As China explained in the report that it
government, China’s industrial plans and the actions circulated in connection with its July 2018 trade
of the Chinese government and the Chinese policy review at the WTO, “[w]hile socialism with
Communist Party leaves no doubt that the Chinese Chinese characteristics has entered a new era, the
state maintains a tight grip on virtually all economic basic dimension of the Chinese context – that China
activity. is still and will long remain in the primary stage of
socialism – has not changed.” China added that it is
At its core, the framework of China’s economy is set committed to a “socialist market economy” and to
by the Chinese government and the Chinese improving “the relationship between the
Communist Party, which exercise control directly government and the market.” In China’s view, an
and indirectly over the allocation of resources improved relationship appears to mean that the
through instruments such as government ownership state plays its role better in managing the economy,
and control of key economic actors and innumerable not that the state ceases to intervene and allows
government directives. The government and the market forces to determine outcomes.
Party have constitutional mandates to develop a
“socialist market economy with Chinese Aside from the role of the government and the Party
characteristics.” Article 6 of the Constitution of the in managing the economy, there are also serious
People’s Republic of China provides that, “[i]n the concerns over how they exercise influence over the
primary stage of socialism, the state upholds the operations and investment decisions of both state-
basic economic system in which public ownership is owned enterprises and private companies, including
dominant and diverse forms of ownership develop foreign-invested enterprises. This influence appears
side by side . . . .” Article 7 provides that “[t]he to be growing, as the Party is increasing its control
state-owned economy, that is, the socialist economy over key actors in China’s economy and not, as
with ownership by the whole people, is the leading hoped, enabling China’s transition to a market
force in the national economy. The state ensures economy.
the consolidation and development of the state-
owned economy.” Similarly, the Constitution of the China claims that its state-owned enterprises make
Chinese Communist Party provides: “The business decisions independently of the state and
Communist Party of China leads the people in based on market principles. However, the
developing the socialist market economy. It government and the Party continue to exercise
unwaveringly consolidates and develops the public control over state-owned enterprises. Among other
sector of the economy and unswervingly things, they appoint and control key executives
encourages, supports and guides the development through the Chinese Communist Party Organization
of the non-public sector.” Department. They also provide state-owned
enterprises with preferential access to important
To fulfill these mandates, the government and the inputs (such as land and capital) and other
Party direct and channel economic actors to meet competitive advantages unavailable to non-state-
the state’s planning targets. The government and owned companies. State-owned enterprises, in turn,
the Party permit market forces to operate only to play an outsized role in China’s economy. For
the extent that they accord with the objectives of example, state-owned enterprises outstrip private
national economic and industrial policies. When Chinese companies in terms of their share of total
there is conflict between market outcomes and state credit, their market dominance in key industries and
objectives, the government and the Party intervene their share of total market capitalization on China’s
to ensure that the state’s objectives prevail. stock market.
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2018 USTR Report to Congress on China’s WTO Compliance
At the 2017 Central Economic Work Conference, a China. In November 2017, the European Union
high-level annual meeting on economic policy, Chamber of Commerce in China expressed similar
China’s leaders made clear the importance of state- concerns. It noted that China’s efforts to codify
owned enterprises. They stated that one of six Party influence in joint ventures between Chinese
priorities for China’s economy in 2018 was to companies and foreign companies significantly
promote stronger, better and bigger state-owned changes the joint venture’s governance and
enterprises, and they explained that the means for undermines the authority of the joint venture’s
achieving this priority was to strengthen Party board of directors. The Chamber of Commerce
leadership and Party infrastructure in state-owned added that it is unaware of any legal basis for the
enterprises. insertion of Party committees into joint ventures.
Indeed, both state-owned enterprises and private Further reinforcing the Party’s influence is the Social
Chinese companies host internal Party committees Credit System, a new tool endorsed by the Party that
capable of exercising government and Party the government will be using to monitor, rate and
influence over their corporate governance and condition not only the conduct of all individuals in
business decisions. This arrangement is actually China, but also all domestic and foreign companies
codified in Chinese law under Article 19 of the in China. This system is expected to become fully
Company Law, which applies to both state-owned operational in 2020. While details are still emerging,
enterprises and private Chinese companies. it appears that the government will use the Social
Recently, moreover, the Party has taken further Credit System, among other things, to ensure that
steps to increase the strength and presence of Party economic actors follow industrial plans.
committees within all of these companies. As part of
these Party building activities, state-owned Separate from these various mechanisms used to
enterprises and private Chinese companies are being control company behavior, the government and the
pressured to amend their articles of association to Party continue to control or otherwise influence the
ensure Party representation on their boards of prices of key factors of production. The result is that
directors, usually as the Chairman of the Board, and the means of production in China are not sufficiently
to ensure that important company decisions are allocated or priced according to market principles.
made in consultation with Party committees.
For example, all land in China is property of the
Recent reports indicate that the Party also is now state, as either state-owned urban land or
looking to influence the managerial and investment collectively owned rural land. Because the state
decisions of foreign-invested enterprises in China controls rural land acquisition and monopolizes the
through the insertion of Party committees. The distribution of urban land-use rights, the state
Federation of German Industries stated in its 2019 remains the final arbiter of who uses the land and
Policy Paper: “The direct influence of the state or for what purpose. Land-use rights holders, in turn,
the party in corporate decisions is being expanded face limits with respect to the tenure and the scope
through a political upgrading of party cells. These of use. The result of these dynamics is an inefficient
intervene not only in the decision-making processes land market in which large swathes of land are
of state-owned enterprises but also in joint ventures misallocated either to small farm plots or to
and private enterprises.” This warning follows a underutilized urban infrastructure.
statement by the Delegations of Germany Industry
and Commerce in November 2017 pushing back In addition, there are significant institutional
against attempts by the Party to strengthen its constraints on the extent to which wage rates are
influence in wholly German-owned companies in determined through free bargaining between labor
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2018 USTR Report to Congress on China’s WTO Compliance
and management. China denies workers the right of banks in China to ensure that their lending decisions
association and the right to organize and collectively align with PBOC and government objectives. In
bargain. China prohibits the formation of addition, the Law on Commercial Banks provides
independent trade unions to represent workers, and that “commercial banks are to conduct their
workers do not have the legal right to strike, which is business of lending in accordance with the needs of
an important lever in collective action and national economic and social development and
negotiation with management over wages in market under the guidance of the industrial policies of the
economies. Labor unions in China are under the state.”
control and direction of the All-China Federation of
Trade Unions (ACFTU), a government-affiliated and Similarly, China’s legal system continues to function
Party organ. While China has implemented as an instrument by which the government and the
legislation such as the Labor Contract Law and the Party can secure discrete economic outcomes,
Labor Dispute Law that appears to provide channel broader economic policy and pursue
employees with a cause of action to challenge industrial policy objectives. Key legal institutions,
particular aspects of an employee’s labor contract, such as the courts, are structured to respond to the
these laws in reality do not advance the Party’s direction, both broadly and on a case-specific
fundamental rights of freedom of association and basis. As a general matter, to the extent that
collective bargaining. In addition, government companies and individuals seek to act independently
restrictions on labor mobility continue to inhibit and of government or Party direction, the legal system
guide labor flows, causing distortions on the supply does not provide a venue for them to achieve these
side of the labor market. objectives on a systemic or consistent basis. In
addition, companies and individuals continue to face
The state also exerts a high degree of control over challenges in obtaining impartial outcomes, either
energy and other input prices. In the electricity because of local protectionism or corruption.
sector, for example, the government owns the
largest power generation and grid operating The larger issue of China’s restrictions on the
companies, controls downstream prices and employs freedom of information also impacts China’s
differential pricing as a policy tool to achieve economic system. For example, while China’s
capacity shedding and other industrial policy Internet firewall and the Party’s regular censorship
objectives. of audio-visual and print media have many negative
effects outside China’s economic system, they also
The influence of the government and the Party is create distortions in China’s economy, and these
particularly acute in the financial sector. Five large distortions affect the ability of foreign companies to
commercial banks that are majority state-owned operate and compete effectively in China’s market.
operate large branch networks on a nationwide basis
and account for nearly half of total bank assets. In recent years, China also has been exporting its
There are also three large state-owned policy banks, non-market economic model to other countries
as well as scores of city commercial banks and credit through its Belt and Road Initiative. As is now well
unions under local government control. In addition known, China invokes this initiative and offers to
to the ownership of these banks by the government, build large infrastructure projects in countries
the state exercises other forms of influence over throughout Asia and other parts of the world,
banking decisions. The Party, through its especially in strategically located or developing
Organization Department, appoints executives in countries. China claims that the Belt and Road
state-owned banks and other state-owned financial Initiative is open to all, but virtually all projects are
institutions. China’s central bank, the People’s Bank financed by Chinese banks, run by Chinese state-
of China (PBOC), also meets frequently with large owned enterprises and built by Chinese workers.
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2018 USTR Report to Congress on China’s WTO Compliance
The Belt and Road Initiative is especially important industrial policies reflect a top-down, state-directed
to the Chinese Communist Party, which has approach to technology development, and are
incorporated the Belt and Road Initiative into its founded on concepts such as “indigenous
Constitution and has called for using this initiative to innovation” and “re-innovation” of foreign
develop relations with surrounding countries technologies. The government and the Party regard
through discussion, collaboration and unity. technology development as integral to the economic
However, Belt and Road Initiative projects are often development of Chinese industry and seek to attain
opaque, one-sided and divisive. These projects its domestic dominance and global leadership in a
generally ignore market principles and fail to adhere wide range of technologies. In pursuit of these
to internationally accepted best practices in overarching objectives, China has issued a large
financing, infrastructure development and number of industrial policies, including, among many
government procurement. Too often, these projects others, the National Medium- and Long-Term
also create unsustainable debt burdens for the Science and Technology Development Plan Outline
recipient countries. (2006-2020) in 2005, the Decision on Accelerating
and Cultivating the Development of Strategic
Emerging Industries in 2010 and the Made in China
China’s State-led, Mercantilist Approach to 2025 industrial plan, launched in 2015.
Trade
Increasingly, China also has used new types of state-
In China’s economic framework, state planning controlled financial institutions, such as the National
through industrial policies conveys the state’s Integrated Circuit Fund, to implement its industrial
instructions regarding sector-specific economic and policies. This fund for the integrated circuit industry
trade objectives. While some sectors are deemed was established under the guidance of two
strategic and fundamental and therefore receive government ministries and funded by several
more attention and resources, no sector of the prominent state-owned enterprises and state-
economy escapes the oversight of the government owned financial institutions. The objectives are to
and the Party. achieve breakthroughs in cutting-edge core
technologies and to establish “secure and
China is currently in its 13th five-year planning cycle, controllable” information technology systems.
a hallmark of a planned economy that has become Unfortunately, “secure and controllable” is a
more, not less, salient over the past 18 years of euphemism used for excluding foreign products and
China’s WTO membership. China retains formal services from many sectors of China’s economy.
mechanisms of plan formulation, tasking and review,
and over the years it has expanded the scope and When compared to the industrial policies of other
specificity of its industrial plans, which span all WTO members, China’s industrial policies are
sectors of China’s economy. Various institutions fundamentally different. In several significant ways,
participate in plan formulation and execution, China’s industrial policies go well beyond traditional
including central government bodies with legislative approaches to guiding and supporting domestic
and regulatory authority, thousands of local industries.
government authorities, various organs of the Party
and key Chinese companies. First, adherence to the objectives of China’s
industrial policies is effectively mandatory. Chinese
As one example, a number of official publications of companies have little discretion to ignore them,
the government and the Party set out China’s even when market forces would dictate different
ambitious technology-related industrial policies. The commercial behavior.
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2018 USTR Report to Congress on China’s WTO Compliance
Second, the financial support that the state provides • China imposes unique national standards
to domestic industries in support of China’s strategically, both to promote the dominance of
industrial policies is significantly larger than in other China’s market by Chinese companies and to
countries, and it is not limited to funding for serve the interests of Chinese companies
research and development. The state also provides seeking to compete globally.
massive, market-distorting financial support to the
ongoing operations of China’s domestic industries. • China pursues forced technology transfer
This support often leads to severe excess capacity in through joint venture requirements and
China – followed by China’s widespread dumping of administrative approval processes.
the inevitable excess production into the markets of
other WTO members. This assault on global markets • State-sponsored, cyber-enabled theft of
can cause serious harm to other WTO members’ intellectual property, trade secrets and know-
industries and workers. The WTO does not provide how is conducted for the commercial benefit of
effective mechanisms for addressing this problem. Chinese companies.
Third, China actively seeks to help its domestic • China continues to insist upon a large role for
producers through myriad additional policies and state-owned enterprises, and accords them
practices that impede, disadvantage and harm the numerous competitive preferences, to the
foreign competition and skew the playing field detriment of foreign companies, both in China’s
against imported goods and services and foreign market and abroad.
manufacturers and services suppliers. For example:
• Chinese government officials routinely intervene
• China seeks to manage the export of many on an ad hoc basis when market-based
primary, intermediate and downstream outcomes conflict with China’s industrial policy
products by strategically raising or lowering the objectives.
value-added tax (VAT) rebate available upon
export, typically with the objective of making • China conditions subsidies, regulatory
large quantities of primary and intermediate preferences and government procurement
products in a particular sector available preferences on the localization of technology in
domestically at lower prices than in the rest of China.
the world. This practice gives China’s
downstream producers using these inputs a • China uses competition law enforcement to
significant competitive advantage over foreign achieve industrial policy objectives.
producers.
• China uses cybersecurity as a pretext to
• China employs extensive and varied market discriminate against foreign information
access prohibitions and limitations designed to communications technology (ICT) products and
protect domestic manufacturers and services services and to promote the substitution of
suppliers from competition in many sectors of domestic ICT products and services in sectors
China’s market. throughout the Chinese economy.
• China employs investment restrictions designed • As described above, China inserts Party
to protect domestic manufacturers and services committees into Chinese companies and,
suppliers from foreign competitors and to increasingly, foreign companies operating in
encourage technology transfer. China, with the objective of ensuring that
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
While these reports focused on the harm caused to excess capacity by imposing trade remedies such as
U.S. interests, it is not a problem borne solely by the antidumping and countervailing duties in response
United States. China’s unfair acts, policies and to petitions from their domestic industries. Second,
practices relating to forced technology transfer also excess capacity in China hurts the global economy
impact other WTO members whose companies have because lower global prices and a glut of supply
developed or are developing advanced technologies. make it difficult for even the most competitive
producers outside China to remain viable. For
Excess Capacity example, China’s excess capacity in solar panels was
a key reason why U.S. imports of solar cells and
One significant result of China’s non-market modules from China increased by 500 percent from
economic system is the creation of excess capacity – 2012 to 2016, while prices for solar cells and
that is, capacity that would not persist if market modules fell by 60 percent. Conditions deteriorated
forces were operating properly. Excess capacity is a to a point where most U.S. producers ceased
sign that resources are not being allocated in an domestic production, moved their facilities to other
efficient manner. According to a 2016 report by the countries or declared bankruptcy. By 2017, the U.S.
European Union Chamber of Commerce, key solar manufacturing industry had almost
recurring factors in the creation of excess capacity in disappeared, with 25 companies closing since 2012.
China include the protection of local industries, weak Similar effects were felt in the EU, which also used to
enforcement of regulations, price controls for be a world leader in the solar sector. These facts led
significant inputs and fiscal imbalances that create a the United States to impose safeguard measures on
perverse incentive to attract excessive investment. imports of solar cells and modules in early 2018.
Even though the state’s management of the China today is the primary cause of excess capacity
economy largely is responsible for excess capacity in in a number of key sectors of the global economy.
China, the state often uses excess capacity as an For example, China’s large increases in steel capacity
excuse for further government control. For since it joined the WTO in 2001 have led to
example, in 2017, the Chinese government issued extraordinary increases in steel production. China’s
guiding measures to reduce severe excess capacity in steel capacity rose from 160 million metric tons (MT)
the steel and coal industries. These measures in 2001 to 1,048 million MT in 2017.
essentially endorse China’s so-called “supply-side Correspondingly, China’s annual steel production
structural reform” initiative as the solution – even rose from 151 million MT in 2001 to 832 million MT
though that initiative calls for further state in 2017, by far the largest in the world. China’s steel
intervention and financial support, rather than a industry now accounts for about 50 percent of global
fuller embrace of market-based principles. steel capacity and global steel production. Because
Unsurprisingly, these measures have proven to be China had created a global crisis in steel, the United
ineffective. States was forced to adopt a global response, in the
form of tariffs under Section 232 of the Trade
Excess capacity in China harms U.S. interests and the Expansion Act of 1962.
interests of other WTO members in numerous ways.
First, it leads to injury in the markets of China’s In its Guiding Opinions on Resolving the Conflict of
trading partners due to direct exports of excess Serious Overcapacity, issued in 2013, China itself
production from China. Many WTO members, acknowledged excess capacity in several industries,
including Canada, Australia, India and the EU, have including steel, cement, electrolytic aluminum, flat
responded to the trade-distortive effects of China’s glass and shipbuilding. Examples of numerous other
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2018 USTR Report to Congress on China’s WTO Compliance
excess capacity industries are discussed in a 2016 The extent of this harm to foreign manufacturers is
study issued by the European Union Chamber of reflected in the very large number of antidumping
Commerce in China entitled “Overcapacity in China: and countervailing duty investigations that have
An Impediment to the Party’s Reform Agenda.” been initiated against China by the investigating
Remarkably, however, no practical steps were taken authorities of WTO members. Since China joined the
to address this problem until the United States acted WTO in 2001, it has been the number one target of
to insulate critical industries like steel and aluminum WTO members’ investigating authorities for both
from the harmful effects of global oversupply. antidumping and countervailing duty investigations.
Since 2001, WTO members have initiated 1,268
Looking ahead, some of the Chinese industries most antidumping investigations of exports from China.
likely to inflict the disastrous consequences of severe No other country has faced even one third as many
excess capacity on the world in the future can be antidumping investigations during that time.
found in the Made in China 2025 industrial plan.
Through that industrial plan, the Chinese One key reason why exports from China are subject
government is seeking to create dominant so often to investigations by other WTO members’
companies in 10 advanced manufacturing sectors, antidumping authorities is China’s economic system,
which include advanced information technology, which is fundamentally different from the open,
robotics and automated machine tools, aircraft and market-oriented economic systems found in other
aircraft components, maritime vessels and marine WTO members. When a sectoral industrial plan
engineering equipment, advanced rail equipment, directs China’s domestic companies to produce
new energy vehicles, electrical generation and certain types of products or products in certain
transmission equipment, agricultural machinery, quantities or allocates billions of dollars of financial
new materials and pharmaceuticals and medical support to manufacture advanced, new products,
devices. By some estimates, the Chinese price distortions are inevitable.
government is making available more than $500
billion of financial support to these sectors, both The relationships that a government tolerates
through Made in China 2025 and related industrial among domestic businesses also can create market
plans. Based on the recent history of the steel and distortions. For example, when a government
aluminum industries, China’s non-market distortions tolerates conduct that leads to widespread,
in these newer sectors will likely result in competition-inhibiting behavior or cross-
oversupply, leading to loss of jobs and production in subsidization among companies in a domestic
market economies. industry (as in Chinese industries dominated by
state-owned enterprises), it can provide the
Distorted Markets domestic companies with unfair advantages over
their foreign counterparts.
Even in the absence of forced technology transfer or
severe excess capacity, China’s non-market
economic system causes serious harm to industries BENEFITS OF WTO MEMBERSHIP TO CHINA
and workers in the United States and other WTO
members. This harm occurs because Chinese China has not transformed its economic system to
companies use the artificial competitive advantages embrace open, market-oriented principles, nor has it
provided to them by the interventionist policies and abandoned its state-led, mercantilist trade regime in
practices of the Chinese state to undersell their favor of a cooperative approach that promotes a
foreign competition. multilateral trading system that is more fair and
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2018 USTR Report to Congress on China’s WTO Compliance
more open. Nevertheless, China has used WTO Customs Valuation Agreement, the Agreement on
membership to develop rapidly. Trade-Related Investment Measures, the Agreement
on Sanitary and Phytosanitary Measures (SPS
In 2001, when China acceded to the WTO, China’s Agreement) and the Agreement on Technical
economy was the sixth largest in the world. Today, Barriers to Trade (TBT Agreement). Most of the
China’s economy is now four times larger than it was remaining WTO agreements either do not have a
in 2001. Overall, China is now the largest goods right of self-election, or the decision whether or not
trader among WTO members, accounting for almost to accord China developing country status is left to
14 percent of total global exports and almost 11 another WTO member’s investigating authorities, as
percent of total global imports in 2017. in the case of the Antidumping Agreement.
In 2001, China was the world’s sixth-largest goods In 2001, when China acceded to the WTO, the facts
exporter. By 2013, it ranked number one, and it supported the approach taken by WTO members to
currently exports about the same value of goods as deny China developing country status. As explained
all of North America combined. In terms of goods above, the facts continue to support that approach
imports, China was the world’s sixth largest importer today.
in 2001, and today it is the second largest importer
in the world. U.S. EFFORTS TO ADDRESS TRADE
DISTORTIONS CAUSED BY CHINA
In short, there can be no doubt that China has
benefited enormously from its WTO membership As China’s role in global trade has grown, its non-
even though, as shown throughout this report, China market economic system and state-led, mercantilist
has not sought to transform its economic system or trade regime increasingly have disrupted
its trade regime as had been expected, and it has international trade to the detriment of the United
never fully complied with WTO rules. States and other WTO members. Rather than allow
this harm to continue, the United States has pursued
Exacerbating this unfortunate situation is the fact both bilateral and multilateral mechanisms in
that China also has generally refused to take on response. Through these efforts, the United States
more responsibilities at the WTO. Instead, China has sought to encourage China to fundamentally
claims that it is a “developing” country, and it uses change its approach to the economy and trade.
that claim to justify maintaining policies and Over the past year, the United States also has taken
practices that protect its domestic industries. corrective actions to limit the adverse effects of
However, China’s claim of developing country status China’s harmful practices. These efforts are
is disingenuous and inconsistent with the terms of its described in more detail below.
Protocol of Accession to the WTO.
Bilateral Engagement
When China joined the WTO more than 17 years
ago, WTO members made clear that they did not Since China’s accession to the WTO, the United
consider China to be a developing country. At that States has repeatedly tried to work with China in a
time, members of the Working Party on China cooperative manner. Through many years of
questioned China’s claim to be a developing country intensive, high-level dialogues, the United States
and expressly denied China’s right to self-elect urged China to pursue market-based policies and
developing country status under several WTO practices and to become a more responsible
agreements. China’s Protocol of Accession expressly member of the WTO. As detailed in last year’s
took away the right of China to self-elect developing report, these efforts largely failed because the
country status under the Subsidies Agreement, the Chinese government and the Chinese Communist
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2018 USTR Report to Congress on China’s WTO Compliance
Party were not sufficiently committed to adopting a significant commitments or to make fundamental
true market economy or taking on a more changes to its trade regime.
responsible role at the WTO.
With these dialogues proving to be largely
The United States has pursued various formal, high- ineffective, in August 2017, in response to direction
level dialogues with China over the years, including from President Trump, USTR initiated an
previous dialogues like the U.S.-China Joint investigation under Section 301 of the Trade Act of
Commission on Commerce and Trade (JCCT), the 1974 to address and limit the adverse effects of
U.S.-China Strategic Economic Dialogue (SED) and certain state-led, mercantilist and non-market
the U.S.-China Strategic and Economic Dialogue policies and practices of the Chinese government.
(S&ED) and a new dialogue known as the U.S.-China Specifically, this investigation was initiated to focus
Comprehensive Economic Dialogue (CED), which was on policies and practices related to technology
launched under this Administration in April 2017. transfer, intellectual property and innovation.
While the United States approached these dialogues
in good faith and put a great deal of effort into them, Subsequently, when President Trump met with
they only achieved isolated, incremental progress. President Xi in Beijing in November 2017, four
At times, the United States did secure broad months after the CED meeting, the U.S. side
commitments from China for fundamental shifts in explained that the United States had no interest in
the direction of Chinese policies and practices, but dialogues that go nowhere. The U.S. side also made
China repeatedly failed to follow through on those clear that it was incumbent upon China to take
commitments. action, not make more promises, and reiterated that
the core problem with China’s approach to trade lies
For example, at the 2010 S&ED meeting, the 2012 in the state-led, mercantilist industrial policies that
S&ED meeting, the 2012 summit meeting between have continued to dominate China’s non-market
President Obama and President Xi and the 2014 JCCT economy.
meeting, China committed that foreign companies
are free to base technology transfer decisions on In March 2018, after a thorough review and analysis
business and market considerations and to of the evidence, USTR issued a detailed report of its
independently negotiate and decide whether and findings in the Section 301 investigation. With
under what circumstances to assign or license regard to each of the four categories of policies and
intellectual property rights to affiliated or practices under investigation, USTR found that China
unaffiliated enterprises. But China did not follow had engaged in a range of unfair and harmful
through on these commitments. China’s regulatory conduct.
authorities do not allow U.S. companies to make
their own decisions about technology transfer and First, USTR found that China uses foreign ownership
the assignment or licensing of intellectual property restrictions, including joint venture requirements,
rights. Instead, they continue to require or pressure equity limitations and other investment restrictions,
foreign companies to transfer technology as a to require or pressure technology transfer from U.S.
condition for securing investment or other companies to Chinese entities. USTR also found that
approvals. China uses administrative review and licensing
procedures to require or pressure technology
In short, while China has sometimes shown a transfer, which, inter alia, undermines the value of
willingness to take modest steps to address isolated U.S. investments and technology and weakens the
issues, it has consistently failed to follow through on global competitiveness of U.S. firms.
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2018 USTR Report to Congress on China’s WTO Compliance
Second, USTR found that China imposes substantial billion becoming effective in July 2018 and a further
restrictions on, and intervenes in, U.S. companies’ $16 billion becoming effective in August 2018. In a
investments and activities, including through supplemental action under Section 301, following
restrictions on technology licensing terms. These China’s imposition of retaliatory tariffs, the U.S.
restrictions deprive U.S. technology owners of the Trade Representative imposed additional tariffs on a
ability to bargain and set market-based terms for further $200 billion in Chinese imports, with the rate
technology transfer. As a result, U.S. companies set at 10 percent effective in September 2018 and
seeking to license technologies must do so on terms originally scheduled to rise to 25 percent in January
that unfairly favor Chinese recipients. 2019.
Third, USTR found that China directs and facilitates Finally, the President instructed the Secretary of the
the systematic investment in, and acquisition of, U.S. Treasury to address concerns about investment in
companies and assets by Chinese companies to the United States directed or facilitated by China in
obtain cutting-edge technologies and intellectual industries or technologies deemed important to the
property and to generate large-scale technology United States. Subsequently, in August 2018,
transfer in industries deemed important by Chinese FIRRMA was signed into law by the President.
government industrial plans. FIRRMA modernizes the tools for protecting the
United States’ critical technologies from harmful
Fourth, USTR found that China conducts and foreign acquisitions. It also strengthens the existing
supports unauthorized intrusions into, and theft mechanism – administered by the Committee on
from, the computer networks of U.S. companies. Foreign Investment in the United States (CFIUS) – for
These actions provide the Chinese government with reviewing foreign investment in the United States for
unauthorized access to intellectual property, national security purposes and establishes a process
including trade secrets, and confidential business for identifying emerging and foundational
information, such as technical data, negotiating technologies that should be added to existing U.S.
positions and sensitive and proprietary internal export controls. The Administration is now
business communications. The purpose of these implementing this legislation with a view toward
actions is to support China’s strategic development addressing the concerns regarding state-directed
goals, including its science and technology investment in critical technologies identified in the
advancement, military modernization and economic Section 301 investigation.
development.
The Section 301 investigation and remedies
Based on these findings, the President instructed the prompted numerous high-level discussions between
U.S. Trade Representative to pursue a dispute the United States and China. In May 2018, the
settlement case at the WTO to address certain United States proposed specific structural changes
discriminatory technology licensing measures for China to become more open and market-
maintained by China. This case was launched in oriented. These structural changes included actions
March 2018, and the proceedings are ongoing. not only in the area of forced technology transfer,
but also in areas such as trade deficit reduction,
The President also instructed the U.S. Trade tariffs, non-tariff barriers, intellectual property rights
Representative to impose an additional tariff of 25 protection and enforcement, services market access
percent on approximately $50 billion worth of and agricultural market access, among other areas.
Chinese imports containing industrially significant
technologies, including those related to China’s China did not take any of the actions called for by
Made in China 2025 industrial plan. These additional the United States, nor did it commit that it would
tariffs were imposed in two tranches, with $34 take any of those actions in the future. China did
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2018 USTR Report to Congress on China’s WTO Compliance
offer to make minor changes and modest increases Under these circumstances, it is striking that China
in its purchases of U.S. goods and services, but even has recently indicated its support for proposals that
this offer was heavily conditioned. Accordingly, the would give more power to the WTO’s Appellate
United States continued to pressure China to make Body. In other words, China has apparently
more significant structural changes. concluded that the Appellate Body is more likely to
protect China’s non-market economic system than
On December 1, 2018, President Trump and China’s to pressure China to change that system. From this
President Xi met in Buenos Aires, Argentina, perspective, it is absurd to pretend that the
following a meeting of the G20 leaders. At the challenges presented by China could be effectively
Presidents’ meeting, it was agreed that the United resolved by increased reliance on the very process
States would suspend raising the tariff rate from 10 that China seeks to empower. Any suggestion that
percent to 25 percent on $200 billion of Chinese the United States or other WTO members could
goods, while the two sides engaged in negotiations address the numerous problems outlined in this
for 90 days on the structural changes needed in report solely by relying on the WTO dispute
China’s trade regime and discussed China’s settlement mechanism is naïve in theory, and likely
additional purchases of U.S. goods and services. to prove downright harmful in practice.
Absent a resolution within 90 days, the United States
indicated that the 10 percent tariff rate would be
raised to 25 percent on March 2, 2019. These New WTO Rules
discussions are ongoing.
In theory, the WTO membership could adopt new
rules requiring members like China to abandon non-
WTO Dispute Settlement market economic systems and state-led, mercantilist
trade regime. For several reasons, however, it is
The United States has actively pursued WTO dispute unrealistic to expect success in any negotiation of
settlement cases involving China. To date, the new WTO rules that would restrict China’s current
United States has brought 23 WTO cases against approach to the economy and trade in a meaningful
China and has routinely prevailed in these disputes. way.
However, the dispute settlement mechanism is of
only limited value in addressing a situation where a First, new WTO rules disciplining China would
WTO member is dedicated to a state-led trade require agreement among all WTO members,
regime that prevails over market forces. The WTO’s including China. However, China has shown no
dispute settlement mechanism is designed to willingness to make fundamental changes to its
address good faith disputes in which one member economic system or trade regime, and it is therefore
believes that another member has adopted a highly unlikely that China would agree to new
measure or taken an action that breaches a WTO disciplines targeted at its trade policies and
obligation. This mechanism is not designed to practices. Indeed, in connection with ongoing
address a trade regime that broadly conflicts with discussions at the WTO relating to needed WTO
the fundamental underpinnings of the WTO system. reform, China has stated that it would not alter its
No amount of WTO dispute settlement by other non-market economic system.
WTO members would be sufficient to remedy this
systemic problem. Indeed, many of the most Second, China has a long record of not pursuing
harmful policies and practices being pursued by ambitious outcomes at the WTO. Past agreements,
China are not even directly disciplined by WTO rules. even relatively narrow ones, have been difficult to
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2018 USTR Report to Congress on China’s WTO Compliance
achieve, and when an agreement is achieved, it is made considerable progress until China expressed its
significantly less ambitious because of China’s views on an acceptable list of products to be
participation. covered. China’s proposed list was much less
ambitious than the list of products that the other
One relatively recent example is the negotiation to participants had been considering. It also seemed
expand the Information Technology Agreement. designed to scuttle the negotiation by including
This negotiation was launched in June 2012 by the products known to be off-limits for other
United States and five other WTO members, with participants. With China intransigent, all attempts to
the hope of concluding an agreement to eliminate complete the negotiation of the EGA were
tariffs on a large number of additional information abandoned one year later.
technology products by the time of the WTO
Ministerial meeting in Bali, Indonesia, in December Another example is the negotiation of new WTO
2013. China joined the negotiation about six months disciplines on fisheries subsidies, where the first
after its launch and offered a much shorter, less draft of an agreement was presented in November
ambitious list of products for coverage than had 2007. A key reason why this negotiation has been
been under consideration. It also insisted on lengthy unsuccessful is China’s insistence on special and
phase-in periods for approximately one-half of the differential treatment as a developing country. In
products on its list. Because of China’s fact, China’s fishing fleet is by far the largest in the
intransigence, the negotiation stalled in November world, China’s annual fisheries harvest is more than
2013. Eventually, the negotiation restarted, and an double that of all other top producers, and China
agreement was concluded in December 2015 at the appears to provide substantial subsidies to its
WTO Ministerial meeting in Nairobi, Kenya. WTO fisheries sector. As a result of China’s participation,
members accounting for more than 90 percent of expectations for any agreement on effective
trade in information technology products signed on disciplines are low.
to the agreement. However, the product coverage
was significantly reduced from what had been under Finally, as should be clear, China’s continued
consideration before China’s involvement. In insistence that it is a developing country significantly
addition, China would only commit to lengthy phase- hinders the chances of meaningful progress in any
ins of its tariff-elimination commitments, and as a type of WTO negotiation. In the unlikely event that
result China will not fully implement the agreement members were able to reach a trade liberalizing
until July 2023, nearly 10 years after it originally agreement at the WTO, it likely would not
joined the negotiation. significantly constrain China, as China would insist on
availing itself of the “special and differential”
Other negotiations do not even lead to an treatment incorporated for the benefit of true
agreement. Rather, they simply reach an impasse developing country members. Moreover, because
once China intervenes. China refuses to recognize differentiation between
varying levels of development among developing
The attempt to negotiate an Environmental Goods countries, true developing country members likely
Agreement (EGA) is one example. This negotiation would not benefit from the most helpful treatment,
began in July 2014 with 14 WTO members, as China would reject provisions crafted to make
accounting for more than 90 percent of global trade “special and differential” treatment available in ways
in environmental goods. Its objective was to targeted to address the difficulties that different
eliminate tariffs on a number of important types of developing country members confront
environment-related products. The negotiation when attempting to implement new obligations.
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2018 USTR Report to Congress on China’s WTO Compliance
Effective Strategies The United States also will continue working with
the EU and Japan in an important trilateral
partnership focused on finding ways to address the
In the United States’ view, like-minded WTO systemic trade distortions caused by China’s non-
members should focus their efforts on developing market economic system. Currently, among other
and implementing effective strategies for fixing the things, the three partners are considering effective
unique and very serious problems posed by China actions that can be taken in the near term. The
and its trade regime. Given the limits of the current three partners also are examining possible model
WTO rules and mechanisms, these strategies initially rules for disciplining a state-led, mercantilist trade
must include actions not currently set out in the regime. As this work progresses, the three partners
WTO agreements, given the serious trade distortions intend to reach out to other like-minded WTO
and harm currently being caused by China’s members.
approach to the economy and trade. Until the
United States and other WTO members are able to Meanwhile, the recent proposals by various WTO
successfully persuade China to make the needed members for WTO reform seem only marginally
fundamental changes to its trade regime, the serious focused on the China problem. While those reform
harm caused by China’s approach to the economy proposals potentially could address some behaviors
and trade will persist and grow. that make China an irresponsible member of the
WTO, they do not directly address the serious threat
Faced with these facts, the United States intends to that China and its state-led, mercantilist trade
hold China accountable not only for strict adherence regime poses for individual WTO members and the
to the existing WTO rules, but also – out of necessity multilateral trading system.
– for any unfair and market-distorting trade
practices that hurt U.S. workers, businesses, farmers The United States is currently pursuing its many
or ranchers. The United States will not allow the concerns bilaterally with China as part of the
interventionist policies and practices of the Chinese discussions established by President Trump and
state to continue harming this country. Until China President Xi in Buenos Aries on December 1, 2018.
transforms its approach to the economy and trade, Our hope is that China will take our concerns
the United States will take all appropriate actions to seriously and engage with us on a productive and
ensure that the costs of China’s non-market comprehensive basis. If it does so, it will benefit not
economic system are borne by China, not by the only the United States, but also China itself and the
United States. rest of the WTO membership.
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2018 USTR Report to Congress on China’s WTO Compliance
PART 2
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2018 USTR Report to Congress on China’s WTO Compliance
Like all WTO accession negotiations, the negotiations To accede to the WTO, China agreed to take
with China had three basic aspects. First, China concrete steps to remove trade barriers and open its
provided information to the Working Party regarding markets to foreign companies and their exports from
its trade regime. China also updated this the first day of accession in virtually every product
information periodically during the 15 years of sector and for a wide range of services. Supporting
negotiations to reflect changes in its trade regime. these steps, China also agreed to undertake
Second, each interested WTO member negotiated important changes to its legal framework, designed
bilaterally with China regarding market access to add transparency and predictability to business
concessions and commitments in the goods and dealings.
services areas, including, for example, the tariffs that
would apply on industrial and agricultural goods and Like all acceding WTO members, China also agreed
the commitments that China would make to open up to assume the obligations of more than 20 existing
its market to foreign services suppliers. The most multilateral WTO agreements, covering all areas of
trade liberalizing of the concessions and trade. Areas of principal concern to the United
commitments obtained through these bilateral States and China’s other trading partners, as
negotiations were consolidated into China’s Goods evidenced by the accession negotiations, included
and Services Schedules and apply to all WTO the core principles of the WTO, including most-
members. Third, overlapping in time with these favored nation treatment, national treatment,
bilateral negotiations, China engaged in multilateral transparency and the availability of independent
negotiations with Working Party members on the review of administrative decisions. Other key
rules that would govern trade with China. concerns arose in the areas of agriculture, SPS
Throughout these multilateral negotiations, U.S. measures, technical barriers to trade, trade-related
leadership in working with China was critical to investment measures, customs valuation, rules of
removing obstacles to China’s WTO accession and origin, import licensing, antidumping, subsidies and
achieving a consensus on appropriate rules countervailing measures, trade-related aspects of
commitments. These commitments are set forth in intellectual property rights and services. For some
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2018 USTR Report to Congress on China’s WTO Compliance
of its obligations in these areas, China was allowed methodology that is not based on a strict
minimal transition periods, where it was considered comparison with domestic prices or costs in China if
necessary. the producers under investigation cannot clearly
show that market economy conditions prevail in the
Even though the terms of China’s accession industry producing the like product with regard to
agreement are directed at the opening of China’s manufacture, production and sale of that product
market to WTO members, China’s accession and (4) an expression of the ability to use
agreement also includes provisions designed to methodologies for identifying and measuring subsidy
address issues related to any injury that U.S. or other benefits to Chinese enterprises that are not based
WTO members’ industries and workers might on terms and conditions prevailing in China.
experience based on import surges or unfair trade
practices. These mechanisms include (1) a special With China’s consent, the WTO also created a special
textile safeguard mechanism (which expired on multilateral mechanism for reviewing China’s
December 11, 2008, seven years after China’s WTO compliance on an annual basis. Known as the
accession), (2) a unique, China-specific safeguard Transitional Review Mechanism, this mechanism
mechanism allowing a WTO member to restrain operated annually for eight years after China’s
increasing Chinese imports that disrupt its market accession. A final review, looking back over the first
(which expired on December 11, 2013, 12 years after 10 years of China’s WTO membership, took place in
China’s WTO accession), (3) an expression of the 2011.
ability of WTO members to use an antidumping
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
into U.S. commercial computer networks or cyber- that Chinese companies develop, extract or acquire
enabled theft for commercial gains. In March 2018, their own technology, intellectual property and
USTR issued a report supporting findings that the know-how and their own brands. The next goal of
four categories of acts, policies and practices Made in China 2025 is to substitute domestic
covered in the investigation are unreasonable or technologies, products and services for foreign
discriminatory and burden and/or restrict U.S. technologies, products and services in the China
commerce. In November 2018, USTR issued an market. The final goal of Made in China 2025 is to
updated report that found that China had not taken capture much larger worldwide market shares in the
any steps to change its problematic policies and 10 targeted, strategic sectors.
practices. On the basis of USTR’s investigation, the
United States has imposed additional tariffs on $250 Many of the policy tools being used by the Chinese
billion worth of Chinese imports. government to achieve the goals of Made in China
2025 raise serious concerns. These tools are largely
Made in China 2025 Industrial Plan unprecedented and include a wide array of state
intervention and support designed to promote the
In May 2015, China’s State Council released Made in development of Chinese industry in large part by
China 2025, a 10-year plan spearheaded by the restricting, taking advantage of, discriminating
Ministry of Industry and Information Technology against or otherwise creating disadvantages for
(MIIT) and targeting 10 strategic advanced foreign enterprises and their technologies, products
manufacturing sectors, including advanced and services. Indeed, even facially neutral measures
information technology, automated machine tools can be applied in favor of domestic enterprises, as
and robotics, aviation and spaceflight equipment, past experience has shown, especially at sub-central
maritime engineering equipment and high-tech levels of government.
vessels, advanced rail transit equipment, new energy
vehicles (NEVs), power equipment, farm machinery, Made in China 2025 also differs from industry
new materials, biopharmaceuticals and advanced support pursued by other WTO members by its level
medical device products. While ostensibly intended of ambition and, perhaps more importantly, by the
simply to raise industrial productivity through more scale of resources the government is investing in the
advanced and flexible manufacturing techniques, pursuit of its industrial policy goals. Indeed, by some
Made in China 2025 is emblematic of China’s estimates, the Chinese government is making
evolving and increasingly sophisticated approach to available more than $500 billion of financial support
“indigenous innovation,” which is evident in to the Made in China 2025 sectors, both through the
numerous supporting and related industrial plans. Made in China 2025 industrial plan and related
Their common, overriding aim is to replace foreign industrial plans. Even if China fails to achieve fully
technologies, products and services with Chinese the industrial policy goals set forth in Made in China
technologies, products and services in the China 2025, it is still likely to create or exacerbate market
market through any means possible so as to ready distortions and create severe excess capacity in
Chinese companies for dominating international many of the targeted sectors as well as do long-
markets. lasting damage to U.S. interests, as China-backed
companies increase their market share at the
Made in China 2025 seeks to build up Chinese expense of U.S. companies operating in these
companies in the 10 targeted, strategic sectors at sectors.
the expense of, and to the detriment of, foreign
industries and their technologies through a multi- As discussed above, USTR’s Section 301 investigation
step process over 10 years. The initial goal of Made and resulting tariff and other actions seek to address
in China 2025 is to ensure, through various means, China’s forced technology transfer regime. This
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2018 USTR Report to Congress on China’s WTO Compliance
regime is one of the instruments through which State Council had issued a document requiring all
China intends to meet its Made in China 2025 agencies and all sub-central governments to “further
targets. clean up related measures linking indigenous
innovation policy to the provision of government
Indigenous Innovation procurement preference.” Again, the United States
should not have to seek the same promises over and
Policies aimed at promoting “indigenous innovation” over through multiple negotiations. Meanwhile, as
continue to represent an important component of time passes, the underlying thrust of China’s
China’s industrialization efforts. Through intensive, indigenous innovation policies remains unchanged.
high-level bilateral engagement with China since
2010, the United States has attempted to address Investment Restrictions
these policies, which provide various preferences
when IP is owned or developed in China, both China seeks to protect many domestic industries
broadly across sectors of China’s economy and through a restrictive investment regime, which
specifically in the government procurement context. adversely affects foreign investors in key services
sectors, agriculture, extractive industries and certain
For example, at the May 2012 S&ED meeting, China manufacturing sectors. Many aspects of China’s
committed to treat IP owned or developed in other current investment regime continue to cause foreign
countries the same as IP owned or developed in investors great concern, including a lack of
China. The United States also used the 2012 JCCT substantial liberalization, evidenced by the
process to press China to revise or eliminate specific continued application of foreign equity caps and
measures that appeared to be inconsistent with this joint venture requirements, the maintenance of a
commitment. Throughout 2013 and 2014, the case-by-case administrative approval system for a
United States and China intensified their discussions. broad range of investments, the evolving potential
At the December 2014 JCCT meeting, China clarified for a new and overly broad national security review
and underscored that it will treat IP owned or mechanism, and the increasingly adverse impact of
developed in other countries the same as China’s Cybersecurity Law and related implementing
domestically owned or developed IP. Once again, measures, including ones that restrict cross-border
however, these commitments were not fulfilled. data flows and impose data localization
China continues to pursue myriad policies that requirements.
require or favor the ownership or development of IP
in China. In addition, foreign enterprises report that Chinese
government officials may condition investment
The United States secured a series of similar approval on a requirement that a foreign enterprise
commitments from China in the government transfer technology, conduct research and
procurement context, where China agreed to de-link development in China, satisfy performance
indigenous innovation policies at all levels of the requirements relating to exportation or the use of
Chinese government from government procurement local content or make valuable, deal-specific
preferences, including through the issuance of a commercial concessions. The United States has
State Council measure mandating that provincial and repeatedly raised concerns with China about its
local governments eliminate any remaining linkages restrictive investment regime. To date, this
by December 2011. Many years later, however, this sustained bilateral engagement has not led to a
promise had not been fulfilled. At the November significant relaxation of China’s investment
2016 JCCT meeting, in response to U.S. concerns restrictions, nor has it appeared to curtail ad hoc
regarding the continued issuance of scores of actions by Chinese government officials. Shortly
inconsistent measures, China announced that its after President Trump’s visit to Beijing in November
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2018 USTR Report to Congress on China’s WTO Compliance
2017, China did announce that it would be relaxing the transfer or disclosure of source code or other
certain restrictions on foreign investment in banking intellectual property.
services, life insurance services and securities and
asset management services in the future, and China In addition, in 2015, China enacted a National
took some steps in that direction in 2018. Security Law and a Counterterrorism Law, which
include provisions citing not only national security
Given that China’s investment restrictions place and counterterrorism objectives but also economic
pressure on U.S. companies to transfer technology and industrial policies. The State Council also
to Chinese companies, they have been a focus of published a plan in 2015 that sets a timetable for
USTR’s Section 301 investigation. The responsive adopting “secure and controllable” products and
actions taken by the United are intended in part to services in critical government ministries by 2020.
address this concern.
Meanwhile, sector-specific policies under this broad
Secure and Controllable ICT Policies framework continue to be proposed and deployed
across China’s economy. A high profile example
In 2018, China continued to issue measures intended from December 2014 was a proposed measure
to implement the Cybersecurity Law adopted in drafted by the China Banking Regulatory Commission
November 2016, and global concerns regarding (CBRC) that called for 75 percent of ICT products
China’s invocation of national security as a basis for used in the banking system to be “secure and
these measures increased. As demonstrated in the controllable” by 2019 and that would have imposed
implementing measures, China’s approach is to a series of criteria that would shut out foreign ICT
impose severe restrictions on a wide range of U.S. providers from China’s banking sector. Not long
and other foreign ICT products and services with an afterwards, a similar measure was proposed for the
apparent goal of supporting China’s technology insurance sector.
localization policies by encouraging the replacement
of foreign ICT products and services with domestic In 2015, the United States, in concert with other
ones. Stakeholders and governments around the governments and stakeholders around the world,
world expressed serious concerns about raised serious concerns about China’s “secure and
requirements that ICT equipment and other ICT controllable” regime at the highest levels of
products and services in critical sectors be “secure government within China. During the state visit of
and controllable,” as these requirements are used by President Xi in September 2015, the U.S. and
the Chinese government to disadvantage non- Chinese Presidents committed to a set of principles
Chinese firms in multiple ways. for trade in information technologies. The issue also
was raised in connection with the June 2015 S&ED
Separate from the Cybersecurity Law, China has meeting and the November 2015 JCCT meeting, with
referenced its “secure and controllable” China making a series of additional important
requirements in a variety of measures dating back to commitments with regard to technology policy.
2013. Through these measures, China has mandated China reiterated many of these commitments at the
that Chinese information technology users purchase November 2016 JCCT meeting, where it affirmed
Chinese products and favor Chinese service that its “secure and controllable” policies are not to
suppliers, has imposed local content requirements, unnecessarily limit or prevent commercial sales
has imposed domestic research and development opportunities for foreign ICT suppliers or
(R&D) requirements, has considered the location of unnecessarily impose nationality-based conditions
R&D as a cybersecurity risk factor and has required and restrictions on commercial ICT purchases, sales
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
Chinese companies and requiring them to achieve production have contributed to imbalances and price
preset targets for domestic market share – at the distortions in global markets, harming U.S. plants
expense of imports – and global market share in and workers.
each of 10 advanced manufacturing industries.
Excess capacity in China – whether in the steel
In manufacturing industries like steel and aluminum industry or other industries such as aluminum –
in particular, China’s economic planners and their hurts U.S. industries and workers not only because
government actions and financial support have of direct exports from China to the United States,
contributed to massive excess capacity in China, with but also because its impact on global prices and
the resulting over-production distorting global supply make it difficult for even the most
markets and hurting U.S. producers and workers in competitive producers to remain viable. Domestic
both the United States and third country markets, industries in many of China’s trading partners
where U.S. exports compete with Chinese exports. continued to petition their governments to impose
While China has publicly acknowledged excess trade measures to respond to the trade-distortive
capacity in these industries, among others, it has yet effects of China’s excess capacity. In addition, the
to take meaningful steps to address the root causes United States has taken action under Section 232 of
of the problem in a sustainable way. the Trade Expansion Act of 1962 to increase duties
on steel and aluminum products after finding that
From 2000 to 2016, China accounted for 75 percent excessive imports are a threat to U.S. national
of global steelmaking capacity growth, an increase security.
well in excess of the increase in global and Chinese
demand over the same period. Currently, China’s Export Restraints
capacity represents about one-half of global capacity
and twice the combined steelmaking capacity of the China continues to deploy a combination of export
EU, Japan, the United States and Russia. Meanwhile, restraints, including export quotas, export licensing,
China’s steel exports grew to be the largest in the minimum export prices, export duties and other
world, at 91 million MT in 2014, a 50-percent restrictions, on a number of raw material inputs
increase over 2013 levels, despite sluggish steel where it holds the leverage of being among the
demand abroad. In 2015, Chinese exports reached a world’s leading producers. Through these export
historic high of 110 million MT, causing increased restraints, it appears that China is able to provide
concerns about the detrimental effects that these substantial economic advantages to a wide range of
exports would have on the already saturated world downstream producers in China at the expense of
market for steel. China’s steel exports continued to foreign downstream producers, while creating
grow in the first half of 2016, before beginning to pressure on foreign downstream producers to move
decline in the second half of the year, a trend that their operations, technologies and jobs to China.
continued into 2017 and 2018.
In 2013, China removed its export quotas and duties
Similarly, primary aluminum production capacity in on several raw material inputs of key interest to the
China increased by more than 50 percent between U.S. steel, aluminum and chemicals industries after
2011 and 2015, despite a severe drop in global the United States won a dispute settlement case
aluminum prices during that period. China’s capacity against China at the WTO. In 2014, the United States
has continued to grow in subsequent years. Large won a second WTO case, focusing on China’s export
new facilities have been built with government restraints on rare earths, tungsten and molybdenum,
support, and China’s primary aluminum capacity which are key inputs for a multitude of U.S.-made
now accounts for more than one-half of global products, including hybrid automobile batteries,
capacity. As a consequence, China’s capacity and wind turbines, energy-efficient lighting, steel,
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
became final in November 2017 and went into effect to open up its vast government procurement market
in January 2018. At the same time, existing technical to the United States and other GPA parties. To date,
committees continue to develop standards, and however, the United States, the EU, and other GPA
more foreign participation is being allowed. For parties have viewed China’s offers as highly
example, while the United States’ substantive disappointing in scope and coverage. China
concerns with China’s cybersecurity standards have submitted its fifth revised offer in December 2014.
not been addressed, the technical committee for This offer showed progress in a number of areas,
cybersecurity standards has begun allowing foreign including thresholds, entity coverage and services
companies to participate in standards development coverage. Nonetheless, it fell short of U.S.
and setting, with several U.S. and other foreign expectations and remains far from acceptable to the
companies being allowed to vote and to participate United States and other GPA parties as significant
at the working group level in standards deficiencies remain in a number of critical areas,
development. Nevertheless, the United States including thresholds, entity coverage, services
remains very concerned about China’s policies with coverage and exclusions.
regard to standards, as China prepares to develop
implementing regulations for the Standardization China’s current government procurement regime is
Law. governed by two important laws. The Government
Procurement Law, administered by the Ministry of
In recent years, two principal types of Chinese Finance, governs purchasing activities conducted
policies have been causing harm to U.S. companies with fiscal funds by state organs and other
in the standards area. First, Chinese government organizations at all levels of government in China.
officials in some cases reportedly have pressured The Tendering and Bidding Law falls under the
foreign companies seeking to participate in the jurisdiction of the National Development and Reform
standards-setting process to license their technology Commission (NDRC) and imposes uniform tendering
or intellectual property on unfavorable terms. and bidding procedures for certain classes of
Second, China has continued to pursue unique procurement projects in China, notably construction
national standards in a number of high technology and works projects, without regard for the type of
areas where international standards already exist. entity that conducts the procurement. Both laws
The United States continues to press China to cover important procurements that GPA parties
address these specific concerns, but to date this would consider to be government procurement
bilateral engagement has yielded minimal progress. eligible for coverage under the GPA.
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
secrets. This investigation and its responsive actions form without having been made available for public
focus on, among other things, the forced disclosure comment created an expedited regulatory approval
of trade secrets through unwanted joint ventures process for innovative new drugs where the
and the abuse of administrative processes as well as applicant’s manufacturing capacity had been shifted
state-sponsored, cyber-enabled theft of trade to China. The United States has urged China to
secrets. reconsider this approach.
Bad Faith Trademark Registration In April 2016, China’s Food and Drug Administration
(CFDA) issued a draft measure that effectively would
Of particular concern is the continuing registration of require drug manufacturers to commit to price
trademarks in bad faith. At the November 2016 JCCT concessions as a pre-condition for securing
meeting, China publicly noted the harm that can be marketing approval for new drugs. Given its
caused by bad faith trademarks and confirmed that inconsistency with international regulatory practices,
it is taking further steps to combat bad faith which are based on safety, efficacy and quality, the
trademark filings. Nevertheless, U.S. companies draft measure elicited serious concerns from the
across industry sectors continue to face Chinese United States and U.S. industry. Subsequently, at
applicants registering their marks and “holding them the November 2016 JCCT meeting, China promised
for ransom” or seeking to establish a business not to require any specific pricing information as
building off of U.S. companies’ global reputations. part of the drug registration evaluation and approval
process and, in addition, not to link pricing
Pharmaceuticals commitments to drug registration evaluation and
approval. Given China’s lack of follow through in
For several years, the United States has pressed other areas, as discussed in this report, the United
China on a range of pharmaceuticals issues. These States remains concerned about whether these
issues have related to matters such as overly promises will be regularly fulfilled in practice.
restrictive patent application examination practices, Accordingly, the United States remains in close
regulatory approvals that are delayed or linked to contact with U.S. industry and has been examining
extraneous criteria, weak protections against the developments carefully in this area.
unfair commercial use and unauthorized disclosure
of regulatory data, and the need for an efficient In April 2017, in response to sustained U.S.
mechanism to resolve patent infringement disputes. engagement, China issued amended patent
examination guidelines that required patent
Four years ago, at the December 2014 JCCT meeting, examiners to take into account supplemental test
China committed to significantly reduce time-to- data submitted during the patent examination
market for innovative pharmaceutical products process. However, to date, it appears that patent
through streamlined processes and additional examiners in China have been either unduly
funding and personnel. Nevertheless, time-to- restrictive or inconsistent in implementing the
market for innovative pharmaceutical products in amended patent examination guidelines, resulting in
China remains a significant concern. rejections of supplemental data and denials of
patents or invalidations of existing patents on
Another serious ongoing concern stems from China’s medicines even when counterpart patents have
proposals in the pharmaceuticals sector that seek to been granted in other countries.
promote government-directed indigenous
innovation and technology transfer through the CFDA also issued several draft notices in 2017 setting
provision of regulatory preferences. For example, in out a conceptual framework to protect against the
August 2015, a State Council measure issued in final unfair commercial use and unauthorized disclosure
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2018 USTR Report to Congress on China’s WTO Compliance
of undisclosed test or other data generated to obtain conditions that allow for pirated content to displace
marketing approval for pharmaceutical products. legitimate content online.
This proposed framework also sought to promote
the efficient resolution of patent disputes between At the November 2016 JCCT meeting, China agreed
right holders and the producers of generic to actively promote e-commerce-related legislation,
pharmaceuticals. However, in 2018, CFDA’s strengthen supervision over online infringement and
successor agency, the State Drug Administration counterfeiting, and to work with the United States to
(SDA), issued draft drug registration regulations and explore the use of new approaches to enhance
implementing measures on drug trial data that online enforcement capacity. In December 2016 and
would preclude or condition the duration of November 2017, China published drafts of a new E-
regulatory data protection on whether clinical trials Commerce Law for public comment. In written
and first market approval occur in China. It remains comments, the United States stressed that the final
unclear, therefore, how China will proceed and version of this law should not undermine the existing
whether China finally intends to comply with its notice-and-takedown regime and should promote
commitments in these areas. Accordingly, the effective cooperation in deterring online
United States will remain in close contact with U.S. infringement. In August 2018, China adopted its
industry, actively examine developments and work new E-Commerce Law, which enters into force in
to ensure that appropriate and non-discriminatory January 2019. This law was an opportunity for China
changes are made to the anticipated implementing to institute strong provisions on IPR protection and
measures in the areas of patent linkage, regulatory enforcement for its $900 billion e-commerce market.
data protection and clinical trials. However, as finalized, the law instead introduced
provisions that weaken the ability of rights holders
Online Infringement to protect their rights online and that alleviate the
liability of Chinese e-commerce platforms for selling
Online piracy continues on a large scale in China, counterfeit and other infringing goods.
affecting a wide range of industries, including those
involved in distributing legitimate music, motion Counterfeit Goods
pictures, books and journals, software and video
games. While increased enforcement activities have Although rights holders report consistent
helped stem the flow of online sales of some pirated enforcement efforts by Chinese government
offerings, much more sustained action and attention authorities, and high-level officials continue to
is needed to make a more meaningful difference for express their steadfast commitment to curtailing IPR
content creators and rights holders, particularly infringement, counterfeiting in China remains
small and medium-sized enterprises. widespread and affects a wide range of goods. One
of many areas of particular U.S. concern involves
The United States has urged China to consider ways medications. Despite years of sustained
to create a broader policy environment that helps engagement by the United States, China still needs
foster the growth of healthy markets for licensed to improve its regulation of the manufacture of
and legitimate content. The United States also has active pharmaceutical ingredients to prevent their
urged China to revise existing rules that have proven use in counterfeit and substandard medications. At
to be counterproductive. For example, rules on the the July 2014 S&ED meeting, China committed to
review of foreign television content present a develop and seriously consider amendments to the
serious concern for the continued viability of Drug Administration Law that will require regulatory
licensed streaming of foreign television content via control of the manufacturers of bulk chemicals that
online platforms. These rules are disrupting can be used as active pharmaceutical ingredients. At
legitimate commerce while inadvertently creating the June 2015 S&ED meeting, China further
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2018 USTR Report to Congress on China’s WTO Compliance
committed to publish revisions to the Drug take advantage of market access opportunities in
Administration Law in draft form for public comment China. China also has failed to fully address U.S.
and to take into account the opinions of the United concerns in areas that have been the subject of WTO
States and other relevant stakeholders. In October dispute settlement, including electronic payment
2017, China published limited draft revisions to the services and theatrical film importation and
Drug Administration Law and stated that future distribution.
proposed revisions to the remainder of this law
would be forthcoming. Although many elements of Electronic Payment Services
the October 2017 draft revisions appear to be
positive, the United States remains in close contact In 2018, China continued to place unwarranted
with U.S. industry and will continue to examine restrictions on foreign companies, including major
developments vigilantly in this area. U.S. credit and debit card processing companies,
which have been seeking to supply electronic
Services payment services to banks and other businesses that
issue or accept credit and debit cards in China. In a
Overview WTO case that it launched in 2010, the United States
argued that China had committed in its WTO
The prospects for U.S. service suppliers in China accession agreement to open up this sector in 2006,
should be promising, given the size of China’s and a WTO panel agreed with the United States in a
market. Nevertheless, while the United States decision issued in 2012. China subsequently agreed
maintained a $38.5 billion surplus in trade in services to comply with the WTO panel’s rulings in 2013, but
with China, the U.S. share of China’s services market China did not take needed steps even to allow
remained well below the U.S. share of the global foreign suppliers to apply for licenses until June
services market. 2017, when China’s regulator – the PBOC – finalized
the establishment of a two-step licensing process in
In 2018, numerous challenges persisted in a range of which a supplier must first complete one year of
services sectors. As in past years, Chinese regulators preparatory work before even being able to apply
continued to use case-by-case approvals, for an actual license. To date, however, no foreign
discriminatory regulatory processes, informal bans suppliers have been able to secure licenses to supply
on entry and expansion, overly burdensome electronic payment services in China. Indeed, one
licensing and operating requirements, and other major U.S. supplier submitted its application to begin
means to frustrate the efforts of U.S. suppliers of its preparatory work in November 2017, and more
services to achieve their full market potential in than one year later the PBOC still has not even
China. These policies and practices affect U.S. accepted that application for consideration. Another
service suppliers across a wide range of sectors, major U.S. supplier faces a similar situation with the
including banking, securities and asset management, application that it filed in April 2018. Throughout
insurance, electronic payments, cloud computing, the time that China has actively delayed opening up
telecommunications, online video and its market to foreign suppliers, China’s national
entertainment software, film production and champion, China Union Pay, has used its exclusive
distribution, express delivery and legal services. In access to domestic currency transactions in the
addition, China’s Cybersecurity Law and related draft China market, and the revenues that come with it, to
and final implementing measures include mandates support its efforts to build out its electronic payment
to purchase domestic ICT products and services, services network abroad, including in the United
restrictions on cross-border data flows and States. In one telling example, China Union Pay
requirements to store and process data locally, all of reportedly has reached 100 percent penetration at
which undermines U.S. services suppliers’ ability to U.S. automated teller machines and between 80 and
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2018 USTR Report to Congress on China’s WTO Compliance
90 percent penetration at U.S. stores that accept In 2017, in accordance with the terms of the MOU,
credit cards. This history shows how China has been the two sides began discussions regarding the
able to maintain market-distorting practices that provision of further meaningful compensation to the
benefit its own companies, even in the face of United States. These discussions continued until
adverse rulings at the WTO. USTR continues to work March 2018, when China embarked on a major
to bring China into WTO compliance and to obtain government reorganization that involved significant
market access for U.S. stakeholders in China. changes for China’s Film Bureau. As of December
2018, the discussions had not yet resumed.
Internet-enabled Payment Services
The PBOC first issued regulations for non-bank Audio-visual and Related Services
suppliers of online payment services in 2010, and it
subsequently began processing applications for China’s restrictions in the area of theater services
licensees in a sector that previously had been have discouraged investment by foreign suppliers,
unregulated. Regulations were further strengthened and China’s restrictions on services associated with
in 2015, with additional provisions aimed at television and radio greatly limit participation by
increasing security and traceability of transactions. foreign suppliers. For example, China prohibits
According to a U.S. industry report, of more than 200 retransmission of foreign TV channels, prohibits
licenses issued as of June 2014, only two had been foreign investment in TV stations and channels in
issued to foreign-invested suppliers, and those two China and imposes quotas on the amount of foreign
were for limited services. This report provides clear programming that can be shown on a Chinese TV
evidence supporting stakeholder concerns about the channel each day. In addition, a draft measure
difficulties they have faced entering the market and issued in September 2018 would prohibit foreign TV
the slow process foreign firms face in getting shows in prime time. China also prohibits foreign
licensed. In addition, as with other ICT sectors, companies from providing film production and
PBOC has required suppliers to localize data and distribution services in China. In addition, the United
facilities in China. The United States will continue to States remains very concerned about the impact of
closely monitor developments in this area. online publishing rules issued by State
Administration of Press, Publication, Radio, Film and
Theatrical Films Television (SAPPRFT) and MIIT in February 2016 on
the ability of foreign companies to engage in the
In February 2012, the United States and China online distribution of videos and entertainment
reached an alternative resolution with regard to software, as these rules prohibit foreign companies
certain rulings relating to the importation and from operating online distribution platforms in
distribution of theatrical films in a WTO case that the China. More recently, the National Radio and
United States had won. The two sides signed a Television Administration’s (NRTA) issued a
memorandum of understanding (MOU) providing for concerning draft measure that would impose new
substantial increases in the number of foreign films restrictions in China’s already highly restricted
imported and distributed in China each year, along market for foreign creative content by requiring that
with substantial additional revenue for U.S. film spending on foreign content account for no more
producers. However, China has not yet fully than 30 percent of available total programs in each
implemented its MOU commitments, including with of several categories, including foreign movies, TV
regard to critical commitments to open up film shows, cartoons, documentaries and other foreign
distribution opportunities for imported films. As a TV programs, made available for display via
result, the United States has been pressing China for broadcasting institutions and online audiovisual-
full implementation of the MOU. content platforms.
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
Securities and Asset Management Services Restrictions maintained by China on less highly
regulated value-added telecommunications services
In the securities and asset management services also have created serious barriers to market entry
sectors, China only permits foreign companies to for foreign suppliers seeking to enter this sector.
establish as Chinese-foreign joint ventures, with These restrictions include opaque and arbitrary
foreign equity capped at 49 percent. Recently, licensing procedures, foreign equity caps and
however, China reportedly licensed one foreign periodic, unjustified moratoria on the issuance of
company to establish as majority foreign-owned new licenses. As a result, only a few dozen foreign-
joint venture. In addition, China has started to invested suppliers have secured licenses to provide
license a small number of wholly foreign-owned value-added telecommunications services, while
companies to provide certain private fund there are thousands of licensed domestic suppliers.
management services to high-wealth individuals, but
these services represent only a subset of the services Internet Regulatory Regime
normally provided by securities and asset
management companies. In November 2017, China China’s Internet regulatory regime is restrictive and
announced that it would be removing certain of its non-transparent, affecting a broad range of
foreign equity restrictions in the securities and asset commercial services activities conducted via the
management services sectors over time. In April Internet, and overseen by multiple agencies without
2018, China issued a measure that immediately clear lines of jurisdiction. China’s Internet economy
raises the foreign equity cap for the securities and has boomed over the past decade and is second in
asset management sector to 51 percent and, in three size only to that of the United States. Growth in
years, removes the cap on foreign investment China has been marked in service sectors similar to
entirely. However, other concerns remain, including those found in the United States, including retail
with regard to the ability of foreign companies to websites, search engines, online education, travel,
pursue a broad scope of business. advertising, audio-visual and computer gaming
services, electronic mail and text, online job
Telecommunications Services searches, Internet consulting, mapping services,
applications, web domain registration and electronic
China’s restrictions on basic telecommunications trading. However, in the China market, Chinese
services, such as informal bans on new entry, a 49- companies dominate due in large part to restrictions
percent foreign equity cap, a requirement that imposed on foreign companies by the Chinese
foreign suppliers can only enter into joint ventures government. At the same time, foreign companies
with state-owned enterprises and exceedingly high continue to encounter major difficulties in
capital requirements, have blocked foreign suppliers attempting to offer these and other Internet-based
from accessing China’s basic telecommunications services on a cross-border basis.
services market. China recently issued draft
regulations that propose to allow domestic and China continues to engage in extensive blocking of
foreign suppliers to obtain licenses to supply mobile legitimate websites, imposing significant costs on
telecommunications resale services. However, the both suppliers and users of web-based services and
terms and conditions applicable to foreign suppliers products. According to the latest data, China
remain unclear, and it is too early to tell whether any currently blocks 12 of the top 30 global sites, and
meaningful market access would be provided. Since U.S. industry research has calculated that up to
China acceded to the WTO almost two decades ago, 3,000 sites in total are blocked, affecting billions of
not a single foreign firm has succeeded in dollars in business, including communications,
establishing a new joint venture to enter this sector. networking, app stores, news and other sites. Even
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2018 USTR Report to Congress on China’s WTO Compliance
when sites are not permanently blocked, the often and branding as part of this arrangement. While the
arbitrary implementation of blocking, and the foreign service supplier earns a licensing fee from
performance-degrading effect of filtering all traffic the arrangement, it has no direct relationship with
into and outside of China, significantly impair the customers in China and no ability to independently
supply of many cross-border services, often to the develop its business. It has essentially handed over
point of making them unviable. its business to a Chinese company that may well
become a global competitor. This treatment has
Cross-border Data Transfers and Data Localization generated serious concerns in the United States and
among other WTO members as well as U.S. and
Various draft and final measures being developed by other foreign companies.
China’s regulatory authorities to implement China’s
Cybersecurity Law, which took effect in June 2017, In major markets, including China, cloud computing
and China’s National Security Law, which has been in services are typically offered through commercial
effect since 2015, would prohibit or severely restrict presence in one of two ways. They are offered as an
cross-border transfers of information that are integrated service in which the owner and operator
routine in the ordinary course of business and are of a telecommunication network also offers
fundamental to any business activity. These computing services, including data storage and
measures also would impose local data storage and processing function, over that network, or they are
processing requirements on companies in “critical offered as a stand-alone computer service, with
information infrastructure sectors,” a term that the connectivity to the computing service site provided
Cybersecurity Law defines in broad and vague terms. separately by a telecommunications service supplier.
Given the wide range of business activities that are Although China’s General Agreement on Trade in
dependent on cross-border transfers of information Services (GATS) commitments include services
and flexible access to global computing facilities, relevant to both of these approaches, neither one is
these developments have generated serious currently open to foreign-invested companies.
concerns among governments as well as among
stakeholders in the United States and other China also is proposing to severely restrict the ability
countries, particularly among services suppliers. of foreign enterprises to offer cloud computing
services into China on a cross-border basis. In 2017,
Cloud Computing Services China’s regulator issued a circular, entitled On
Cleaning up and Regulating Internet Access Services
Especially troubling is China’s treatment of foreign Market, which prohibits Chinese telecommunication
companies seeking to participate in the operators from offering consumers leased lines or
development of cloud computing services, including virtual private network (VPN) connections reaching
computer data and storage services and software overseas data centers – which could restrict a key
application services provided over the Internet. access mechanism companies use to connect to
China prohibits foreign companies from directly foreign cloud computing service providers and
providing any of these services. Given the difficulty related resources.
in providing these services on a cross-border basis
(largely due to restrictive Chinese policies), the only Online Video and Entertainment Software Services
option a foreign service supplier has to access the
Chinese market is to establish a contractual China restricts the online supply of foreign video and
partnership with a Chinese company, which is the entertainment software through measures affecting
holder of the necessary Internet data center license, both content and distribution platforms. With
and turn over its valuable technology, IP, know-how respect to content, the most burdensome
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
China had exceeded its de minimis level of domestic the meeting between Presidents Trump and Xi in
support for soybeans (in 2012, 2014 and 2015), Buenos Aires in December 2018, China issued five
cotton (from 2011 to 2016), corn (from 2013 to additional product approvals. Many other products
2016), rapeseed (from 2011 to 2013) and sugar remain pending at the final approval stage of NBC
(2012). The situation was likely even worse, as the review.
methodologies used by China to calculate domestic
support levels result in underestimates. The Food Safety Law
notification also identified changes to its domestic
support programs for cotton and corn. China’s ongoing implementation of its 2015 Food
Safety Law has introduced a myriad of new
In September 2016, the United States launched a regulations. These regulations, many of which were
WTO case challenging China’s government support notified to the WTO TBT Committee but not the
for the production of rice, wheat and corn as being WTO SPS Committee, include exporter facility and
in excess of China’s commitments. The United product registration requirements for goods such as
States is pursuing this case aggressively. The WTO dairy, infant formula, seafood, grains, animal feed,
panel hearing this case is expected to issue its pet food and oilseeds. Additionally, despite facing
decision in early 2019. strong international opposition and agreeing to a
two-year implementation delay, Chinese authorities
Tariff-rate Quota Administration are still considering the implementation of a
burdensome and unnecessary measure requiring
Market access promised through the tariff-rate official certification of all food products, including
quota (TRQ) system set up pursuant to China’s WTO low-risk food exports. These and other new
accession agreement has yet to be fully realized. measures continue to place excessive strain on
China’s TRQs for rice, wheat and corn do not fill each Chinese agencies’ resources, traders and exporting
year. In December 2016, the United States launched countries’ competent authorities, with no apparent
a WTO case challenging China’s administration of added benefit to food safety, yet they seemingly
TRQs for rice, wheat and corn, and it is pursuing this provide China a tool to control the volume of food
case aggressively. The WTO panel hearing this case trade as desired.
is expected to issue its decision in mid-2019.
Poultry
Agricultural Biotechnology Approvals
China is the last remaining major trading partner of
The number of products pending Chinese regulatory the United States to maintain a ban on imports of
approval continues to increase, causing uncertainty U.S. poultry due to a previous outbreak of high
among traders and resulting in an adverse trade pathogenicity avian influenza (HPAI) in the United
impact, particularly for U.S. exports of corn and States, even though the outbreak was resolved in
alfalfa. In addition, the asynchrony between China’s 2017 in accordance with the guidelines of the World
biotech product approvals and the product Organization for Animal Health (known by its
approvals made by other countries has widened historical acronym, OIE). China’s continuing import
considerably over the past three years. Following a ban therefore is unwarranted and unscientific and
commitment made to President Trump by Chinese remains in place despite many exchanges between
President Xi during their April 2017 meeting, China’s U.S. and Chinese regulators and repeated
National Biosafety Committee (NBC) met in May and demonstrations that U.S. poultry is safe. Separately,
June 2017 and issued four product approvals (two the United States has sought China’s agreement that
after each meeting), while not approving four other it will follow OIE guidelines in the case of future
products that were subject to NBC review. Following outbreaks of HPAI by only banning imports of
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2018 USTR Report to Congress on China’s WTO Compliance
poultry from regions in the United States affected by despite having received sufficient technical and
the disease rather than impose a nationwide ban like scientific data justifying market access. Affected
the one currently in place. To date, however, China products include potatoes, nectarines, blueberries
has shown no willingness to consider this and avocados, among others.
regionalization approach, despite its endorsement
by the OIE and China’s WTO obligations. VAT Rebates and Related Policies
China maintains an approach to U.S. pork that is In its WTO accession agreement, China committed to
inconsistent with international standards, limiting adopt a single official journal for the publication of
the potential of an important export market given all trade-related laws, regulations and other
China’s growing meat consumption and China’s measures. China adopted a single official journal, to
recent shortages of domestic pork due to African be administered by the Ministry of Commerce
swine fever. Specifically, China bans the use of (MOFCOM), in 2006. Many years later, however, it
certain veterinary drugs and growth promotants appears that some but not all central-government
instead of accepting the maximum residue levels entities publish trade-related measures in this
(MRLs) set by Codex. China also enforces a zero journal, and these government entities tend to take
tolerance standard for the detection of salmonella in a narrow view of the types of trade-related
imported pork, which is unnecessarily prohibitive measures that need to be published in the official
and generally unachievable. China does not apply journal. These government entities more commonly
the same standard to domestic pork. (but still not regularly) publish trade-related
administrative regulations and departmental rules in
Horticultural Products the journal, but it is less common for them to publish
other measures such as opinions, circulars, orders,
China has not approved longstanding market access directives and notices, even though they are in fact
requests for a variety of U.S. horticultural products, all binding legal measures. In addition, China rarely
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
OVERVIEW OF U.S. ENGAGEMENT Secretaries and a Chinese Vice Premier, in July 2017,
China’s implementation of the commitments that it
had made in May 2017 was already problematic.
BILATERAL ENGAGEMENT Despite having committed to market access for U.S.
beef consistent with international food safety and
As explained in last year’s report, in April 2017, at a animal health standards, China back-tracked one
summit meeting in Mar-a-Lago, Florida, President month later and insisted that it would retain certain
Trump and China’s President Xi agreed to the conditions relating to veterinary drugs and
establishment of a new high-level dialogue structure hormones that were inconsistent with international
for the United States and China, which included the food safety and animal health standards. In
Comprehensive Economic Dialogue (CED), the addition, by the time of the CED meeting, China had
Diplomatic and Security Dialogue, the Law approved only four of the eight long-pending
Enforcement and Cybersecurity Dialogue and the biotechnology product applications on which it had
Social and Cultural Dialogue. It was agreed that promised to take action. At the time, it appeared
trade and investment issues would be addressed that China was reserving action on the remaining
through the CED, whose mandate also extended to four applications for strategic purposes, and that
macroeconomic policy, financial stability, currency view proved to be correct. Meanwhile, it remained
and energy. The CED was chaired on the U.S. side by unclear whether China would be willing to follow
the Commerce Secretary and the Treasury Secretary through with its commitment to allow U.S. EPS
and on the Chinese side by a Vice Premier. It suppliers to begin the licensing process. In fact, as of
supplanted two other high-level dialogues, the JCCT December 2018, China still had not followed
and the S&ED (see Box 1). through. Even though two major U.S. EPS suppliers
have submitted applications to begin the licensing
Staff-level discussions under the auspices of the CED process, the Chinese regulator continues to delay its
began shortly after the Mar-a-Lago summit meeting. formal acceptance of their applications for
One month later, in May 2017, the two sides agreed consideration.
to certain initial results, which included five
outcomes for the U.S. side. These outcomes focused Under these circumstances, it is not surprising that
primarily on overdue actions by Chinese regulatory the CED meeting in July 2017 proved unsuccessful.
authorities, rather than any fundamental changes to Despite extensive discussion of a number of
China’s trade regime. Specifically, China committed additional issues during the run-up to that meeting,
to (1) resume imports of U.S. beef and beef products the two sides made no progress on any of those
on conditions consistent with international food issues, and no outcomes were achieved.
safety and animal health standards, (2) conduct
science-based evaluations of eight long-pending U.S. When President Trump met with President Xi in
biotechnology product applications, (3) allow wholly Beijing in November 2017, the U.S. side explained
foreign-owned financial services firms in China to that it had no interest in continuing to engage in the
provide credit rating services and to begin the types of discussions pursued in the CED or in
licensing process for credit investigation services, (4) previous dialogues like the JCCT, the SED and the
allow wholly U.S.-owned suppliers of electronic S&ED. The U.S. side explained that, despite the
payment services (EPS) to begin the licensing process intensity of engagement in those many dialogues,
and (5) issue bond underwriting and settlement they had only achieved isolated, incremental
licenses to two qualified U.S. financial institutions. progress on problematic Chinese trade and
investment barriers. The U.S. side made clear that it
By the time of the first plenary meeting of the CED, is seeking fundamental changes to China’s trade
chaired by the U.S. Commerce and Treasury regime, including to the problematic industrial
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2018 USTR Report to Congress on China’s WTO Compliance
policies that have continued to dominate China’s held plenary meetings annually. In the Economic Track, the
state-led, mercantilist economy. As the U.S. side two sides focused on four pillars of engagement: (1) promoting
a strong recovery and achieving more sustainable and
noted, these unacceptable industrial policies persist balanced growth; (2) promoting more resilient, open and
and continually evolve, as China seems determined market-oriented financial systems; (3) strengthening trade and
to maintain the state’s leading role in the economy investment; and (4) strengthening the international financial
and to continue to pursue policies and practices that architecture. The S&ED convened annually from 2009 to 2016.
promote, guide and support domestic industries
while simultaneously and actively seeking to impede,
disadvantage and harm their foreign counterparts. During the course of 2018, periodic high-level
The U.S. side emphasized that China’s approach is discussions took place between the United States
incompatible with the open, market-oriented and China. By May 2018, the United States had
approach expressly envisioned by WTO members proposed specific structural changes that China
and contrary to the fundamental principles running needed to make to re-orient its state-led,
throughout the many WTO agreements. mercantilist trade regime and become more open
and market-oriented. These included actions not
only in the area of forced technology transfer, but
Box 1: Previous U.S.-China Dialogues also in areas such as trade deficit reduction, tariffs,
non-tariff barriers, intellectual property rights
JCCT: In 1983, the United States and China founded the JCCT
protection and enforcement, services market access
as a government-to-government consultative mechanism
between the U.S. Department of Commerce and a MOFCOM and agricultural market access, among other areas.
predecessor, the Ministry of Foreign Economic Relations and
Trade. It was designed to provide a forum for discussing trade For a long time, China did not respond constructively
concerns and pursuing bilateral commercial opportunities. In
to the United States’ proposal. China did not take
2003, President Bush and Premier Wen agreed to elevate the
JCCT, with the Commerce Secretary and the U.S. Trade any of the actions called for by the United States,
Representative chairing the U.S. side and a Vice Premier nor did it commit that it would take any of those
chairing the Chinese side. From 2004 through 2016, the JCCT actions in the future. China’s position is essentially
held annual plenary meetings, while numerous JCCT working
that the United States should accept as sufficient
groups and sub-dialogues met throughout the year in areas
such as industrial policies, competitiveness, intellectual China’s past “reform and opening up” measures and
property rights, structural issues, steel, agriculture, China’s plans for future “reform and opening up”
pharmaceuticals and medical devices, information technology, measures. China did offer to make minor changes
insurance, tourism, environment, commercial law, trade
and modest increases in its purchases of U.S. goods
remedies and statistics.
and services, but this offer contained many
SED: In 2006, President Bush and President Hu agreed to conditions.
create a Strategic Economic Dialogue between the United
States and China. The objectives of the SED were to help to
On December 1, 2018, President Trump and China’s
ensure leaders of the two countries could address critical
economic challenges facing their economies, have a forum for President Xi met in Buenos Aires following a meeting
discussing cross-cutting issues and can make the most of the G20 leaders. At this meeting, the Chinese side
productive use of the existing bilateral commissions and seemed to show more willingness to seriously
dialogues. President Bush designated the Treasury Secretary engage with the United States. It was agreed that
to lead the U.S. side of this dialogue, with participation by
Cabinet members from other U.S. agencies. President Hu
the United States would suspend raising the tariff
designated a Vice Premier to lead the Chinese side, with rate from 10 percent to 25 percent on $200 billion of
participation from various ministers. The SED convened semi- Chinese goods on January 1, 2019, while the two
annually from 2006 through 2008. sides engaged in intensive negotiations for 90 days
S&ED: In 2009, the U.S.-China Strategic and Economic
on the entire range of structural changes needed in
Dialogue was established by Presidents Obama and Hu. The China’s trade regime as well as China’s additional
S&ED included separate strategic and economic tracks and purchases of U.S. goods and services. Absent a
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
foreign equity limitations and other mechanisms) to edge technologies and intellectual property and to
require or pressure the transfer of technologies and generate large-scale technology transfer in
intellectual property to Chinese companies; (2) the industries deemed important by Chinese
Chinese government reportedly deprives U.S. government industrial plans. Fourth, USTR found
companies of the ability to set market-based terms that China conducts and supports unauthorized
in licensing negotiations with Chinese companies; (3) intrusions into, and theft from, the computer
the Chinese government reportedly intervenes in networks of U.S. companies. These actions provide
markets by directing or unfairly facilitating the the Chinese government with unauthorized access
acquisition of U.S. companies and assets by Chinese to intellectual property, trade secrets or confidential
companies to obtain cutting-edge technologies and business information, including technical data,
intellectual property; and (4) the Chinese negotiating positions and sensitive and proprietary
government reportedly conducts or supports internal business communications. These actions
unauthorized intrusions into U.S. commercial support China’s strategic development goals,
computer networks or cyber-enabled theft. The including its science and technology advancement,
notice invited written comments and information military modernization, and economic development.
from interested parties and scheduled a public
hearing, which was held in October 2017. Based on these findings, the President directed that
a range of responsive actions be taken. Specifically,
After thoroughly analyzing the available evidence, the President instructed the U.S. Trade
USTR issued a detailed report in March 2018. With Representative to commence Section 301
regard to each of the four categories of policies and procedures for imposing additional tariffs on imports
practices under investigation, USTR found ample of Chinese goods. The President also instructed the
support for concluding that China had engaged in U.S. Trade Representative to initiate a WTO case to
unfair and harmful conduct. Specifically, USTR address certain discriminatory technology licensing
found, first, that China uses foreign ownership measures maintained by China. In addition, the
restrictions, including joint venture requirements, President instructed the Treasury Secretary to
equity limitations, and other investment restrictions, address concerns about investment in the United
to require or pressure technology transfer from U.S. States directed or facilitated by China in industries or
companies to Chinese entities. USTR also found that technologies deemed important to the United
China uses administrative review and licensing States.
procedures to require or pressure technology
transfer, which, inter alia, undermines the value of In March 2018, as directed by the President, USTR
U.S. investments and technology and weakens the initiated a WTO case challenging Chinese measures
global competitiveness of U.S. firms. Second, USTR that deny foreign patent holders the ability to
found that China imposes substantial restrictions on, enforce their patent rights against a Chinese joint-
and intervenes in, U.S. firms’ investments and venture partner after a technology transfer contract
activities, including through restrictions on ends and that impose mandatory adverse contract
technology licensing terms. These restrictions terms that discriminate against and are less
deprive U.S. technology owners of the ability to favorable for imported foreign technology as
bargain and set market-based terms for technology compared to Chinese technology. Consultations
transfer. As a result, U.S. companies seeking to took place in August 2018, and a panel was
license technologies must do so on terms that established to hear the case at the United States’
unfairly favor Chinese recipients. Third, USTR found request in November 2018
that China directs and facilitates the systematic
investment in, and acquisition of, U.S. companies In May 2018, following the submission of written
and assets by Chinese companies to obtain cutting- comments by interested parties and a public hearing
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2018 USTR Report to Congress on China’s WTO Compliance
on the proposed additional tariffs, the President had decided to respond constructively to the United
instructed the U.S. Trade Representative to impose States’ initial report. USTR found that China had not
an additional duty of 25 percent on approximately fundamentally altered the unfair, unreasonable and
$50 billion worth of Chinese imports containing market-distorting policies and practices that were
industrially significant technologies, including those the subject of the March 2018 report. Instead,
related to China’s Made in China 2025 industrial China’s responsive actions had been confined to
plan. These additional tariffs were imposed in two imposing tariffs on U.S. goods in retaliation for the
tranches, with $34 billion becoming effective in July United States’ efforts to address the harm caused by
2018 and a further $16 billion becoming effective in China’s extensive unreasonable policies and
August 2018. Instead of eliminating its unfair and practices designed to force or pressure the transfer
harmful policies and practices, China decided of technology from U.S. companies to Chinese
without justification to impose additional tariffs on companies.
imports of U.S. goods, with $34 billion becoming
effective in July 2018 and a further $16 billion In December 2018, at the meeting between
becoming effective in August 2018. At the direction President Trump and President Xi in Buenos Aires,
of the President, in a supplemental action under the United States agreed to hold off on raising the
Section 301, the U.S. Trade Representative imposed duty rate on $200 billion of Chinese goods from 10
a further $200 billion in additional tariffs on Chinese percent to 25 percent on January 1, 2019, while the
imports, with the duty set at 10 percent effective in two sides engaged in intensive negotiations for 90
September 2018 and rising to 25 percent in January days on the entire range of structural changes
2019. needed in China’s trade regime. Absent a resolution
within 90 days, the 10 percent tariff rate would be
With regard to U.S. concerns relating to Chinese raised to 25 percent.
investment in technology-intensive sectors, the
President announced in June 2018 that Congress had WTO Litigation
made significant progress toward passing legislation
that would modernize the tools for protecting the Separate from enforcement actions under U.S. law,
United States’ critical technologies from harmful the United States continued to pursue litigation at
foreign acquisitions. Indeed, this legislation not only the WTO to hold China accountable for adherence to
strengthened the existing mechanism – WTO rules in 2018. Key WTO cases being pursued by
administered by the Committee on Foreign the United States are discussed below.
Investment in the United States (CFIUS) – for
reviewing foreign investment in the United States for In December 2016, the United States launched a
national security purposes, but also created a WTO case challenging China’s administration of
process for identifying emerging and foundational tariff-rate quotas for rice, wheat and corn. Due to
technologies that should be added to existing U.S. China’s poorly defined criteria for applicants, unclear
export controls. The President accordingly directed procedures for distributing TRQ allocations, and
the Administration to implement this legislation, failure to announce quota allocation and reallocation
once enacted, promptly and to enforce it rigorously, results, traders are unsure of available import
with a view toward addressing the concerns opportunities and producers worldwide have
regarding state-directed investment in critical reduced market access opportunities. Consultations
technologies identified in the Section 301 took place in February 2017. A WTO panel was
investigation. established to hear the case at the United States’
request in September 2017, and 17 other WTO
In November 2018, USTR issued another detailed members joined as third parties. Hearings before
section 301 report, which examined whether China the panel took place in July and October 2018, and
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2018 USTR Report to Congress on China’s WTO Compliance
the panel is expected to issue its decision in mid- In May 2016, the United States launched a challenge
2019. to China’s redetermination in a proceeding under
Article 21.5 of the WTO’s Dispute Settlement
In September 2016, the United States initiated Understanding (DSU). A hearing before the panel
another agriculture-related case against China, took place in April 2017, and the panel issued its
challenging excessive government support for the decision in January 2018, ruling that China had failed
production of rice, wheat and corn by farmers in to comply with the findings made by the panel in
China. Like other WTO members, China committed August 2013. China removed its duties in February
to limit its support for producers of agricultural 2018.
commodities. China’s market price support
programs for these agricultural commodities appear In a WTO case initiated in September 2010, the
to provide support far exceeding the agreed levels. United States challenged China’s restrictions on
This excessive support creates price distortions and foreign suppliers of electronic payment services.
skews the playing field against U.S. farmers. In Suppliers like the major U.S. credit card companies
October 2016, consultations took place. In January provide these services in connection with the
2017, a WTO panel was established to hear the case operation of electronic networks that process
at the United States’ request, and 27 other WTO payment transactions involving credit, debit, prepaid
members joined as third parties. Hearings before and other payment cards. China’s regulatory regime
the panel took place in January and April 2018, and places severe restrictions on foreign suppliers of
the panel is expected to issue its decision in early electronic payment services. Among other things,
2019. China prohibits foreign suppliers from handling the
typical payment card transaction in China, in which a
In a WTO case initiated in September 2011, the Chinese consumer is billed and makes payment in
United States successfully challenged China’s China’s domestic currency, known as the renminbi
imposition of antidumping and countervailing duties (RMB). Instead, China has created a national
on imports of certain U.S. chicken products known as champion, allowing only one domestic entity, China
“broiler products.” In the course of its AD and CVD Union Pay, to supply these services. Consultations
investigations, China’s regulatory authorities were held in October 2010. A WTO panel was
imposed the duties at issue without necessary legal established to hear this case at the United States’
and factual support and without observing certain request in March 2011, and six other WTO members
transparency and procedural fairness requirements, joined the case as third parties. Hearings before the
in violation of various WTO obligations under the AD panel took place in October and December 2011,
Agreement and the Subsidies Agreement. and the panel issued its decision in July 2012. The
Consultations were held in October 2011. A WTO panel ruled that China’s commitments under the
panel was established to hear this case at the United GATS required China to allow foreign suppliers to
States’ request in January 2012, and seven other provide electronic payment services for payment
WTO members joined the case as third parties. card transactions denominated in RMB through
Hearings before the panel took place in September commercial presence in China on non-discriminatory
and December 2012, and the panel issued its terms. China decided not to appeal the panel’s
decision in August 2013, finding in favor of the decision and subsequently agreed to come into
United States on all significant claims. China decided compliance with the WTO’s rulings by July 2013.
not to appeal the panel’s decision and subsequently
agreed to come into compliance with the WTO’s To date, however, China has failed to come into
rulings by July 2014. China issued a redetermination compliance. In October 2014, China’s State Council
in July 2014 that left the duties in place, but it announced that China would be opening its market
appeared to be inconsistent with the WTO’s rulings. to foreign suppliers of electronic payment services,
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2018 USTR Report to Congress on China’s WTO Compliance
but delayed the issuance of a formal decision. In the United States and China reached agreement in
April 2015, the State Council finally issued the formal February 2012 on an MOU providing for substantial
decision setting forth the terms on which China increases in the number of foreign films imported
would be opening its market to foreign suppliers of and distributed in China each year, substantial
electronic payment services. In August 2015, the additional revenue for foreign film producers and
regulator, PBOC, issued draft licensing regulations, the opening up of film distribution opportunities for
but it did not issue those regulations in final form imported films. To date, however, China has not yet
until June 2016, during the S&ED meeting. PBOC fully implemented its MOU commitments, including
followed up with the issuance of additional guidance with regard to critical commitments to open up film
for potential applicants in October 2016 and June distribution opportunities for imported revenue-
2017. Two major U.S. suppliers subsequently filed sharing films. In addition, U.S. industry reports that
applications to begin preparatory work, the first of China has been imposing an informal quota on the
two required steps in the licensing process, but to total number of U.S. revenue-sharing films and flat-
date PBOC has not yet taken action even to accept fee films that can be imported each year, which, if
their applications for consideration. Consequently, true, would undermine the terms of the MOU. As a
as of December 2018, over five years after China had result, the United States has pressed China for full
promised to comply, these U.S. suppliers remained implementation of the MOU.
blocked from entering China’s market. The United
States continues to press this issue in its ongoing The MOU provided that it would be reviewed in
negotiations with China. calendar year 2017 in order for the two sides to
discuss issues of concern, including additional
Another WTO case active in 2018 involved U.S.
compensation for the U.S. side. At the November
challenges to market access restrictions maintained
2016 JCCT meeting, China agreed to begin discussing
by China that restricted the importation and
an updated MOU promptly in 2017. China further
distribution of copyright-intensive products such as
promised that those discussions will seek to increase
books, newspapers, journals, theatrical films, DVDs
the number of revenue-sharing films to be imported
and music. In this case, hearings before a WTO
each year and the share of gross box office receipts
panel took place in 2008, and the panel issued its
received by U.S. enterprises as well as seek to
decision in August 2009, ruling in favor of the United
address outstanding U.S. concerns relating to other
States on every significant claim in the case. China
policies and practices that may impede the U.S. film
appealed the panel’s decision in September 2009.
industry’s access to China’s market, such as
The WTO’s Appellate Body rejected China’s appeal
importation rights, the number of distributors of
on all counts in December 2009. China agreed to
imported films and the independence of distributors,
come into compliance with the WTO’s rulings by
among other issues.
March 2011. China subsequently issued several
revised measures, and repealed other measures,
relating to the market access restrictions on books, In 2017, in accordance with the terms of the MOU,
newspapers, journals, DVDs and music. As China the two sides began discussions regarding the
acknowledged, however, it did not issue any provision of further meaningful compensation to the
measures addressing theatrical films. Instead, China United States in an updated MOU. These discussions
proposed bilateral discussions with the United States continued until March 2018, when China embarked
in order to seek an alternative solution. on a major government reorganization that involved
significant changes for China’s Film Bureau. The
After months of negotiations, which included discussions have not yet resumed. The United States
discussions between the two sides’ Vice Presidents, will continue pressing China to fulfill its obligations.
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
theatrical films, DVDs and music. The WTO panel received by U.S. enterprises as well as seek to
established to hear this case issued its decision in address outstanding U.S. concerns relating to other
August 2009, ruling in favor of the United States on policies and practices that may impede the U.S. film
all significant claims. China appealed the panel’s industry’s access to China’s market, such as
decision in September 2009, and the WTO’s importation rights, the number of distributors of
Appellate Body rejected China’s appeal on all counts imported films and the independence of distributors,
in December 2009. China agreed to comply with among other issues.
these rulings by March 2011. China subsequently
issued several revised measures, and repealed other In 2017, in accordance with the terms of the MOU,
measures, relating to the importation restrictions on the two sides began discussions regarding the
books, newspapers, journals, DVDs and music. provision of further meaningful compensation to the
However, China did not issue any measures United States. These discussions continued until
addressing theatrical films and instead proposed March 2018, when China embarked on a major
bilateral discussions with the United States in order government reorganization that involved significant
to seek an alternative solution. changes for China’s Film Bureau. The discussions
have not yet resumed. The United States will
After months of negotiations, the United States and continue pressing China to fulfill its obligations.
China reached agreement in February 2012 on an
MOU providing for substantial increases in the IMPORT REGULATION
number of foreign films imported and distributed in
China each year, substantial additional revenue for Tariffs
U.S. film producers and the opening up of film
distribution opportunities for imported films. The During its bilateral negotiations with interested WTO
MOU provides that it will be reviewed after five members leading up to its accession, China agreed
years in order for the two sides to discuss issues of to increase market access for U.S. and other foreign
concern, including additional compensation for the companies by reducing tariff rates on industrial
U.S. side. goods over a period of years running from 2002
through 2010. The agreed reductions are set forth
To date, China has not yet fully implemented its as tariff “bindings” in China’s Goods Schedule,
MOU commitments, including with regard to critical meaning that while China cannot exceed the bound
commitments to open up film distribution tariff rates, it can decide to apply them at a lower
opportunities for imported revenue-sharing films. In rate, as many members do when trying to attract
addition, U.S. industry reports that China has been particular imports.
imposing an informal quota on the total number of
U.S. revenue-sharing films and flat-fee films that can Despite the significant reductions in China’s tariffs
be imported each year, which, if true, would that WTO members were able to negotiate with
undermine the terms of the MOU. China in connection with its accession to the WTO,
China retains the right to impose relatively high
The films MOU provided that it would be reviewed in tariffs on some products that compete with sensitive
calendar year 2017 in order for the two sides to domestic industries. For example, the tariff on most
discuss issues of concern, including additional automobiles is 15 percent, and most audio and video
meaningful compensation for the U.S. side. At the recorders still face 30 percent tariffs.
November 2016 JCCT meeting, China pledged that
those discussions would seek to increase the In 2018, China imposed additional tariffs on certain
number of revenue-sharing films to be imported U.S. products in excess of China’s bound rates.
each year and the share of gross box office receipts China took these actions in retaliation for tariffs
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2018 USTR Report to Congress on China’s WTO Compliance
imposed by the United States on national security determining customs value. It also called on China
grounds under Section 232 of the Trade Expansion to implement the Decision on Valuation of Carrier
Act of 1962 and tariffs imposed by the United States Media Bearing Software for Data Processing
under Section 301 of the Trade Act of 1974 in Equipment and the Decision on Treatment of Interest
response to numerous unfair and harmful policies Charges in Customs Value of Imported Goods by
and practices of the Government of China related to December 11, 2003.
technology transfer, intellectual property and
innovation. In addition, there are credible reports In September 2015, China accepted the WTO Trade
that officials at China’s ports from the General Facilitation Agreement (TFA), which includes
Administration of Customs are now assessing duties provisions for expediting the movement, release and
on U.S. products based on higher “reference prices,” clearance of goods, including goods in transit. It also
rather than the declared value, effectively resulting sets out measures for effective cooperation between
in even higher tariffs. There is no legitimate basis for customs and other appropriate authorities on trade
these actions. facilitation and customs compliance issue. By its
terms, the TFA enters into force after two-thirds of
Customs and Trade Administration the WTO membership have accepted it, a level that
was reached in February 2017.
Like other acceding WTO members, China agreed to
take on the WTO obligations set forth in three Notwithstanding these various commitments, the
agreements that address the means by which United States continues to have significant concerns,
customs and other trade administration officials as discussed below.
check imports and establish and apply relevant trade
regulations. These agreements cover the areas of Customs Clearance Procedures
customs valuation, rules of origin and import
licensing. U.S. exporters continue to be concerned about
inefficient and inconsistent customs clearance
CUSTOMS VALUATION procedures in China. These procedures vary from
port to port, lengthy delays are not uncommon, and
The WTO Agreement on the Implementation of the fees charged appear to be excessive, giving rise
GATT Article VII (Agreement on Customs Valuation) to concerns about China’s compliance with its
is designed to ensure that determinations of the obligations under Article VIII of GATT 1994.
customs value for the application of duty rates to
imported goods are conducted in a neutral and Tariff Classifications
uniform manner, precluding the use of arbitrary or
fictitious customs values. Adherence to the U.S. industry notes that Chinese customs officers
Agreement on Customs Valuation is important for appear to have wide discretion in classifying goods
U.S. exporters, particularly to ensure that market for tariff purposes, and their classifications
access opportunities provided through tariff sometimes appear to be arbitrary. This lack of
reductions are not negated by unwarranted and uniformity and predictability creates unnecessary
unreasonable “uplifts” in the customs value of goods challenges for U.S. and other foreign companies
to which tariffs are applied. China agreed to seeking to export their goods to China.
implement its obligations under the Agreement on
Customs Valuation upon accession, without any Customs Valuation Determinations
transition period. In addition, China’s accession
agreement reinforces China’s obligation not to use China has still not uniformly implemented the
minimum or reference prices as a means for various customs valuation measures issued following
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2018 USTR Report to Congress on China’s WTO Compliance
its accession to the WTO. U.S. exporters continue to valuation, and customer rebates and sales discounts
report that they are encountering valuation associated with modern supply chains.
problems at many ports.
The United States first presented its concerns about
According to U.S. exporters, even though the the customs valuation problems being encountered
General Administration of Custom’s measures by U.S. companies several years ago. At that time,
provide that imported goods normally should be China indicated that it was working to establish
valued on the basis of their transaction price, more uniformity in its adherence to WTO customs
meaning the price the importer actually paid, many valuation rules. Since then, the United States has
Chinese customs officials are still improperly using sought to assist in this effort in part by conducting
“reference pricing,” which usually results in a higher technical assistance programs for Chinese
dutiable value. Indeed, it appears that the practice government officials on WTO compliance in the
of using reference prices is increasing. Imports of customs area. The United States has also raised its
information technology products reportedly are concerns about particular customs valuation
often subjected to reference pricing, as are other problems before the WTO’s Committee on Customs
imported products, such as wood products. Valuation and during the WTO’s biannual Trade
Policy Reviews of China, the most recent of which
In addition, some of China’s customs officials are was held in July 2018. At present, China still needs
reportedly not applying the rules set forth in the to improve its adherence to applicable customs
General Administration of Custom’s measures as valuation measures.
they relate to software royalties and license fees.
Rather, following their pre-WTO accession practice,
these officials are still automatically adding royalties RULES OF ORIGIN
and license fees to the dutiable value (for example,
when an imported personal computer includes pre- Upon its accession to the WTO, China became
installed software), even though the rules expressly subject to the WTO Agreement on Rules of Origin,
direct them to add those fees only if they are which sets forth rules designed to increase
import-related and a condition of sale for the goods transparency, predictability and consistency in both
being valued. the establishment and application of rules of origin,
which are necessary for import and export purposes,
U.S. exporters also have continued to complain that such as determining the applicability of import
some of China's customs officials are assessing quotas, determining entitlement to preferential or
duties on digital products based on the imputed duty-free treatment and imposing antidumping or
value of the content, such as the data recorded on a countervailing duties or safeguard measures, and for
floppy disk or CD-ROM. China’s own regulations the purpose of confirming that marking
require this assessment to be made on the basis of requirements have been met. The Agreement on
the value of the underlying carrier medium, meaning Rules of Origin also provides for a work program
the floppy disk or CD-ROM itself. leading to the multilateral harmonization of rules of
origin. This work program is ongoing, and China
U.S. exporters also have complained about the specifically agreed to adopt the internationally
General Administration of Custom’s use of outdated harmonized rules of origin once they were
and arbitrary pricing methodologies that do not take completed. In addition, China confirmed that it
account of modern, complex supply chain models. would apply rules of origin equally for all purposes
In particular, according to these exporters, China's and that it would not use rules of origin as an
customs officials do not seem to understand transfer instrument to pursue trade objectives either directly
pricing, inbound and outbound bonded zone or indirectly.
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2018 USTR Report to Congress on China’s WTO Compliance
As previously reported, it took China nearly three Shortly after China acceded to the WTO, the Ministry
years after its accession to the WTO for China’s State of Foreign Trade and Economic Cooperation
Council to issue the regulations intended to bring (MOFTEC), the predecessor to MOFCOM, issued
China’s rules of origin into conformity with WTO regulations revising China’s automatic import
rules for import and export purposes. Shortly licensing regime, and it later supplemented these
thereafter, the General Administration of Customs regulations with implementing rules. MOFTEC also
issued implementing rules addressing the issue of issued regulations revising China’s non-automatic
substantial transformation. U.S. exporters have not licensing regime.
raised concerns with China’s implementation of
these measures. Nevertheless, a variety of specific compliance issues
continue to arise. In 2018, these included an import
ban on recyclable materials (discussed below in the
IMPORT LICENSING section on Standards, Technical Regulations and
Conformity Assessment Procedures), the
The Agreement on Import Licensing Procedures administration of the tariff-rate quota system for
(Import Licensing Agreement) establishes rules for fertilizer (discussed below in the section on Tariff-
all WTO members, including China, that use import rate Quotas on Industrial Goods), the administration
licensing systems to regulate their trade. Its aim is of the tariff-rate quota system for certain
to ensure that the procedures used by members in agricultural commodities (discussed below in the
operating their import licensing systems do not, in section on Tariff-rate Quotas on Bulk Agricultural
themselves, form barriers to trade. The objective of Commodities), various SPS measures (discussed
the Import Licensing Agreement is to increase below in the section on Sanitary and Phytosanitary
transparency and predictability and to establish Issues) and inspection-related requirements for
disciplines to protect an importer against soybeans, meat, poultry, pork and dairy products
unreasonable requirements or delays associated (discussed below in the section on Inspection-
with the licensing regime. The Import Licensing Related Requirements).
Agreement covers both “automatic” licensing
systems, which are intended only to monitor
imports, not regulate them, and “non-automatic” Non-tariff Measures
licensing systems, which are normally used to
administer import restrictions, such as tariff-rate In its WTO accession agreement, China agreed that it
quotas, or to administer safety or other would eliminate numerous trade-distortive non-
requirements, such as for hazardous goods, tariff measures (NTMs), including import quotas,
armaments or antiquities. While the Import licenses and tendering requirements covering
Licensing Agreement’s provisions do not directly hundreds of products. Most of these NTMs had to
address the WTO consistency of the underlying be eliminated by the time that China acceded to the
measures that licensing systems might implement, WTO. China committed to phase out other NTMs,
they do establish the baseline of what constitutes a listed in an annex to the accession agreement, over a
fair and non-discriminatory application of import transition period ending on January 1, 2005.
licensing procedures. In addition, China specifically
committed not to condition the issuance of import Import Ban on Remanufactured Products
licenses on performance requirements of any kind,
such as local content, export performance, offsets, China prohibits the importation of remanufactured
technology transfer or research and development, or products, which it typically classifies as used goods.
on whether competing domestic suppliers exist. China also maintains restrictions that prevent
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2018 USTR Report to Congress on China’s WTO Compliance
remanufacturing process inputs (known as cores) persisted. U.S. fertilizer exports to China declined
from being imported into China’s customs territory, sharply after China acceded to the WTO, as separate
except special economic zones. These import Chinese government policies promoting domestic
prohibitions and restrictions hurt Chinese businesses fertilizer – including export duties (discussed below
and consumers who are unable to purchase high- in the Export Regulation section) and discriminatory
quality, lower-cost remanufactured products internal taxes (discussed below in the Taxation
produced outside of China. section) – appear to have made it difficult for foreign
producers to compete in China’s market.
China’s import prohibitions and restrictions remain a
serious problem and U.S. companies’ activities Other Import Regulation
remain severely restricted. To help address this
problem, the United States has convened annual ANTIDUMPING
U.S.-China Remanufacturing Dialogues, which
include relevant government and industry At the time of its accession to the WTO, China
stakeholders from both countries as participants. In agreed to revise its regulations and procedures for
addition, the United States has continued to press AD proceedings to make them consistent with the
China to lift its import prohibitions and to expand AD Agreement. That agreement sets forth detailed
the scope of remanufacturing activity allowed to be rules prescribing the manner and basis on which a
conducted in China through other bilateral WTO member may take action to offset the injurious
engagement. dumping of products imported from another WTO
member. China also agreed to provide for judicial
Tariff-rate Quotas on Industrial Products review of determinations made in its AD
investigations and reviews.
In its WTO accession agreement, China agreed to
implement a system of tariff-rate quotas (TRQs) Currently, China has in place 109 AD measures,
designed to provide significant market access for affecting imports from 17 countries or regions.
three industrial products, including fertilizer, a major China also has 15 AD investigations in progress. The
U.S. export. Under this TRQ system, a set quantity of greatest systemic shortcomings in China’s AD
imports is allowed at a low tariff rate, while imports practice continue to be in the areas of transparency
above that level are subject to a higher tariff rate. In and procedural fairness. In addition, as discussed
addition, the quantity of imports allowed at the low below, in recent years, China has invoked AD and
tariff rate increases annually by an agreed amount. CVD remedies under troubling circumstances. In
China’s accession agreement specifies detailed rules, response, the United States has pressed China both
requiring China to operate its fertilizer TRQ system in bilaterally and in WTO meetings to adhere strictly to
a transparent manner and dictating precisely how WTO rules in the conduct of its AD investigations,
and when China is obligated to accept quota and the United States has consistently pursued WTO
applications, allocate quotas and reallocate unused dispute settlement where necessary.
quotas.
Legal Regime
As previously reported, since China began
implementing its TRQ system for fertilizer in 2002, it Under China’s AD regime, until 2014, MOFCOM’s
has not functioned smoothly. Despite repeated Bureau of Fair Trade for Imports and Exports (BOFT)
bilateral engagement and multilateral engagement was charged with making dumping determinations,
at the WTO, including formal consultations with and MOFCOM’s Bureau of Industry Injury
China in Geneva, concerns about inadequate Investigation (IBII) was charged with making injury
transparency and administrative guidance have determinations. In 2014, MOFCOM consolidated
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2018 USTR Report to Congress on China’s WTO Compliance
BOFT and IBII into a new entity, the Trade Remedy placed on the record by domestic Chinese
and Investigation Bureau (TRIB), which makes both producers, insufficiently detailed disclosures of the
dumping and injury determinations. In cases where essential facts underlying MOFCOM decisions, such
the subject merchandise is an agricultural product, as dumping margin calculations, evidence supporting
the Ministry of Agriculture and Rural Affairs also may injury and dumping conclusions, and MOFCOM not
be involved in the injury investigation. The State adequately addressing critical arguments or
Council Tariff Commission continues to make the evidence put forward by interested parties. These
final decision on imposing, revoking or retaining AD aspects of China’s AD practice have been challenged
duties, based on recommendations provided by the by the United States in the WTO cases involving
TRIB. GOES, chicken broiler products and automobiles. In
each of the cases, the WTO has upheld U.S. claims
China continues to add new regulations and rules to relating to transparency and procedural fairness.
its AD legal framework, although not all of these
measures have been notified to the WTO in a timely The United States and other WTO members have
manner. In July 2009, MOFCOM solicited public also expressed serious concerns about China’s
comments on draft revisions of its rules on new evolving practice of launching AD and CVD
shipper reviews, AD duty refunds and price investigations that appear designed to discourage
undertakings. In May 2013, MOFCOM solicited the United States or other trading partners from the
public comments on rules concerning the legitimate exercise of their rights under WTO AD and
implementation of WTO rulings in trade remedy CVD rules and the trade remedy provisions of
cases. While these rules entered into effect in July China’s accession agreement. Further, when China
2013, China did not notify them to the WTO until has pursued investigations under these
May 2017. In August 2015 and April 2017, MOFCOM circumstances, it appears that its regulatory
solicited public comments on draft revisions of its authorities have tended to move forward with the
rules regarding AD and CVD investigation hearings, imposition of duties regardless of the strength of the
interim reviews of AD margins and AD investigation underlying legal and factual support. The United
questionnaires. To date, however, China still has not States’ successful WTO cases challenging the duties
finalized revisions to any of these rules. Once imposed by China on imports of U.S. GOES, U.S.
finalized, China is obligated to notify these revised chicken broiler products and U.S. automobiles offer
rules to the WTO so that all Members have an telling examples of this problem.
opportunity to review the rules for compliance with
the AD Agreement and seek any needed The United States initiated the GOES WTO case in
clarifications. September 2010, claiming that China’s regulatory
authorities appeared to have imposed the duties at
Conduct of Antidumping Investigations issue without necessary legal and factual support
and without observing certain transparency and
In practice, it appears that China’s conduct of AD procedural fairness requirements, in violation of
investigations continues to fall short of full various WTO obligations under the AD Agreement
commitment to the fundamental tenets of and the Subsidies Agreement. Consultations were
transparency and procedural fairness embodied in held in November 2010. A WTO panel was
the AD Agreement. In 2018, respondents from the established to hear this case at the United States’
United States and other WTO members continued to request in March 2011, and eight other WTO
express concerns about key lapses in transparency members joined the case as third parties. Hearings
and procedural fairness in China’s conduct of AD before the panel took place in September and
investigations. The principal areas of concern December 2011. The panel issued its decision in
include the inadequate disclosure of key documents June 2012, finding in favor of the United States on all
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2018 USTR Report to Congress on China’s WTO Compliance
significant claims. China appealed the panel’s proceeding under Article 21.5 of the DSU. A hearing
decision in July 2012. The WTO’s Appellate Body before the panel took place in April 2017, and the
rejected China’s appeal in October 2012, and China panel issued its decision in January 2018, ruling that
subsequently agreed to come into compliance with China had failed to comply with the findings made by
the WTO’s rulings by July 2013. China issued a the panel in August 2013. China removed its duties
redetermination in July 2013, but it appeared to be in February 2018.
inconsistent with the WTO’s rulings. In January
2014, the United States launched a challenge to In July 2012, the United States initiated a WTO case
China’s redetermination in a proceeding under challenging China’s imposition of antidumping and
Article 21.5 of the DSU. This compliance challenge countervailing duties on imports of certain U.S.
was the first one that any WTO member had automobiles. Again, China’s regulatory authorities
initiated to challenge a claim by China that it had appeared to have imposed the duties at issue
complied with adverse WTO findings. A hearing without necessary legal and factual support and
before the panel took place in October 2014. without observing certain transparency and
MOFCOM terminated the duties at issue in April procedural fairness requirements, in violation of
2015, and the panel issued its decision in July 2015, various WTO obligations under the AD Agreement
confirming, as the United States had argued, that and the Subsidies Agreement. Consultations took
MOFCOM’s redetermination did not comply with the place in August 2012. A WTO panel was established
WTO’s rulings. to hear this case in October 2012, and eight other
WTO members joined the case as third parties.
In September 2011, the United States initiated a Hearings before the panel took place in June 2013
WTO case challenging the antidumping and and then in October 2013. Two months later, in
countervailing duties that China imposed on imports December 2013, China terminated the duties at
of certain U.S. chicken products known as “broiler issue. In May 2014, the panel issued its decision,
products.” Once again, in the course of its AD and finding in favor of the United States on all significant
CVD investigations, China’s regulatory authorities claims.
appeared to have imposed the duties at issue
without necessary legal and factual support and Throughout 2018, the United States continued to
without observing certain transparency and work closely with U.S. companies subject to Chinese
procedural fairness requirements, in violation of AD investigations to help them better understand
various WTO obligations under the AD Agreement China’s trade remedy system and practices. In
and the Subsidies Agreement. Consultations were addition, the United States advocated on their
held in October 2011. A WTO panel was established behalf in connection with ongoing AD investigations,
to hear this case at the United States’ request in with the goal of obtaining fair and objective
January 2012, and seven other WTO members joined treatment for U.S. companies, consistent with the
the case as third parties. Hearings before the panel AD Agreement.
took place in September and December 2012, and
the panel issued its decision in August 2013, finding In addition, the United States continued to engage
in favor of the United States on all significant claims. China vigorously on the various concerns generated
China decided not to appeal the panel’s decision and by China’s AD practices, including systemic concerns
subsequently agreed to come into compliance with in the areas of transparency and procedural fairness.
the WTO’s rulings by July 2014. China issued a The United States also raised concerns about China’s
redetermination in July 2014 that left the duties in apparent decisions to use AD and CVD remedies
place, but it appeared to be inconsistent with the against U.S. imports as a means to discourage the
WTO’s rulings. In May 2016, the United States United States from the legitimate exercise of its
launched a challenge to China’s redetermination in a rights under WTO AD and CVD rules and the trade
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2018 USTR Report to Congress on China’s WTO Compliance
Going forward, the United States will continue to As previously reported, China has put in place much
raise awareness of this problem at the WTO. It also of the legal framework for its CVD regime. Under
will continue to seek the cooperation of other WTO this regime, like in the AD area, MOFCOM’s TRIB is
members, including China, to help counter and charged with making both subsidy and injury
eliminate this problem. determinations.
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2018 USTR Report to Congress on China’s WTO Compliance
China’s regulations and procedural rules generally rights under WTO AD and CVD rules and the trade
track those found in the Subsidies Agreement, remedy provisions of China’s accession agreement.
although there are certain areas where key
provisions are omitted or are vaguely worded. Since As discussed above in the Antidumping section, in
China’s accession, the United States and other WTO September 2010, the United States initiated – and
members have sought clarifications on a variety of later won – a WTO case challenging the final AD and
issues concerning China’s regulatory framework and CVD determinations in China’s GOES investigations
have pressed China for greater transparency both because China’s regulatory authorities appeared to
during regular meetings and the annual transitional have imposed the duties at issue without necessary
reviews before the WTO’s Subsidies Committee. The legal and factual support and without observing
United States will continue to seek clarifications as certain transparency and procedural fairness
needed in 2019. requirements, in violation of various WTO
obligations under the AD Agreement and the
Conduct of Countervailing Duty Investigations Subsidies Agreement. For similar reasons, the
United States initiated a second WTO case in
MOFCOM initiated China’s first CVD investigation in September 2011 challenging the final AD and CVD
June 2009. This investigation addressed alleged determinations in China’s chicken broiler products
subsidies being provided to the U.S. GOES industry, investigations and won that case, too. The United
concurrently with MOFCOM’s AD investigation of States initiated a third WTO case in July 2012
imports of GOES from the United States. Later that challenging the final AD and CVD determinations in
year, MOFCOM initiated additional CVD China’s automobiles investigations. Again, the
investigations involving imports of chicken broiler United States won.
products and automobiles from the United States,
along with concurrent AD investigations. In addition to pursuing WTO dispute settlement, the
United States has raised its concerns bilaterally with
These three CVD investigations, along with two MOFCOM as well as at the WTO in meetings before
additional ones involving imports of U.S. polysilicon the Subsidies Committee. The United States also has
initiated in July 2012 and imports of U.S. dried actively participated in MOFCOM’s CVD
distillers’ grains initiated in January 2016, make clear investigations and will continue to do so, as
that, as in the AD area, China needs to improve its envisioned by WTO rules, in order to safeguard the
transparency and procedural fairness when interests of U.S. industry. Going forward, the United
conducting these investigations. In addition, the States will continue to impress upon China the
United States has noted procedural concerns specific importance of strictly adhering to WTO rules when
to China’s conduct of CVD investigations. For conducting CVD investigations and imposing
example, China initiated investigations of alleged countervailing duties.
subsidies that raised concerns, given the
requirements regarding “sufficient evidence” in
Article 11.2 of the Subsidies Agreement. The United SAFEGUARDS
States is also concerned about China’s application of
facts available under Article 12.7 of the Subsidies In its WTO accession agreement, China committed to
Agreement. In addition, as in the AD area, the revising its regulations and procedures for
United States has expressed serious concerns about conducting safeguard investigations by the time of
China’s pursuit of AD and CVD remedies that appear its WTO accession in order to make them consistent
intended to discourage the United States and other with the WTO Agreement on Safeguards (Safeguards
trading partners from the legitimate exercise of their Agreement). That agreement articulates rules and
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2018 USTR Report to Congress on China’s WTO Compliance
procedures governing WTO members’ use of leading to a strong flow of imports. China appears to
safeguard measures. have timed its safeguard investigation so that it
would be able to impose import relief before the
Legal Regime government unloads the excessive sugar reserves
that it has built up. The United States has expressed
While the provisions of China’s regulations and concern that this investigation could set a precedent
procedural rules generally track those of the for strategically important grains, where China is
Safeguards Agreement, there are some potential struggling to reduce large reserves accumulated over
inconsistencies, and certain omissions and the past few years as the government bought at
ambiguities remain. In addition, some provisions do above-market prices. China imposed import relief in
not have any basis in the Safeguards Agreement. In May 2017, as it adjusted its existing TRQ for sugar by
earlier transitional reviews before the WTO’s nearly doubling the out-of-quota tariff rate.
Committee on Safeguards, the United States noted
several areas of potential concern, including EXPORT REGULATION
transparency, determination of developing country
status, treatment of non-WTO members, protection Upon acceding to the WTO, China took on the
of confidential data, access to non-confidential obligations of Article XI of the GATT 1994, which
information, refunding of safeguard duties collected generally prohibits WTO members from maintaining
pursuant to provisional measures when definitive export restraints (other than duties, taxes or other
measures are not imposed, and the conditions charges), although certain limited exceptions are
governing the extension of a safeguard measure. allowed. China also agreed to eliminate all taxes and
charges on exports, including export duties, except
Conduct of Safeguards Investigations as included in Annex 6 to its WTO accession
agreement or applied in conformity with Article VIII
To date, China has completed two safeguard of GATT 1994. Article VIII of GATT 1994 only permits
proceedings. Both of these proceedings resulted in fees and charges limited to the approximate cost of
the imposition of import relief. services rendered and makes clear that any such
fees and charges shall not represent an indirect
In November 2002, China imposed tariff-rate quotas protection to domestic products or a taxation of
on imports of nine categories of steel products from exports for fiscal purposes.
various countries, including the United States.
Although U.S. companies exported little of this As in prior years, China maintains numerous export
merchandise to China, there were complaints from restraints despite the prohibitions set forth in the
interested parties that China’s process for allocating GATT 1994 and the specific commitments that China
quotas under the safeguard measures was unclear, made in its WTO accession agreement. These export
making it difficult for them to determine the quota restraints distort trade in raw materials as well as
available and obtain a fair share. China terminated intermediate and downstream products.
the safeguard measures in December 2003.
Export Restraints on Raw Materials
In September 2016, China launched a safeguard
investigation of sugar imports. According to some Following its accession to the WTO, China continued
reports, the Chinese government set minimum to impose restraints on exports of raw materials,
prices at which it would purchase sugar from including export quotas, related export licensing and
Chinese farmers under its market price support bidding requirements, minimum export prices and
program too high in recent years, causing Chinese export duties, as China’s economic planners
prices to climb above international price levels and continued to guide the development of downstream
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2018 USTR Report to Congress on China’s WTO Compliance
industries. These export restraints were widespread. accession, while also working with other WTO
For example, China maintained some or all of these members with an interest in this issue, including the
types of export restraints on antimony, bauxite, EU and Japan. In response to these efforts, China
coke, fluorspar, indium, lead, magnesium carbonate, refused to modify its policies in this area. In fact,
manganese, molybdenum, phosphate rock, rare over time, China’s economic planners expanded
earths, silicon, silicon carbide, talc, tin, tungsten, their use of export restraints and made them
yellow phosphorus and zinc, all of which are of key increasingly restrictive, particularly on raw materials.
interest to U.S. downstream producers.
In June 2009, the United States and the EU initiated
These types of export restraints can significantly a WTO case challenging export quotas, export duties
distort trade, and for that reason WTO rules and other restraints maintained by China on the
normally outlaw them. In the case of China, the export of several key raw material inputs for which
trade-distortive impact can be exacerbated because China is a leading world producer. The materials at
of the size of China’s production capacity. Indeed, issue include bauxite, coke, fluorspar, magnesium,
for many of the raw materials at issue, China is the manganese, silicon carbide, silicon metal, yellow
world’s leading producer. phosphorus and zinc. Mexico became a co-
complainant in August 2009.
China’s export restraints affect U.S. and other
foreign producers of a wide range of downstream At the time of the initiation of this case, China’s
products, such as steel, chemicals, hybrid and treatment of coke, a key steel input, provided a clear
electric cars, energy efficient light bulbs, wind example of the trade distortions engineered by
turbines, hard-disk drives, magnets, lasers, ceramics, China’s export restraints. In 2008, China produced
semiconductor chips, refrigerants, medical imagery, 336 million MT of coke, but it limited exports of coke
aircraft, refined petroleum products, fiber optic to 12 million MT and additionally imposed 40
cables and catalytic converters, among numerous percent duties on coke exports. The effects of the
others. The export restraints can create serious export restraints on pricing were dramatic. In
disadvantages for these foreign producers by August 2008, the world price for coke reached $740
artificially increasing China’s export prices for their per MT at the same time that China’s domestic price
raw material inputs, which also drives up world was $472 per MT. This $268 per MT price difference
prices. At the same time, the export restraints can created a huge competitive advantage for China’s
artificially lower China’s domestic prices for the raw downstream steel producers over their foreign
materials due to significant increases in domestic counterparts, as coke represents about one-third of
supply, enabling China’s domestic downstream the input costs for integrated steel producers.
producers to produce lower-priced products from
the raw materials and thereby creating significant A WTO panel and the Appellate Body rejected
advantages for China’s domestic downstream China’s defenses, which had attempted to portray
producers when competing against foreign China’s export restraints as conservation or
downstream producers both in the China market and environmental protection measures or measures
in other countries’ markets. The export restraints taken to manage critical shortages of supply, and
can also create pressure on foreign downstream found in favor of the United States and its co-
producers to move their operations, technologies complainants on all significant claims, ruling that the
and jobs to China. export restraints at issue were inconsistent with
China’s WTO obligations. China subsequently agreed
As previously reported, the United States began to come into compliance with the WTO’s rulings by
raising its concerns about China’s continued use of the end of December 2012. China took timely steps
export restraints shortly after China’s WTO to remove the export quotas and export duties on
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2018 USTR Report to Congress on China’s WTO Compliance
the raw materials at issue, while imposing export had eliminated the export quotas and export duties
licensing requirements on a subset of those at issue by that deadline.
materials. Since then, the United States has been
closely examining China’s export licensing regime to In July 2016, the United States, joined by the EU,
ensure that it operates automatically and does not initiated a third WTO case challenging export quotas
distort trade. and export duties maintained by China. This case
addresses the export of various forms of 11 raw
While the United States was prosecuting this first materials, including antimony, chromium, cobalt,
WTO case on export restraints, China’s export copper, graphite, indium, lead, magnesia, talc,
restraints on rare earths – a collection of 17 different tantalum and tin. These raw materials are key
chemical elements used in a variety of green inputs in important U.S. manufacturing industries,
technology products, among other products – began including aerospace, automotive, construction and
to generate significant concern among China’s electronics. The export restraints at issue appear to
trading partners. At the time, China controlled be inconsistent with China’s obligations under
about 97 percent of the global rare earths market various provisions of the GATT 1994 and China’s
and had been imposing increasingly restrictive accession agreement. Joint consultations took place
export quotas and export duties on rare earth ores, in September 2016. A WTO panel was established to
oxides and metals. hear the case at the complaining parties’ request in
November 2016, and 14 other WTO members joined
In March 2012, when it had become clear that China the case as third parties. Subsequently, China
would not abandon its use of export restraints on removed the export restraints on the challenged
rare earths and certain other raw materials in the materials.
face of further U.S. engagement, the United States,
joined by the EU and Japan, initiated a WTO case Border Tax Policies
challenging export quotas, export duties and other
restraints maintained by China on the export of rare China’s economic planners attempt to manage the
earths, tungsten and molybdenum. These materials export of many primary, intermediate and
are key inputs in a multitude of U.S.-made products, downstream products by raising or lowering the VAT
including not only a variety of green technology rebate available upon export and sometimes by
products, such as hybrid car batteries, wind turbines imposing or retracting export duties. With VAT
and energy-efficient lighting, but also steel, rebates ranging from zero to 17 percent and export
advanced electronics, automobiles, petroleum and duties typically ranging from zero to 40 percent,
chemicals. The export restraints appeared to be these border tax practices have caused tremendous
inconsistent with China’s obligations under various disruption, uncertainty and unfairness in the global
provisions of the GATT 1994 and China’s accession markets for the affected products – particularly
agreement. when these practices operate to incentivize the
export of downstream products for which China is a
As in the first WTO case on export restraints, a WTO leading world producer or exporter such as steel,
panel and the Appellate Body rejected China’s aluminum and soda ash.
defenses and found in favor of the United States and
its co-complainants on all significant claims, ruling Typically, the objective of China’s border tax
that the export restraints at issue were inconsistent adjustments is to make larger quantities of primary
with China’s WTO obligations. China subsequently and intermediate products in a particular sector
agreed to come into compliance with the WTO’s available domestically at lower prices than the rest
rulings by May 2015, and it later announced that it of the world, giving China’s downstream producers
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2018 USTR Report to Congress on China’s WTO Compliance
of finished products using these inputs a competitive trade-neutral VAT system is based. Subsequently, at
advantage over foreign downstream producers. To the July 2014 S&ED meeting, China pledged to
accomplish this objective, China discourages the improve its value-added tax rebate system, including
export of the relevant primary and intermediate by actively studying international best practices, and
products by reducing or eliminating VAT rebates and to deepen communication with the United States on
perhaps also imposing export duties on them, this matter, including regarding its impact on trade.
resulting in increased domestic supply and lower Despite these commitments, China has taken no
domestic prices. China’s downstream producers, in steps to abandon its use of trade-distortive VAT
turn, benefit not only from these lower input prices export rebates and to adopt a trade-neutral VAT
but also from full VAT rebates when they export system.
their finished products.
INTERNAL POLICIES AFFECTING TRADE
In some situations, China uses border taxes to
encourage the export of certain finished products Non-discrimination
over other finished products within a particular
sector. For example, in the past, China targeted In its WTO accession agreement, China agreed to
value-added steel products, particularly wire assume the obligations of GATT 1994, the WTO
products and steel pipe and tube products, causing a agreement that establishes the core principles that
surge in exports of these products, many of which constrain and guide WTO members’ policies relating
ended up in the U.S. market. to trade in goods. The two most fundamental of
these core principles are the most-favored nation
For several years, the United States and other WTO (MFN), or non-discrimination, rule – referred to in
members have raised broad concerns about the the United States as “normal trade relations” – and
trade-distortive effects of China’s VAT export rebate the rule of national treatment.
and export duty practices, including through each of
the biannual Trade Policy Reviews of China at the The MFN rule (set forth in Article I of GATT 1994)
WTO, including the most recent one held in July attempts to put the goods of all of an importing
2018, as well as through many of the annual WTO member’s trading partners on equal terms with
transitional reviews before the Committee on one another by requiring the same treatment to be
Market Access and the Council for Trade in Goods. applied to goods of any origin. It generally provides
Bilaterally, the United States also has raised broad that if a WTO member grants another country’s
concerns about the trade-distortive effects of goods a benefit or advantage, it must immediately
China’s variable VAT export rebate practices in and unconditionally grant the same treatment to
connection with multiple JCCT and S&ED meetings. imported goods from all WTO members. This rule
Through this engagement, the United States applies to customs duties and charges of any kind
highlighted in particular the harm being caused to connected with importing and exporting. It also
specific U.S. industries, including steel, aluminum applies to internal taxes and charges, among other
and soda ash. internal measures.
China has long claimed that its eventual goal is to The national treatment rule (set forth in Article III of
provide full VAT rebates for all exports like other GATT 1994) complements the MFN rule. It is
WTO members with VAT systems. In addition, at the designed to put the goods of an importing WTO
December 2012 JCCT meeting, China agreed to begin member’s trading partners on equal terms with the
holding serious discussions with the United States in importing member’s own goods by requiring, among
order to work toward a mutual understanding of other things, that a WTO member accord no less
China’s VAT system and the concepts on which a favorable treatment to imported goods than it does
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2018 USTR Report to Congress on China’s WTO Compliance
for like domestic goods. Generally, once imported Since then, however, concerns have arisen regarding
goods have passed across the national border and China’s observation of MFN and national treatment
import duties have been paid, the importing WTO requirements in some areas.
member may not subject those goods to internal
taxes or charges in excess of those applied to Made in China 2025 Industrial Plan
domestic goods. Similarly, with regard to measures
affecting the internal sale, purchase, transportation, In May 2015, China’s State Council released Made in
distribution or use of goods, the importing WTO China 2025, a 10-year plan spearheaded by the MIIT
member may not treat imported goods less and targeting 10 strategic industries, including
favorably than domestic goods. advanced information technology, automated
machine tools and robotics, aviation and spaceflight
In its WTO accession agreement, China agreed to equipment, maritime engineering equipment and
repeal or revise all laws, regulations and other high-tech vessels, advanced rail transit equipment,
measures that were inconsistent with the MFN rule new energy vehicles (NEVs), power equipment, farm
upon accession. China also confirmed that it would machinery, new materials, biopharmaceuticals and
observe this rule with regard to all WTO members, advanced medical products. While ostensibly
including separate customs territories, such as Hong intended simply to raise industrial productivity
Kong, Macau and Taiwan. In addition, China through more advanced and flexible manufacturing
undertook to observe this rule when providing techniques, Made in China 2025 is emblematic of
preferential arrangements to foreign-invested China’s evolving and increasingly sophisticated
enterprises within special economic areas. With approach to “indigenous innovation,” which is
regard to the national treatment rule, China similarly evident in numerous supporting and related
agreed to repeal or revise all inconsistent laws, industrial plans. The common, overriding aim of
regulations and other measures. China also these plans is to replace foreign technology with
specifically acknowledged that its national treatment Chinese technology in the China market through any
obligation extended to the price and availability of means possible to help Chinese companies dominate
goods or services supplied by government international markets.
authorities or state-owned enterprises, as well as to
the provision of inputs and services necessary for the Made in China 2025 seeks to build up Chinese
production, marketing or sale of finished products. companies in the 10 targeted, strategic sectors at
Among other things, this latter commitment the expense of, and to the detriment of, foreign
precludes dual pricing, i.e., the practice of charging industries and their technologies through a multi-
foreign or foreign-invested enterprises more for step process over 10 years. The initial goal of Made
inputs and related services than Chinese enterprises. in China 2025 is to ensure, through various fair and
China also agreed to ensure national treatment in unfair means, that Chinese companies develop,
respect of certain specified goods and services that extract or acquire their own technology, IP and
had traditionally received discriminatory treatment know-how and their own brands. The next goal of
in China, such as boilers and pressure vessels (upon Made in China 2025 is to substitute domestic
accession), after sales service (upon accession), and technologies, products and services for foreign
pharmaceuticals, chemicals and spirits (one year technologies, products and services in the China
after accession). market. The final goal of Made in China 2025 is to
capture much larger worldwide market shares in the
As previously reported, China reviewed its pre-WTO 10 targeted, strategic sectors.
accession laws and regulations and revised many of
those which conflicted with its WTO MFN and Many of the policy tools being used by the Chinese
national treatment obligations in 2002 and 2003. government to achieve the goals of Made in China
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2018 USTR Report to Congress on China’s WTO Compliance
2025 raise serious concerns. These tools are largely other countries. It followed soon after the
unprecedented, as other WTO members do not use Communist Party Central Committee’s elevation of
them, and include a wide array of state intervention “indigenous innovation” to a strategy level, equal to
and support designed to promote the development Deng Xiaoping’s “reform and opening up” policy.
of Chinese industry in large part by restricting, taking The MLP set in motion a web of laws, policies and
advantage of, discriminating against or otherwise actions intended to create Chinese indigenous
creating disadvantages for foreign enterprises and intellectual property and technology by introducing,
their technologies, products and services. Indeed, digesting, absorbing and re-innovating foreign
even facially neutral measures are likely to be intellectual property and technology through
applied in favor of domestic enterprises, as past measures like the Several Opinions on Encouraging
experience has shown, especially at sub-central Technology Introduction and Innovation and
levels of government. Promoting the Transformation of the Growth Mode
in Foreign Trade.
Made in China 2025 also differs from industry
support pursued by other WTO members by its level Strategic Emerging Industries
of ambition and, perhaps more importantly, by the
scale of resources the government is investing in the One of the key ongoing initiatives from which Made
pursuit of its industrial policy goals. Indeed, by some in China 2025 evolved was unveiled by China’s state
estimates, the Chinese government is making planners in 2010. In the Decision of the State Council
available more than $500 billion of financial support on Accelerating the Cultivation and Development of
to the Made in China 2025 sectors, both through the Strategic Emerging Industries, China announced a
Made in China 2025 industrial plan and related new high-level government plan to rapidly spur
industrial plans. Even if China fails to achieve fully innovation in seven high-technology sectors dubbed
the industrial policy goals set forth in Made in China the strategic emerging industries (SEIs). This
2025, it is still likely to create or exacerbate market measure established an early, broad framework for
distortions and create severe excess capacity in “developing and cultivating” innovation in energy
many of the targeted sectors as well as do long- efficient environmental technologies, next
lasting damage to U.S. interests, as China-backed generation information technology, biotechnology,
companies increase their market share at the cost of high-end equipment manufacturing, new energy,
U.S. companies operating in these sectors. new materials and NEVs. The subsequently issued
National 12th Five-year Plan for the Development of
China’s government has many other industrial plans Strategic Emerging Industries defined SEI sectors, set
like Made in China 2025. Examples include the priorities, and recommended fiscal and taxation
Integrated Circuit Industry Plan issued in 2014, the policy support.
13th Five-Year Plan issued in 2016, the National
Informatization Development Plan issued in 2016 By 2012, China had issued additional policy
and the Artificial Intelligence Plan issued in 2017, documents and catalogues explaining the
among others. development priorities for key technologies and
products considered to be SEIs, identifying specific
All of these plans have their roots in China’s National sub-sectors, technologies and products in each SEI
Medium- and Long-Term Plan for the Development sector, and setting forth a variety of specific policies
of Science and Technology (2006-2020) (MLP), and support measures designed to spur
issued in 2006, which is China’s state planners’ key development in each sub-sector. One of these
blueprint for ensuring that China’s policies and documents, a catalogue issued by MIIT, instructed
practices inure mainly to China’s advantage, not to sub-central government authorities to identify firms,
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2018 USTR Report to Congress on China’s WTO Compliance
technologies and measures supporting the central In September 2018, the NDRC requested public
government’s SEI initiative, listed relevant comment on amendments to its Guiding Catalogue
companies and research and development units for for Strategic Emerging Industries’ Key Products and
each sub-sector and further indicated that the list Services (SEI Guiding Catalogue), which continued to
should be used by other Chinese government reflect troubling correlations between the products
ministries to “issue targeted supporting fiscal and and services listed in the proposed amendments to
taxation policies.” Only a very small number of the catalogue and the industries targeted by China’s
companies listed had any foreign investment, as the problematic Made in China 2025 industrial plan. The
list was dominated by Chinese-invested companies, United States laid out its concerns in written
particularly state-owned enterprises and domestic comments submitted in October 2018.
national champions.
In the meantime, the United States has continued to
By January 2013, China had created a central press China about its problematic policies. For
government-level support fund for SEI development example, the United States has continued its efforts
while encouraging local governments to establish to address problems that had begun to arise after
their own local SEI support funds. Sub-central China’s economic planners decided that the Chinese
government transparency varies greatly, and in auto industry should focus on developing expertise
many provinces very limited information on the SEI in manufacturing NEVs, which include alternative
initiative is publicly available. fuel vehicles such as electric, fuel cell and bio-diesel
vehicles. As discussed below in the Investment
Since the unveiling of China’s SEI plan in 2010, the section, China has pursued policies in support of
United States has voiced strong concerns over the both NEVs and NEV batteries that, among other
direction of some of China’s SEI policy development, things, appear to discriminate against imported
particularly with regard to policies that discriminate NEVs and NEV batteries and have generated serious
against U.S. firms or their products, encourage concerns.
excessive government involvement in determining
market winners and losers, encourage technology National Integrated Circuit Fund
transfer, are targeted at exports or tied to
localization or the use of domestic intellectual China continues to increase its efforts to develop
property, or could lead to injurious subsidization. and expand an indigenous semiconductor, or
integrated circuit (IC), industry. Through the
In January 2015, China announced a new SEI Integrated Circuit Promotion Guidelines announced
development fund that raised concerns about in June 2014, China began moving aggressively to
procurement preferences for both Chinese implement a comprehensive plan, which calls for
government agencies and state-owned enterprises, government-directed funding in the tens of billions
as well as strong support for national champions and of dollars. This funding includes an initial $21 billion
the inclusion of Chinese IP or R&D localization National Integrated Circuit Fund, significant amounts
requirements. This new fund and other new policies of additional funding in several dozen regional IC
direct billions of dollars of investment into key investment funds, and state-owned bank loan
Chinese industries. At the June 2015 S&ED meeting, financing to domestic Chinese semiconductor firms.
China committed that its industry development The funds appear largely directed at the
plans and investment funds for SEIs are available on subsidization of Chinese-owned companies and the
an equal basis for foreign-invested enterprises, and acquisition of foreign semiconductor companies and
that China will strengthen the transparency of these assets throughout the supply chain in order to
plans and funds. Since then, however, little has increase Chinese industry’s competitiveness and
changed. control over key technologies. Even though these
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2018 USTR Report to Congress on China’s WTO Compliance
funds have become increasingly active in the past administrative licensing, create opportunities for
several years, China has publicly disclosed very few Chinese government officials to treat foreign
details regarding the funds’ investment policies, companies and foreign products less favorably than
governance structures, funding sources, domestic companies and domestic products, as
relationships with central and sub-central discussed below in the Other Legal Framework
government authorities or the criteria for investing Issues section. The United States has raised these
in or receiving investment from the funds. and other MFN and national treatment issues with
China, both bilaterally and in WTO meetings, and will
The United States pressed China at the November continue to do so.
2015 JCCT meeting, the June 2016 S&ED meeting
and the November 2016 JCCT meeting to ensure that
China’s various industry development funds for Taxation
semiconductors operate in a transparent,
nondiscriminatory and market-based manner free China committed to ensure that its laws and
from government intervention. The United States regulations relating to taxes and charges levied on
also sought assurances from China that it would not imports and exports would be in full conformity with
impose compulsory technology or IPR transfer WTO rules upon accession, including, in particular,
conditions on participation in the funds’ investment the MFN and national treatment provisions of
projects. While China provided the United States Articles I and III of GATT 1994.
with the requested commitments and assurances,
little seems to have changed in the operation of the Since China’s WTO accession, certain aspects of
funds. In addition, in 2018, China announced plans China’s taxation system have raised national
for significant additional funding of $47 billion for a treatment concerns under Article III of GATT 1994.
second fund, according to news reports and industry Some of these taxation issues have been resolved
stakeholders. through WTO dispute settlement. Other taxation
issues remain, however.
Other Areas
Fertilizer VAT
U.S. industries report that China continues to apply
the value-added tax in a manner that unfairly China has used VAT policies to benefit domestic
discriminates between imported and domestic fertilizer production. In July 2001, the Ministry of
goods, both through official measures and on an ad Finance (MOF) and the State Administration of
hoc basis, as discussed below in the Taxation section. Taxation (SAT) issued a circular exempting all
In addition, China’s industrial policies on phosphate fertilizers except diammonium phosphate
automobiles, including NEVs, and steel call for (DAP) from a 13 percent VAT. DAP, a product that
discrimination against foreign producers and the United States exports to China, competes with
imported goods, as discussed below in the similar phosphate fertilizers produced in China,
Investment section. It also appears that China has particularly monoammonium phosphate.
applied sanitary and phytosanitary measures in a
discriminatory manner since it acceded to the WTO, The United States raised this issue bilaterally with
as discussed below in the Agriculture section, while China soon after it acceded to the WTO and in many
concerns about discriminatory treatment also subsequent bilateral meetings, including high-level
remain prevalent in a variety of services sectors, as meetings. The United States has also raised this
discussed below in the Services section. issue at the WTO in meetings before the Committee
Additionally, various aspects of China’s legal on Market Access. To date, China has not eliminated
framework, such as China’s extensive use of its discriminatory treatment of DAP.
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2018 USTR Report to Congress on China’s WTO Compliance
Meanwhile, a larger concern for U.S. fertilizer section above on Import Regulation, under the
exporters remains the rapid expansion of China’s heading of Countervailing Duties), but also a
domestic fertilizer production. This expanded government’s use of subsidies and the application of
production, which appears to have been brought on remedies through enforcement proceedings at the
in part by China’s export duties on phosphate rock, a WTO. As part of its accession agreement, China
key fertilizer input, has saturated China’s market committed that it would eliminate, by the time of its
with low-priced fertilizer and greatly reduced accession, all subsidies prohibited under Article 3 of
demand for imported fertilizer. the Subsidies Agreement, which includes subsidies
contingent on export performance (export subsidies)
VAT Irregularities and subsidies contingent on the use of domestic
over imported goods (import substitution subsidies).
Several U.S. industries have continued to express China also agreed to various special rules that apply
concerns more generally about the unfair operation when other WTO members pursue the disciplines of
of China’s VAT system. They report that Chinese the Subsidies Agreement against Chinese subsidies,
producers are often able to avoid payment of the either in individual WTO members’ CVD proceedings
VAT on their products, either as a result of poor or in WTO enforcement proceedings. These rules
collection procedures, special deals or even fraud, address the identification and measurement of
while the full VAT still must be paid on competing Chinese subsidies and also govern the actionability
imports. In discussions with Chinese government of subsidies provided to state-owned enterprises in
officials on this issue, the United States has raised its China.
serious concerns about the de facto discriminatory
treatment accorded to foreign products, while also Subsidies Notification
continuing to emphasize the value to China of a
properly functioning VAT system as a revenue As previously reported, following repeated pressure
source. from the United States and other WTO members,
China submitted its first subsidies notification to the
Border Trade WTO’s Subsidies Committee in April 2006, nearly five
years late. Although the notification reported on
China’s border trade policy also continues to more than 70 subsidy programs, it was also notably
generate MFN and other concerns. China provides incomplete, as it failed to notify any subsidies
preferential import duty and VAT treatment to provided by provincial and local government
certain products, often from Russia, apparently even authorities or any subsidies provided by state-owned
when those products are not confined to frontier banks, whether in the form of preferential loans,
traffic as envisioned by Article XXIV of GATT 1994. debt forgiveness or otherwise. In addition, while
During meetings before the WTO’s Council for Trade China notified several subsidies that appear to be
in Goods, the United States has urged China to prohibited, it did so without making any
eliminate the preferential treatment for all of these commitment to withdraw them, and it failed to
products. notify other subsidies that appear to be prohibited.
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provincial and local governments play an important In 2012, the United States continued to highlight
role in implementing China’s industrial policies, China’s failure to abide by its important
including through subsidization of enterprises, much transparency obligations under the Subsidies
of which is misdirected into sectors with excess Agreement. For example, both bilaterally and
capacity, such as steel and aluminum. before the Subsidies Committee, the United States
regularly noted that China should have submitted its
In the ensuing years, the United States repeatedly subsidies notification for the period 2009-2010 in
raised concerns about China’s incomplete subsidies July 2011 and its subsidies notification for the period
notification and identified numerous unreported 2010-2012 in July 2013. In addition, in connection
subsidies both in bilateral meetings and in meetings with the October 2012 meeting of the Subsidies
before the Subsidies Committee as well as during the Committee, the United States submitted a written
WTO’s Trade Policy Reviews of China. At the request for information pursuant to Article 25.8 of
October 2009 meeting of the Subsidies Committee, the Subsidies Agreement in which it provided
China indicated that it would finalize a second evidence of 110 central government and sub-central
subsidies notification in the coming months while government subsidy measures that China had not
noting that this notification would again not include yet notified, including, for example, various stimulus
any subsidies provided by provincial and local programs for steel, non-ferrous metals,
government authorities. China reiterated this same semiconductors, aircraft and fish implemented in
pledge a year later at the October 2010 meeting of response to the global financial crisis in 2008.
the Subsidies Committee.
In April 2014, the United States submitted another
In response to these unfulfilled promises from China, request for information pursuant to Article 25.8.
the United States pressed China on this issue This request covered extensive subsidies provided by
through the filing of a “counter notification” under China in support of its so-called “strategic emerging
Article 25.10 of the Subsidies Agreement in October industries,” including over 60 subsidy measures at
2011. In this counter notification, the United States the central, provincial, county and city levels of
identified more than 200 unreported subsidy government, covering industries such as electric
measures that China maintained, including many vehicles, specialized steel, semiconductors, high-end
emanating from provincial and local government equipment manufacturing and medical technology.
authorities. Shortly after the United States filed its
counter notification, China finally submitted the new Despite the obligation of WTO members to answer
subsidies notification that it had been promising. questions posed pursuant to Article 25.8 “as quickly
Unfortunately, China’s new notification covered only as possible and in a comprehensive manner,” China
the period from 2005 to 2008, and it again failed to failed to provide substantive answers to the
notify a single subsidy administered by provincial or questions set forth in the United States’ 2012 and
local governments. In addition, the central 2014 Article 25.8 requests for information.
government subsidies included in the new Accordingly, in October 2014, the United States
notification were largely the same partial listing of submitted a counter notification under Article 25.10
subsidies as those notified in China’s 2006 of the Subsidies Agreement. This counter
notification. The new notification also did not notification addressed the same 110 Chinese subsidy
include any significant programs related to key measures that were the subject of the United States’
industries, such as steel and aluminum, and only 2012 Article 25.8 submission. Similarly, after China
included a small number of the more than 200 failed to answer the United States’ 2014 Article 25.8
subsidy measures identified in the U.S. counter questions on its strategic emerging industries
notification. As a result, China’s new notification programs, the United States submitted a counter
was again far from complete. notification in October 2015. This counter
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2018 USTR Report to Congress on China’s WTO Compliance
notification addressed the same 60 subsidy subsidy programs since becoming a WTO member in
measures that were the subject of the United States’ 2001. Unfortunately, the number and range of sub-
2014 Article 25.8 submission. central government subsidy programs covered
represent a very small sample of the programs
In 2015, the United States submitted another administered at the sub-central levels of
written request for information pursuant to Article government. Moreover, notifying a program several
25.8 of the Subsidies Agreement. This submission years after its implementation, or after a program
addressed fisheries subsidies provided by China at has been terminated, as is the case with most of the
central and sub-central levels of government. The reported sub-central government subsidy programs,
subsidies at issue were set forth in nearly 40 contributes little to the transparency of China’s
measures and included a wide range of subsidies, subsidies regime.
including: fishing vessel acquisition and renovation
grants; a 100-percent corporate income tax In April 2017, the United States submitted another
exemption; grants for new fishing equipment; counter notification under Article 25.10 of the
subsidies for insurance; subsidized loans for Subsidies Agreement. This counter notification
processing facilities; fuel subsidies; and the addressed China’s Internationally Well-Known Brand
preferential provision of water, electricity and land. program, pursuant to which China has provided
Once again, when China did not respond to these subsidies that appear to be contingent upon
questions, the United States was compelled to exportation and therefore prohibited under Article
submit a counter notification covering the same 3.1(a) of the Subsidies Agreement.
measures. China’s refusal to fulfill its notification
obligations in this sector is particularly troubling, In total, taking into account all of the U.S. counter
given the role that harmful fisheries subsidies play in notifications, the United States has now submitted
the devastating trend of overfishing and counter notifications of approximately 500 Chinese
overcapacity that threatens global fish stocks. subsidy measures. While China notified some
Indeed, in the years since its WTO accession, China subsidy measures for the period 2015-2016 in July
has built up its fishing fleet through subsidies and 2018, China has included in its subsidy notifications
other market-distorting means so that it is now the to date only a small number of the subsidy programs
largest in the world. Its annual fisheries harvest has identified in those counter notifications, and China
grown to almost triple that of other top producers. has refused to engage in bilateral discussions to
At the same time, Chinese-flagged fishing vessels address the subsidy measures that it has failed to
repeatedly have been reported to have engaged in notify.
illegal, unreported and unregulated (IUU) fishing in
distant waters, including in areas under the In 2018, the United States continued to research and
jurisdiction of other WTO members. analyze the various forms of financial support that
China at all levels of government provides to
In October 2015, China did submit a new subsidies manufacturers and exporters in China, including in
notification, covering the period from 2009 to 2014. the steel, aluminum, green technology, fisheries and
As in its two previous subsidy notifications, this semiconductor sectors, among other sectors, and
notification was far from complete, and it included assess whether the support being provided is
numerous programs that should not have been consistent with WTO rules. The United States also
notified as subsidies, such as programs for poverty continued to raise its concerns with China’s subsidies
alleviation, the disabled and HIV medication. practices in bilateral meetings with China. In
addition, before the WTO’s Subsidies Committee,
In July 2016, China submitted its first subsidy the United States continued to press China to submit
notification that included sub-central government more complete and timely subsidies notifications.
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
Since then, many other U.S. industries, including the In its WTO accession agreement, China agreed that it
steel, textiles, chemicals, solar panels, tires and would not use price controls to restrict the level of
paper industries, among others, have expressed imports of goods or services. In addition, in an
concern about the injurious effects of various annex to the agreement, China listed the limited
Chinese subsidies in the U.S. market as well as in number of products and services remaining subject
China and third-country markets, leading to the filing to price control or government guidance pricing, and
of additional CVD petitions, together with it provided detailed information on the procedures
companion AD petitions. In response, the used for establishing prices. China agreed that it
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2018 USTR Report to Congress on China’s WTO Compliance
would try to reduce the number of products and informal dialogue with NDRC, and the United States
services on this list and that it would not add any pressed China in this area using the JCCT process.
products or services to the list, except in While acknowledging China’s legitimate concerns
extraordinary circumstances. regarding the need to provide effective and
affordable medical devices to patients and the need
Notwithstanding these commitments, in 2018, China to address inefficiency, excessive mark-ups and
continued to maintain price controls on several irregular business practices among wholesalers and
products and services provided by both state-owned distributors of medical devices, the United States
enterprises and private enterprises. Published and U.S. industry urged China to develop an
through the China Economic Herald and NDRC’s approach that would not inhibit increased imports of
website, these price controls may be in the form of the same innovative and effective health care
either absolute mandated prices or specific pricing products that China is seeking to encourage.
policy guidelines as directed by the government.
Products and services subject to government-set In 2012, NDRC released an updated draft of a pricing
prices include pharmaceuticals, tobacco, natural gas proposal, which would impose price mark-up
and certain telecommunications services. Products controls on six major categories of implantable
and services subject to government guidance prices medical devices, with the potential to significantly
include gasoline, kerosene, diesel fuel, fertilizer, discriminate against foreign manufacturers. To date,
cotton, edible oils, various grains, wheat flour, it appears that NDRC has not finalized this proposal.
various forms of transportation services, The United States is working to ensure that NDRC
professional services such as engineering and and provincial government authorities seek input
architectural services, and certain from U.S. industry stakeholders in a transparent and
telecommunications services. meaningful way as China develops new policies and
measures.
The United States obtained additional information
about China’s use of price controls in connection Separately, in 2008, China’s Ministry of Health
with the Trade Policy Reviews of China at the WTO, (MOH) published procedures for the centralized
held in 2006, 2008, 2010, 2012, 2014, 2016 and tender of certain medical devices. These tendering
2018. The United States will continue its efforts to procedures built on a 2007 MOH measure
persuade China to eliminate price controls. establishing a centralized procurement system for
medical devices for the stated purposes of reigning
in escalating healthcare costs and ensuring high-
Medical Devices quality healthcare. The United States and U.S.
industry immediately expressed concern to the
Beginning in 2006, NDRC released proposals for Chinese government that MOH’s tendering
managing the prices of medical devices, with the procedures could operate to unfairly disadvantage
stated objectives of avoiding excessive mark-ups by high-quality, advanced technology products, a large
distributors and reducing health care costs. Among proportion of which are made by U.S. companies. In
other things, the proposals would impose limits on response to these concerns, at the September 2008
the allowable mark-ups on medical devices. The JCCT meeting, China agreed to hold discussions with
proposals also would require manufacturers to the United States and U.S. industry to discuss
provide sensitive pricing information. tendering policies that are fair and transparent and
that given adequate consideration in purchasing
Since 2006, the United States and U.S. industry have decisions to the quality and innovation of medical
raised their concerns about NDRC’s proposals. In devices. MOH subsequently entered into discussions
particular, U.S. industry was able to engage in an directly with U.S. industry.
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2018 USTR Report to Congress on China’s WTO Compliance
During the run-up to the December 2010 JCCT The United States and U.S. industry have expressed
meeting, U.S. industry presented a risk-based concerns to the Chinese government about
approach to medical device classification based on developments in this area, and continue to press the
Global Harmonization Task Force principles. Since relevant government regulatory authorities to
then, the United States has worked closely with U.S. develop sound payment systems that adequately
industry and to promote a cooperative resolution of reward research and development and not to
U.S. concerns. require foreign companies to transfer manufacturing
activities to China in order to receive preferential
At the December 2012 JCCT meeting, China benefits. At the November 2015 JCCT meeting,
committed that any measures affecting the pricing China committed that, in the area of market access,
of medical devices will treat foreign and domestic it will give imported medical devices the same
manufacturers equally. China further committed treatment as those manufactured or developed
that it will take into account comments that it domestically. This promise has not been fulfilled.
receives from the United States, including on the
issue of how to improve transparency. In September 2017, China’s National Health and
Family Planning Commission (NHFPC) issued the
Since then, the United States has been engaging Notice on Company Applications for National Price
China on its proposals to centralize pricing and Negotiation for High-Value Medical Consumables.
tendering procedures. At the same time, provincial This measure required a significant amount of
governments have begun pushing for consolidated extensive, complex and sensitive data translated into
tendering of medical devices for purchase by public Chinese and notarized within six days from the
hospitals and clinics within their territories. While measure’s publication. In addition, the measure
provincial governments’ centralized purchasing plans omitted critical details, such as the evaluation
vary widely, many of them contain requirements criteria and the designated authority to manage
that unfairly disadvantage foreign manufacturers. price negotiations upon submission of this data. The
United States immediately raised concerns with
According to reports from U.S. industry, some plans NHFPC, which agreed to delay the measure’s
impose ceiling prices for tenders to be determined in implementation. Since then, however, NHFPC has
a manner that is unfair and discriminates against not provided any additional information about how
imported medical technology products, and some it plans to implement this measure. Without the
plans require the manufacturers to disclose sensitive measure’s official withdrawal, the United States
data. Certain provincial government plans also remains concerned about this measure and NHFPC’s
impose controls on imported products or limit plans with regard to the management of price
certain procurements to only domestically negotiations for medical devices.
manufactured products, and some provincial
governments directly subsidize the purchase of In August 2015, China’s State Council issued a
domestically manufactured products. Furthermore, normative document entitled Opinions of the State
the Made in China 2025 industrial plan announced Council on Reforming the Review and Approval
by the State Council in 2015 seeks to elevate the System for Drugs and Medical Devices, which
competitiveness of China’s domestic medical device outlined the State Council’s guidance for wide-
manufacturing capacity through a series of support ranging reforms relating to China’s drug and medical
policies, including targeted funds and procurement devices registration review and approval systems.
policies, in order to increase significantly the market Two years later, in October 2017, the State Council
share of domestically owned and produced medical and the General Office of the Communist Party
devices by 2025. issued the Opinions on Deepening Reform of the
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2018 USTR Report to Congress on China’s WTO Compliance
Review and Approval System and Encouraging the domestic goods. China agreed to ensure that all of
Innovation of Drugs and Medical Devices, which its conformity assessment bodies are authorized to
outlined many additional policies at a high level with handle both imported and domestic goods within
the potential to improve China’s approach to the one year of accession. China also consented to
regulation of medical devices. While several accept the Code of Good Practice (set forth in Annex
promising draft measures subsequently have been 3 to the TBT Agreement) within four months after
issued, the United States remains concerned about accession, which it has done, and to speed up its
how China plans to approach pricing and tendering process of reviewing existing technical regulations,
procedures as other reforms progress. In 2019, the standards and conformity assessment procedures
United States therefore will continue to closely and harmonizing them with international norms.
examine developments in this area.
In addition, in the Services Schedule accompanying
its WTO accession agreement, China committed to
Standards, Technical Regulations and permit foreign service suppliers that have been
Conformity Assessment Procedures engaged in inspection services in their home
countries for more than three years to establish
With its accession to the WTO, China assumed minority foreign-owned joint venture technical
obligations under the Agreement on Technical testing, analysis and freight inspection companies
Barriers to Trade (TBT Agreement), which establishes upon China’s accession to the WTO, with majority
rules and procedures regarding the development, foreign ownership no later than two years after
adoption and application of standards, technical accession and wholly foreign-owned subsidiaries
regulations and the conformity assessment four years after accession. China further agreed that
procedures (such as testing or certification) used to qualifying joint venture and wholly foreign-owned
determine whether a particular product meets such enterprises would be eligible for accreditation in
standards or regulations. Its aim is to prevent the China and accorded national treatment.
use of technical requirements as unnecessary
barriers to trade. The TBT Agreement applies to all REGULATORY REFORMS
products, including industrial and agricultural
products. It establishes rules that help to distinguish In October 2001, China announced the creation of
legitimate standards and technical regulations from the Standardization Administration of China (SAC)
protectionist measures. Among other things, under the State Administration of Quality
standards, technical regulations and conformity Supervision, Inspection and Quarantine (AQSIQ).
assessment procedures are to be developed and SAC is charged with unifying China’s administration
applied transparently and on a non-discriminatory of product standards and aligning its standards and
basis by WTO members and should be based on technical regulations with international practices
relevant international standards and guidelines, and China’s commitments under the TBT Agreement.
when appropriate. SAC is the Chinese member of the International
Organization for Standardization and the
In its WTO accession agreement, China also International Electrotechnical Commission.
specifically committed that it would ensure that its
conformity assessment bodies operate in a U.S. industry has concerns about significant
transparent manner, apply the same technical conformity assessment and testing-related issues in
regulations, standards and conformity assessment China. For example, U.S. exporters representing
procedures to both imported and domestic goods several sectors continue to report that China’s
and use the same fees, processing periods and regulatory requirements are not enforced as strictly
complaint procedures for both imported and or uniformly against domestic producers as
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2018 USTR Report to Congress on China’s WTO Compliance
compared to foreign producers. In addition, in some create tension with laws designed to protect the
cases, China’s regulations provide only that products intellectual property incorporated into standards.
will be inspected or tested upon entry into China’s
customs territory, without any indication as to In May and September 2017, China issued two
whether or how the regulations will be applied to subsequent drafts of the Standardization Law, and
domestic producers. the United States continued to engage China on its
draft provisions. China modified and clarified some
SAC released a standardization reform plan in March provisions in these drafts in response to U.S. and
2015 entitled the Reform Plan on Further Improving other stakeholders’ written comments. However,
Standardization Work. This plan was supposed to the September 2017 draft of the law introduced a
streamline standards and reduce government serious new concern with regard to preference for
involvement in standards-setting by reducing the Chinese technologies in standards development and
number of government-set mandatory and voluntary failed to address other concerns detailed in prior
standards, fostering the development of non- written comments by the United States. The
governmental standards-setting organizations and September 2017 draft, with only minor revisions,
encouraging companies to set their own standards. became final in November 2017 and went into effect
in January 2018.
Since then, the Chinese government has taken a
series of steps at the central and provincial U.S industry noted disappointment that China did
government levels to implement this plan. For not take the opportunity of revising the
example, SAC issued draft Association Standardization Law to incorporate China’s WTO TBT
Standardization – Part 1: Guidelines for Good Agreement obligations, to mandate fair and open
Practice and accepted public comments on these participation in standards development activities for
draft national standards. The American National foreign parties or to address the issue of a voluntary
Standards Institute and other U.S. stakeholders standard becoming mandatory, among other
commented on these draft national standards. concerns. U.S. industry also has articulated
significant concerns about disclosure requirements
In March 2016, the State Council Legislative Affairs in the revised law that would appear to impair the
Office circulated proposed amendments to China’s ability of foreign companies to protect their
Standardization Law for public comment. China’s intellectual property.
stated objectives for reforming its standardization
system included the creation of a system in which Meanwhile, existing technical committees continue
the private sector would play a greater role in to develop standards, and more foreign participation
standards development. In response to China’s is being allowed. For example, while the United
solicitation of public comments, the United States States’ substantive concerns with China’s
expressed its view that China should carefully cybersecurity standards have not been addressed,
evaluate its obligations under the TBT and SPS the technical committee for cybersecurity standards
Agreements as it revises the draft law and that China has begun allowing foreign companies to participate
should ensure that the final version of the law in standards development and setting, with several
conforms to both the letter and the spirit of the TBT U.S. and other foreign companies being allowed to
Agreement. For example, the United States urged vote and to participate at the working group level in
China to ensure that the final law sets an open policy standards development. Nevertheless, the United
for participating in the development of draft States remains very concerned about China’s policies
standards, including by persons of other countries. with regard to standards, as China prepares to
Additionally, the United States expressed concerns develop implementing regulations for the
about provisions in the draft law that appear to Standardization Law.
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2018 USTR Report to Congress on China’s WTO Compliance
STANDARDS AND TECHNICAL REGULATIONS infant formula registration rules, fuel requirements
for new energy vehicles and rules regarding
Shortly after its accession to the WTO, China began recyclable materials. The United States will continue
the task of bringing its standards regime more in line pressing these concerns in 2019.
with international practice. One of its first steps was
AQSIQ’s issuance of rules designed to facilitate Wi-Fi Standards
China’s adoption of international standards. China
subsequently embarked on the task of reviewing all Since shortly after its accession to the WTO, China
of China’s existing 21,000 standards and technical has pursued unique standards for encryption over
regulations to determine their continuing relevance Wireless Local Area Networks (WLANs), applicable to
and consistency with international standards. domestic and imported equipment containing WLAN
During transitional reviews before the TBT (also known as Wi-Fi) technologies, despite the
Committee, China has periodically reported on the existence of well-established international
status of this review process and the number of standards. These efforts appear designed to protect
standards and technical regulations that have been Chinese companies from competing foreign
nullified, but it remains unclear whether these standards and technologies.
actions have had a beneficial impact on U.S. market
access. As previously reported, China’s initial focus was on
the WLAN Authentication and Privacy Infrastructure
Concern has grown over the past few years that (WAPI) encryption technique for secure
China seems to be actively pursuing the communications. China eventually moved forward
development of unique requirements, despite the with plans to mandate the use of the WAPI standard
existence of well-established international in mobile handsets, despite the growing commercial
standards, as a means for protecting domestic success of computer products in China complying
companies from competing foreign standards and with the internationally recognized ISO/IEC 8802-11
technologies. Indeed, China has already adopted WLAN standard, otherwise known as “Wi-Fi,” and
unique standards for digital televisions, and it is despites serious concerns raised by the United
trying to develop unique standards and technical States, both through the JCCT process and in
regulations in a number of other sectors, including, meetings of the TBT Committee.
for example, autos, telecommunications equipment,
Internet protocols, wireless local area networks, A new issue related to Wi-Fi standards arose in 2011,
radio frequency identification tag technology, audio after China published a proposed voluntary wireless
and video coding and fertilizer as well as software LAN industry standard known as the “UHT/EUHT
encryption and mobile phone batteries. This standard.” China’s UHT/EUHT standard appears to
strategy has the potential to create significant be an alternative to the international standard IEEE
barriers to entry into China’s market, as the cost of 802.11n, which is the wireless LAN industry standard
compliance will be high for foreign companies, while currently used throughout the world in Wi-Fi
China will also be placing its own companies at a networks. The Chinese UHT/EUHT standard was
disadvantage in its export markets, where released for only a 15-day public comment period on
international standards prevail. September 20, 2011. U.S. industry groups submitted
comments, arguing, among other things, that there
In 2018, as in prior years, the United States raised are technical compatibility concerns regarding the
concerns at the WTO TBT Committee regarding interoperability of the UHT/EUHT standard with the
several Chinese measures. These measures covered existing Chinese national standard (WAPI) and with
banking sector ICT rules, insurance sector ICT rules, the most widely used and recognized WLAN industry
cosmetics labeling, processed products certification, standard (IEEE 802.11). Separately, the United
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2018 USTR Report to Congress on China’s WTO Compliance
States expressed concerns to China that, if China By the end of 2004, it had become evident that there
integrates standards such as the UHT/EUHT standard was still pressure from within the Chinese
into its certification or accreditation schemes, these government to ensure a place for China’s home-
standards would become de facto mandatory and grown 3G telecommunications standard, known as
therefore would raise questions in light of China’s TD-SCDMA. In 2005, China continued to take steps
obligations under the WTO TBT Agreement. In to promote the TD-SCDMA standard. It also became
February 2012, MIIT approved the UHT/EUHT evident that they had not ceased their attempts to
standard as a voluntary standard, but U.S. industry influence negotiations on royalty payments. Then, in
has expressed concern that the unusual approval February 2006, China declared TD-SCDMA to be a
process for UHT/EUHT may reflect a desire within “national standard” for 3G telecommunications,
the Chinese government to promote this indigenous heightening concerns among U.S. and other foreign
standard, despite technical concerns raised by telecommunications service providers that Chinese
industry participants in the technical committee mobile telecommunications operators would face
relating to its compatibility and co-existence with Chinese government pressure when deciding what
802.11 products. Since then, the United States has technology to employ in their networks.
raised its concerns about the de facto mandating of
voluntary standards like UHT/EUHT via certification The United States again raised the issue of
or accreditation schemes, and the United States will technology neutrality in connection with the April
continue to do so. 2006 JCCT meeting. At that meeting, China restated
its April 2004 JCCT commitment to technology
neutrality for 3G telecommunications standards,
Telecommunications Standards agreeing to ensure that mobile telecommunications
operators would be allowed to make their own
The United States elevated another standards issue choices as to which standard to adopt. China also
to the JCCT level beginning in 2004. The U.S. committed to issue licenses for all 3G
telecommunications industry was very concerned telecommunications standards in a technologically
about increasing interference from Chinese neutral manner that does not advantage one
regulators, both with regard to the selection of 3G standard over others.
telecommunications standards and in the
negotiation of contracts between foreign Throughout 2008, China’s test market for its TD-
telecommunications service providers and their SCDMA standard continued to grow, and widespread
Chinese counterparts. The United States urged test networks were put in place in time for the
China to take a market-based and technology August 2008 Summer Olympics in Beijing. In January
neutral approach to the development of next 2009, China’s MIIT issued 3G licenses based on the
generation wireless standards for computers and three different technologies, with a TD-SCDMA
mobile telephones. At the April 2004 JCCT meeting, license for China Mobile, a W-CDMA license for
China announced that it would support technology China Unicom and a CDMA2000 EV-DO license for
neutrality with regard to the adoption of 3G China Telecom. However, despite the issuance of
telecommunications standards and that licenses for all three standards, the Chinese
telecommunications service providers in China government continued to heavily promote, support
would be allowed to make their own choices about and favor the TD-SCDMA standard. For example,
which standard to adopt, depending on their China’s economic stimulus-related support plan for
individual needs. China also announced that Chinese Information Technology and Electronics, approved
regulators would not be involved in negotiating by the State Council and published in April 2009,
royalty payment terms with relevant intellectual specifically identifies government support for TD-
property rights holders. SCDMA as a priority.
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2018 USTR Report to Congress on China’s WTO Compliance
In March 2010, U.S. concerns over China’s Group, organized a U.S.-China Spectrum Roundtable
preferential treatment of TD-SCDMA were to discuss spectrum allocation issues. The Spectrum
exacerbated by the inclusion of products based on Roundtable included participants from U.S. and
this technology in the Opinions on Advancing Third- Chinese industry as well as government
Generation Communications Network Construction, representatives. China subsequently agreed to an
issued by MIIT, NDRC, the Ministry of Science and additional roundtable discussion of this issue, which
Technology (MOST), MOF, the Ministry of Land and took place in an August 2016 meeting. At that
Resources, the Ministry of Housing and Urban-Rural meeting, and in other subsequent bilateral
Development (MOHURD) and SAT. Specifically, the engagements, the United States urged China to work
United States was concerned that this measure to identify spectrum for auction and set eligibility
would lead to these products being entitled to rules that make clear that foreign-invested
government procurement preferences. enterprises may participate in any future spectrum
auctions with domestic competitors on an equal
Meanwhile, China’s insistence on promoting TD- basis. Nevertheless, China failed to satisfy U.S.
SCDMA discouraged further innovation. For concerns.
example, China was reluctant to permit operators to
deploy alternative technologies, including 4G ZUC Encryption Algorithm Standard
technologies.
Beginning in late 2011, China moved ahead with the
Throughout 2010, the United States continued to rollout of a Chinese government-developed 4G LTE
press China to reaffirm the principle of technology encryption algorithm known as the ZUC standard.
neutrality for current and future services and The European Telecommunication Standards
technologies. In an important development at the Institute (ETSI) 3rd Generation Partnership Project
December 2010 JCCT meeting, China committed to (3GPP) had approved ZUC as a voluntary standard in
technology neutrality for 3G networks and future September 2011. According to U.S. industry reports,
networks based on new technologies, allowing MIIT, in concert with the State Encryption
operators to choose freely among those Management Bureau, informally announced in early
technologies and without the Chinese government 2012 that only domestically developed encryption
providing any preferential treatment based on the algorithms, such as ZUC, would be allowed for 4G
standard or technology used by an operator. TD-LTE networks in China, and it appeared that
burdensome and invasive testing procedures
In subsequent years, the United States carefully threatening companies’ sensitive intellectual
reviewed developments in this area, stressing to property could be required.
China in bilateral meetings the importance of a
continuing commitment to technology neutrality in In response to U.S. industry concerns, the United
line with China’s JCCT commitments, both for 3G States urged China not to mandate any particular
standards and for emerging 4G standards issues. In encryption standard for 4G LTE telecommunications
November 2013, however, China licensed 4G equipment, in line with its bilateral commitments
spectrum in a manner that is not technology neutral, and the global practice of allowing commercial
as it licensed only the domestically favored Long- telecommunications services providers to work with
Term Evolution (LTE) standard known as LTE-TDD equipment vendors to determine which security
and not the other common standard known as LTE- standards to incorporate into their networks. Any
FDD. mandate of a particular encryption standard such as
ZUC would contravene a commitment that China
In July 2014, the U.S. government, under the made to its trading partners in 2000, which clarified
framework of the JCCT Information Industry Working that foreign encryption standards were permitted in
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the broad commercial marketplace and that strict In April 2012, MIIT shared a draft Notice Regarding
“Chinese-only” encryption requirements would only Strengthening Management of the Network Access
be imposed on specialized IT products whose “core for Mobile Smart Devices with select foreign
function” is encryption. Additionally, a ZUC mandate companies for informal comments. It appeared that
would contravene China’s 2010 JCCT commitment the draft measure would impose numerous new
on technology neutrality, in which China had agreed obligations and technical mandates on information
to take an open and transparent approach with technology and telecommunications hardware,
regard to operators’ choices and not to provide operating systems, applications, application stores
preferential treatment based on the standard or and other related services. The draft measure also
technology used in 3G or successor networks, so that could impose, by reference, mandatory technical
operators could choose freely among whatever regulations and testing requirements on these same
existing or new technologies might emerge to goods and services, as well as on the mobile smart
provide upgraded or advanced services. devices themselves. In addition, the China
Communications Standardization Association was in
The United States pressed China on this issue the process of developing numerous “industry
throughout the run-up to the December 2012 JCCT standards” relating to smart terminal requirements,
meeting. At that meeting, China committed that it which appeared to be linked to the development of
will not mandate any particular encryption standard the draft measure.
for commercial 4G LTE telecommunications
equipment. The United States expressed its concerns to MIIT and
requested that China notify the measure to the WTO
In 2013, the United States worked to ensure that TBT Committee. The United States also offered to
MIIT’s voluntary testing and approval process for the work with MIIT on best practices for addressing
ZUC 4G telecom equipment standard fully protects privacy and security associated with mobile smart
applicants’ intellectual property by not requiring devices. In response, in June 2012, MIIT published
source code or other sensitive business confidential the draft measure on the MIIT website and asked for
information to be provided during the approval public comments within 30 days. In addition, in
process. At the December 2013 JCCT meeting, China November 2012, China notified the draft measure to
committed that it will not require applicants to the WTO TBT Committee and indicated that it would
divulge source code or other sensitive business accept comments for a 60-day period.
information in order to comply with the ZUC
provisions in the MIIT application process for 4G The United States and U.S. industry were concerned
devices. To date, the United States continues to because the far-reaching regulatory approach
press China with regard to this sensitive issue. embodied in the draft measure – which is exclusively
oriented toward government mandates rather than
voluntary private sector-developed global standards
Mobile Smart Device Regulations and public-private cooperation – is unprecedented
among the leading markets for mobile smart devices
In 2012, MIIT began to develop a new draft and could create significant trade barriers.
regulatory framework for the mobile smart device Furthermore, the potential inclusion of numerous
market. MIIT’s stated objective was to help protect voluntary standards relating to smart terminal
consumer interests relating to the privacy of users requirements could create further trade barriers, as
and the security of their personal information in it could readily lead to these voluntary standards
connection with the operation of their mobile smart becoming mandatory standards within MIIT’s testing
devices. and certification process. Unfortunately, in
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November 2013, MIIT finalized and began In September 2014, the United States provided
implementing this measure, along with two written comments on the draft Interpretations of the
associated voluntary standards. From that date until Supreme People’s Court on Certain Issues Concerning
now, the United States has continued to express the Application of Law in the Trial of Patent
concerns about what a process that appears to put Infringement Cases II. Article 27 of this draft
non-Chinese companies at an unfair disadvantage. measure addressed disputes between patent
holders and potential licensees relating to non-
compulsory national, industrial or local standards.
Patents Used in Chinese National Standards The United States recommended that Article 27 be
modified in several ways, including to clarify that
China has prioritized the development of Chinese Article 27 should apply only to patents that the
national standards in documents such as the Outline patent holder has committed voluntarily, and
for the National Medium to Long-Term Science and without coercion by government or quasi-
Technology Development Plan (2006-2020), issued government entities, to license on FRAND terms as
by the State Council in February 2006, and amplified part of its participation in a standards-setting
shortly thereafter in the 11th Five-year Plan (2006- process. The United States also recommended that
2010) for Standardization Development, issued by Article 27 be modified to clarify the circumstances
SAC. More recently, China has also publicly under which a patent holder may be found to have
expressed its resolve to rely on either non-patented violated FRAND principles by negotiating in bad faith
technology or patented technology made available and also make clear that an alleged infringer should
at prices lower than those that patent owners would have an opportunity to assert non-infringement and
otherwise seek to charge when developing that patent holders are entitled to FRAND
standards. As a result, China’s treatment of patents compensation where infringers are permitted to
in the standard setting process has garnered continue to use a patented invention. The United
increasing attention and concern around the world, States further recommended that, where courts
including in the United States. must determine an appropriate FRAND royalty, they
should take into account that patent holders in
Over the years, the United States has engaged China face challenges in enforcing their patents and
repeatedly with China on issues relating to the use of securing appropriate compensation for the use of
national standards. This engagement has included their patents and, in addition, take steps to avoid
the submission of extensive written comments on outcomes that under-compensate patent holders or
draft measures. undermine incentives to innovate.
In July 2014, the United States provided written As in-depth discussion of these issues continued into
comments on the eighth draft of the Rules of the 2015 and beyond, the United States has repeatedly
Administration for Industry and Commerce on the expressed concern because China’s standard setting
Prohibition of Abuses of Intellectual Property Rights rules do not ensure that participation in the
for the Purposes of Eliminating or Restricting standards development process is open to all
Competition. In April 2015, SAIC adopted the final persons. Indeed, reports from U.S. industry indicate
version of this measure. A key U.S. industry concern that even foreign enterprises with operations in
in the measure is that Article 13 suggests that a China are unable to participate in many standards-
patent holder is subject to a commitment to license setting activities on a non-discriminatory basis. The
its patent on fair, reasonable and non-discriminatory United States continues to press China to take
(FRAND) terms merely because its patent has been further steps to ensure that standards development
incorporated into a standard. processes are open to all interested parties, both
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within the context of China’s implementation of its networks and IT infrastructure, they could have a
revised Standardization Law and the functioning of significant impact on sales by U.S. information
China’s current standardization system. security technology providers in China. The United
States therefore has urged China to notify any MLPS
implementing rules laying down equipment-related
Information Security Standards requirements in accordance with China’s obligations
under the TBT Agreement.
Beginning in 2010 and continuing through 2012,
both bilaterally and during meetings of the WTO’s At the December 2012 JCCT meeting, China
TBT Committee, the United States raised its indicated that it would begin the process of revising
concerns with China about framework regulations the MLPS regulations. It also agreed that, during
for information security in critical infrastructure that process, it would enter into discussions with the
known as the Multi-Level Protection Scheme (MLPS), United States regarding U.S. concerns. Throughout
first issued in June 2007 by the Ministry of Public 2013 and 2014, using the JCCT process, the United
Security and MIIT. The MLPS regulations put in place States pressed China to fully and quickly implement
guidelines to categorize information systems its JCCT commitment to revise the MLPS regulations.
according to the extent of damage a breach in the To date, however, China has not yet revised those
system could pose to social order, public interest regulations.
and national security. The MLPS regulations also
appear to require, by reference, purchasers’ In 2015, concerns about the MLPS regulations were
compliance with certain information security heightened in light of provisions contained in the
technical regulations and encryption regulations that draft Administrative Regulations on the
are referenced within the MLPS regulations. Informatization of Insurance Institutions that
mandate compliance with MLPS requirements. At
Among other things, the MLPS regulations bar the November 2015 JCCT meeting, China agreed to
foreign products from information systems graded strengthen exchange and dialogue with the United
level 3 and above, because all products deployed States in this area.
must be developed by Chinese information security
companies and must bear Chinese intellectual In 2016, however, concerns about China’s MLPS
property in their key components. Additional regulations were amplified as China adopted new
troubling product testing provisions for level 3 and measures, such as the Cybersecurity Law. These
above require companies to disclose product source measures appear to create an analogous or
code, encryption keys and other confidential overlapping “cybersecurity multi-level protection
business information. To date, hundreds of request scheme.” These concerns were heightened even
for proposals (RFPs) incorporating MLPS more in January 2018, when China issued a
requirements have come from government agencies, proposed measure, the Cybersecurity Classified
the financial sector, telecommunications companies, Protection Regulations, which appears to expand
the power grid, educational institutions and existing requirements in the MLPS regulations. As
hospitals in China. These RFPs cover a wide range of discussed in the section below on Secure and
information security software and hardware, and Controllable ICT Policies, the United States actively
many of them exclude the purchase of foreign engaged China when it was drafting the
products by incorporating level-3 requirements. Cybersecurity Law while also continuing to press
China on its overall approach with regard to
If implementing rules for the MLPS regulations are regulation in the area of cybersecurity, and these
issued and apply broadly to commercial sector efforts continued in 2018.
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2018 USTR Report to Congress on China’s WTO Compliance
Secure and Controllable ICT Policies those requirements and restrictions, but it remains
unclear whether they will nevertheless be included
Since 2015, concerns about China’s regulations in subsequent implementing measures. Additionally,
addressing information security have heightened as new obligations in the Counterterrorism Law
China has pursued a series of measures that would requiring companies in the telecommunications and
impose severe restrictions on a wide range of U.S. Internet-related services sectors to “provide
and other foreign ICT products and services with an technical support and assistance, including handing
apparent long-term goal of replacing foreign ICT over access or interface information and decryption
products and services. These measures include keys,” to proactively monitor their networks for
provisions relating to standards and conformity terrorism information and to disclose any discovered
assessment procedures as well as provisions relating terrorism information to the regulatory authorities
to intellectual property ownership and research and could present undue burdens on foreign companies.
development requirements. These provisions stem
from a May 2014 announcement by the Cyberspace In November 2016, the National People’s Congress
Administration of China (CAC) that it would passed the Cybersecurity Law, which became
implement a broad-reaching “Cybersecurity Review effective in June 2017. Leading up to the passage of
Regime” focused on ensuring that technology in this law, the United States and numerous other WTO
China is “secure and controllable.” This policy members had expressed serious concerns to China
direction was affirmed in November 2016 with about the contents of two circulated drafts of the
China’s passage of a Cybersecurity Law, which puts in law, as did private sector stakeholders. For example,
place an overarching statutory framework for the in August 2016, 46 global industry groups signed a
regulation of cybersecurity in China. letter to China’s Premier Li describing their serious
concerns. Confirming WTO member and private
In July 2015, the National People’s Congress passed sector concerns, the final version of the law imposes
a National Security Law with a stated purpose of far-reaching and onerous trade restrictions on
safeguarding China’s security. However, this law imported ICT products and services in China. Among
included sweeping provisions addressing economic other things, the law requires testing for products
and industrial policy. sold into “critical information infrastructure,” which
is vaguely and broadly defined.
In December 2015, the National People’s Congress
passed a Counterterrorism Law. Leading up to the China’s implementation of its “secure and
passage of this law, the United States and numerous controllable” policies extended beyond the pursuit
stakeholders around the world had expressed of these new laws. Over the past four years, China
serious concerns about the then-draft has adopted a large number of other measures
Counterterrorism Law, particularly with regard to incorporating the concept of “secure and
provisions that seemed to extend far beyond the controllable.” Particular areas of concern include
law’s general objective of reinforcing the the vague definition of “secure and controllable” and
government’s authority to investigate and prevent its potential implications for discrimination against
terrorism. Especially troubling trade-related foreign firms, cross-border data flow restrictions and
concerns in the original draft law included in-country requirements for in-country storage of data, as well
data storage requirements and restrictions on cross- as encryption requirements.
border data flows for “all telecom and Internet
businesses,” as well as requirements for To date, Chinese legislators and regulators have
telecommunications and Internet service providers never publicly defined the term “secure and
to pre-install cryptographic solutions in their controllable.” The United States has expressed its
equipment. The final version of the law removed strong concern that the term appears to mean
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products and technologies with domestically owned border data transfers also can be necessary for
and registered intellectual property or conforming to international businesses to meet regulatory
other localization requirements and that this term obligations in their home countries or other
will be interpreted to mean products, technologies jurisdictions. Similarly, requirements for in-country
or intellectual property of domestic origin. storage of data would not appear to further data
Numerous global technology stakeholders and security and integrity, but instead would impose
governments have expressed similar concern that restrictions that could unduly raise the cost for
the lack of a concrete definition of “secure and international companies doing business in China, as
controllable” allows Chinese regulators to interpret well as for Chinese companies that have global
the term in a discriminatory fashion. operations. These requirements also run counter to
trends in most major economies, where efforts are
Requirements in various “secure and controllable” expended not in restricting data transfers or
measures to use domestically owned and registered requiring local data storage, but rather in ensuring
intellectual property call into question China’s prior that appropriate protections are in place once
bilateral commitments to treat intellectual property information has been transferred. Unfortunately,
owned or developed in other countries the same as the data localization provision in the Cybersecurity
intellectual property owned or developed in China. Law entered into effect on December 31, 2018,
In addition, these requirements undermine the potentially subjecting many companies across an
flexibility needed by domestic and foreign array of economic sectors to the law’s very
companies to make their own ICT product restrictive data localization requirements if they
procurement decisions on the basis of their unique employ cloud computing or big data technologies.
business considerations and as dictated by any legal
or fiduciary responsibilities to protect their With regard to encryption requirements in China’s
customers’ information. These requirements also numerous “secure and controllable” measures, the
could impair the ability of companies to quickly and United States has emphasized to China the
effectively respond to new cybersecurity risks. importance of China’s acknowledgement at the
Furthermore, these requirements could result in November 2015 JCCT meeting of its prior bilateral
companies needing to operate different ICT commitment that it would only regulate encryption
platforms for different markets, which would technologies that, “at their core, are dedicated to
increase costs prohibitively and detract from encryption and decryption operations.” Numerous
business efficiencies without any guarantee of more references in recent Chinese measures to
or enhanced security. These requirements also raise “domestic” cryptography create concern that they
serious questions and concerns by associating may refer to various measures related to
intellectual property rights with national security. cryptography that set goals of applying domestic
cryptography requirements across China’s financial
China’s numerous “secure and controllable” services sector and other sectors. Accordingly, the
measures also have included potential generally United States has urged China to live up to its
applicable restrictions on cross-border data flows commitment not to mandate in generally applicable
and requirements for in-country storage of data, measures the use of domestic encryption
which have been criticized by the United States and technologies, so as to ensure that companies are
numerous other WTO members and by the private free to utilize the encryption technologies most
sector. Given the international nature of the appropriate for their needs, regardless of their
modern economy, a company’s ability to transfer country of origin.
data across borders to its headquarters or other
locations is important for conducting data analysis to In 2017, China’s Office of State Commercial
improve the quality of its risk management. Cross- Cryptography issued a draft Cryptography Law for
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2018 USTR Report to Congress on China’s WTO Compliance
public comment. The draft law raises serious Protection Regulations, Security Assessment of Cross-
questions and concerns, particularly given that Border Transfer of Personal Information and
passage of this law in final form would codify Important Data, the Catalogue of Network Critical
potentially far-reaching, highly trade restrictive Equipment and Cybersecurity Products, numerous
cryptography-related constraints on foreign ICT sector-specific cybersecurity requirements and a
products. The draft law potentially could sweep series of cybersecurity-related national standards,
widely sold technologies and products using including a series of 24 draft standards published in
encryption into more restrictive policies, given the June 2018. These measures do not appear to be
almost ubiquitous use of encryption technologies in consistent with the non-discriminatory, non-trade
today’s commercial products. The draft law also restrictive approach to which China has committed.
would establish licensing requirements and a
cryptography accreditation, testing and certification Accordingly, throughout the past year, the United
system, which could require applicants to divulge States has strongly conveyed serious concerns to
source code and other sensitive design information, China about its approach to cybersecurity regulation.
an issue of enormous concern to global industry, The United States used written comments on draft
particularly to the extent that encryption measures, bilateral engagement under the auspices
requirements are expanded beyond the current of the CED and multilateral engagement at WTO
“core function” encryption products. The United committee meetings in an effort to persuade China
States also is concerned that new testing and to revise its policies in this area to ensure that they
certification requirements could discriminate against are consistent with its WTO obligations and bilateral
foreign products and services and put foreign commitments.
companies at a severe disadvantage.
Secure and Controllable ICT Standards
Given all these concerns, the United States has
identified the issue of technology policy as a top U.S. In November 2016, the National Information
priority. Over the past few years, China has Security Standardization Technical Committee,
committed that generally applicable measures to chaired by the Cyberspace Administration of China
enhance ICT cybersecurity in commercial sectors (CAC), released a series of proposed cybersecurity
should be consistent with WTO rules, be narrowly standards for public comment. Included among the
tailored, take into account international norms, be standards were proposed “secure and controllable”
non-discriminatory and not impose nationality-based product standards for central processing units
conditions or restrictions on the purchase, sale or (CPUs), operating systems (OS) and office software
use of ICT products by commercial enterprises suites, as well as standards on testing specifications
unnecessarily. In addition, China has expressly for “secure and trustworthy” office information
confirmed that its prior commitments relating to systems. Seven standards relating to the MLPS also
information security measures apply to its “secure were released, covering cloud computing, mobile
and controllable” policies. China also agreed that it Internet and other applications. In 2017 and 2018,
would notify relevant “secure and controllable” the technical committee released an additional six
technical regulations to the WTO TBT Committee. tranches of cybersecurity standards for public
comment.
Despite the apparent progress represented by these
various commitments, China has continued to issue Throughout the past two years, working closely with
numerous draft and final cybersecurity measures U.S. industry stakeholders, the United States
that raised serious questions about China’s approach expressed serious concerns about stringent
to cybersecurity regulation. Key measures of requirements laid out in many of the draft
concern include the Cybersecurity Classified standards, which would make it difficult for foreign
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technology companies to comply. In addition, it scrap and recovered materials in order to advance a
appears that many Chinese enterprises switched to policy of local substitution. Consistent with this
purchasing Chinese products instead of foreign plan, it does not appear that similar restrictions,
products based on the draft standards. The United including thresholds for contaminants, apply to
States submitted written comments on the various domestically sourced scrap or recovered materials.
iterations of the draft standards and followed up
with meetings in Beijing with Chinese regulatory In 2018, China issued additional catalogues and
authorities. In 2019, the United States will continue measures to further restrict the importation of
to press China to take steps to ensure that its recyclable materials. In April 2018, MEE announced
policies in this area are consistent with its WTO additional materials to be added to the import ban,
obligations and bilateral commitments. effective in 2018 and 2019. In June 2018, the State
Council’s Opinions on Strengthening Ecological
Import Ban on Recyclable Materials Environmental Protection set a target of reducing
imports of scrap and recovered materials to zero by
In July 2017, China notified to the WTO’s TBT 2020. In July 2018, MEE issued a draft Law on the
Committee two measures issued by China’s Ministry Prevention and Control of Environmental Pollution by
of Environment and Protection (MEP), known as the Solid Waste, which would mandate a complete ban
Ministry of Ecology and Environment (MEE) after the on the importation of “solid waste.”
March 2018 government reorganization. These
measures would limit or ban imports of certain scrap U.S. exports to China of the scrap and recovered
and recovered materials, such as plastic bottles and materials covered by the measures totaled $479
unsorted paper. However, the comment periods million in 2016. U.S. stakeholders have reported
provided by China were less than the 60 days significant negative impact on those exports.
required by the TBT Agreement, and the timeframe
for implementation was less than six months. Shortly after China notified the measures at issue to
the TBT Committee, the United States began raising
In January 2018, China banned imports of 24 kinds of its serious concerns about the measures and urged
“solid wastes” under four classes, including “plastic China to halt its implementation of these measures.
wastes,” “unsorted waste paper,” textile remnants In 2019, the United States will continue to urge
and vanadium slag. Additionally, effective China to reverse its approach to the treatment of
September 2017, China began enforcing new import imported recyclable materials and to apply the same
standards for the identification of solid waste standards to both imported and domestically
utilizing a broad definition that includes substances sourced materials.
that have lost their original production or functional
value, various manufacturing and agricultural by- CONFORMITY ASSESSMENT PROCEDURES
products, environmental control by-products and
other substances identified by MEE as solid waste. China’s regulatory authorities appear to be turning
more and more to in-country testing for a broader
These measures represent the first of a series of range of products. This policy direction is troubling,
anticipated actions outlined in the State Council’s as it is inconsistent with common international
Implementing Plan for Banning the Entry of Overseas conformity assessment practices, which favor
Garbage and Promoting the Reform of the processes that accept test results from
Management System for Solid Waste Imports. This internationally recognized laboratories, the concept
plan calls for, among other things, a comprehensive of a “supplier’s declaration of conformity” and other
ban on the import of “heavily polluting solid wastes” similar trade-facilitating conformity assessment
by the end of 2017 and a more gradual phase out of mechanisms.
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The United States is unaware of any meaningful certification process for mobile phones represents a
efforts by China to move toward a system that clear example of unpublished requirements.
recognizes test results or conformity assessment Companies have also reported that, in some cases,
certifications from bodies other than Chinese testing requirements for products can change on an
government-run testing, certification, or almost monthly basis.
accreditation entities. Instead, China has developed
plans to expand the China Compulsory Certification In bilateral meetings in 2010, the United States and
Mark (CCC Mark) scheme and its mandatory testing China discussed testing and certification
requirements to information security, an area in redundancies in the area of telecommunications
which most countries do not engage in government equipment. As a result of these meetings, China’s
certification. China also continues to prepare to MIIT and U.S. regulatory officials, together with
implement in-country government testing for global industry stakeholders, conducted a one-day
compliance with its new regulations on hazardous workshop in May 2010 to discuss prevalent concerns
substances in electronic information products. about telecommunications testing and certification
Working with U.S. industry, the United States will requirements from a technical perspective. China
continue to urge China in 2019 to reverse this trend also committed, at the December 2010 JCCT
and move in the direction of more globally meeting, that it would develop a one-stop shopping
recognized conformity assessment practices. mechanism for telecommunications network access
license and radio type approval. At the November
Telecommunications Equipment 2011 JCCT meeting, China agreed to publish the
procedures for this new mechanism by the end of
The product testing and certification processes in 2011. In December 2011, MIIT announced the
China for mobile phones have been significantly implementation of its December 2010 JCCT
more burdensome and time-consuming than in commitment through the establishment of a single
other markets, which increases the costs of application window for both RTA and NAL testing
exporting products to China. China’s three main and certification. In February 2012, a one-stop-
type approval certification processes for mobile shopping mechanism became operational on MIIT’s
phones are the Network Access License (NAL), the website, with MIIT’s Telecommunications Equipment
Radio Type Approval (RTA), and the CCC Mark. Certification Center being appointed to process
While each one represents a different certification applications for both testing and certification
process, there are overlapping testing requirements processes.
among them, particularly between the NAL and the
RTA with regard to radio telecommunications testing Based on industry’s experience to date, it does not
requirements for electromagnetic interference and appear that MIIT’s approach is meaningful in terms
between the NAL and the CCC Mark with regard to of streamlining the MIIT processes. The United
electromagnetic compatibility and product safety. In States remains concerned that it does not actually
addition to redundancy, China’s testing eliminate any redundancies or unnecessary
requirements are often unclear and subject to elements of the testing and certification processes.
change without written notification and adequate It also does not appear to address a fundamental
time for companies to adjust. Companies must concern that unnecessary functionality testing is a
often determine what testing requirements are major cause of the burdensome nature of these
applicable by communicating directly with the processes. In addition, the lack of transparency in
relevant regulatory body, rather than by having the NAL testing and certification process remains a
access to a comprehensive, published list of testing concern, as NAL requirements are not readily
requirements. The WAPI mandate in MIIT’s approval available to the public.
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CCC Mark System country. Reportedly, Japan has MOUs allowing two
conformity assessment bodies to conduct follow-up
As previously reported, CNCA regulations inspections, as does Germany.
establishing a new Compulsory Product Certification
System, issued in December 2001, took full effect in In 2018, China made updates to the CCC system. It
August 2003. Under this system, there is now one removed existing CCC requirements for several
safety mark – the CCC Mark – issued to both Chinese product categories and developed a “self-
and foreign products. Under the old system, declaration” process for others, which is intended to
domestic products were only required to obtain the shorten time to market for the product categories
“Great Wall” mark, while imported products needed identified.
both the “Great Wall” mark and the “CCIB” mark.
Despite the changes made by the regulations, U.S. Going forward, the United States will remain in close
companies in some sectors continue to express contact with U.S. industry. The United States also
concerns about duplication in certification will continue working to further expand the scope of
requirements, particularly for radio and testing and certification activities available to U.S.
telecommunications equipment, medical equipment providers in China.
and automobiles.
Medical Devices
Meanwhile, to date, China has granted more than
150 Chinese enterprises accreditation to test and at China’s regulatory requirements applicable to
least 14 Chinese enterprises accreditation to certify medical devices, such as requirements for country of
for purposes of the CCC Mark. Despite China’s origin approval and in-country clinical trials, hamper
commitment that qualifying majority foreign-owned the ability of U.S. medical device manufacturers to
joint venture conformity assessment bodies would get their products to market in China in a timely
be eligible for accreditation and would be accorded manner, delaying U.S. medical devices reaching
national treatment, China so far has only accredited Chinese patients by as much as five years or more
six foreign-invested conformity assessment bodies. depending on the product. The medical device
It is not clear whether these six foreign-invested industry’s innovation cycle moves quickly, so China’s
conformity assessment bodies play a sizeable role in regulatory delays often can result in medical devices
accrediting products sold in China. China has also only reaching Chinese patients once there is already
not developed any alternative, less trade-restrictive a newer, more efficient version of treatment
approaches to third-party certification, such as available in other major markets. Additionally, China
recognition of a supplier’s declaration of conformity. maintains policies that attempt to drive down the
As a result, U.S. exporters to China are often costs of U.S. medical devices and that state clear
required to submit their products to Chinese preferences for the procurement of domestic
laboratories for tests that may be unwarranted or medical devices when that alternative is available.
have already been performed abroad, resulting in
greater expense and a longer time to market. One When issued in 2014, the State Council’s Order No.
U.S.-based conformity assessment body has entered 650, the Regulations for the Supervision and
into an MOU with China allowing it to conduct Administration of Medical Devices, was expected to
follow-up inspections (but not primary inspections) result in the creation and update of numerous rules
of manufacturing facilities that make products for and requirements pertaining to clinical trials, testing,
export to China requiring the CCC Mark. However, inspections, evaluations, re-registration and post-
China has not been willing to grant similar rights to market surveillance. Unfortunately, China did not
other U.S.-based conformity assessment bodies, notify it to the WTO’s TBT Committee in advance, or
explaining that it is only allowing one MOU per otherwise seek public comment on it. Since then,
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the United States and U.S. industry have raised United States has urged CFDA to expand the ways
concerns relating to Order No. 650 and the various that foreign companies can demonstrate eligibilities
implementing measures with the relevant Chinese for these exemptions.
government authorities, using the JCCT process,
meetings of the WTO TBT Committee and other In May 2017, CFDA followed up by issuing three
engagement opportunities and venues. Particular proposed notices, known as Notices 52, 53 and 54,
provisions of concern included the requirement that addressing clinical trials and related time-to-market
a medical device be approved in the country of issues. Subsequently, in October 2017, China’s State
export before it can obtain approval in China, and Council and the General Office of the Communist
remaining local clinical trial requirements. China’s Party released the Opinions on Deepening Reform of
slow approval process for new medical devices also the Review and Approval System and Encouraging
continued to create market disruptions for the Innovation of Drugs and Medical Devices, which
sector. seeks to further advance the policies outlined in
Notices 52, 53 and 54. In January 2018, CFDA issued
When the United States raised concerns about the the Technical Guidelines for the Acceptance of
requirement that a medical device must be Overseas Clinical Trial Data of Medical Devices. This
approved in the registrant’s country of origin before measure provides general guidance as to what
it can begin clinical trials or submit an application for requirements foreign firms must meet in order to
approval in China, CFDA assured the United States avoid duplicative in-country testing, but
that implementation would be effectively the same implementation of this measure to date remains
as the prior requirement, so that marketing unclear.
authorization from the country of origin would
satisfy the requirement under Order No. 650. In January 2018, China’s Ministry of Science and
However, the United States remains concerned that Technology issued a solicitation for submissions to
this requirement places unnecessary market entry qualify for the innovative medical devices catalogue.
delays on imported medical devices, while offering This solicitation states that “priority consideration”
no actual assurance regarding the safety and efficacy would be provided to domestic medical devices.
of the medical devices in question. The lack of
registration in the manufacturer’s home country or In June 2018, the Ministry of Justice issued Draft
country of export is not necessarily an indication Amendments to the Regulations of the Supervision
that a medical device is unsafe. Moreover, since and Management of Medical Devices. This measure
the United States does not have this same provides high-level direction about the requirements
requirement, Chinese medical devices can enter the for foreign clinical trial data and clinical evaluations,
U.S. market months and, in some cases, years but it also reinforces China’s requirement that an
before similar U.S. medical devices can enter China’s applicant seeking to register an imported medical
market, putting U.S. industry at a significant device must submit documentation that the product
disadvantage. was approved for sale in the country where the
product is manufactured.
The United States is also concerned about lingering
clinical trial requirements that have yet to be Overall, while China’s medical device regulatory
abolished that further delay the entry of U.S. agency, now called the National Medical Products
medical devices into China’s market. For products Administration (NMPA), appears motivated to
not listed in the exemption catalogues, foreign improve its processes and compete globally, various
manufacturers have limited options and unclear Chinese regulatory authorities with a role in this area
guidance as to how they can demonstrate safety and continue to issue measures that either distort
effectiveness to obtain clinical trial waivers. The previously understood developments or explicitly
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make it more difficult for U.S. firms to compete with distributors. This policy also causes significant
domestic medical device manufacturers. In 2019, uncertainty in the market, with the potential for
the United States will press China to issue final creating, among other things, an unfair advantage
implementing regulations removing country of origin for a handful of distributors in their dealings with
approval requirements, clarifying that overseas manufacturers.
clinical trial data for medical devices will be accepted
in China, and providing a level playing field for In September 2017, NHFPC notified medical device
foreign and Chinese manufacturers. manufacturers that they had two weeks to provide a
wide range of data in order to participate in China’s
In 2015, China reinstated and increased registration pricing and reimbursement program for public and
fees for both medical devices and pharmaceutical military hospitals. The United States and other
products. For Class II medical devices, while foreign foreign governments immediately raised serious
manufacturers are required to pay a set amount, concerns about this measure with the Chinese
registration fees for domestic manufacturers are set authorities. Although NHFPC subsequently extended
by the provincial regulatory authorities and can vary. its deadline by two weeks, U.S. and other foreign
The United States continues to press relevant companies still encountered significant burdens in
Chinese regulatory authorities to ensure equitable providing the vast amount of data required of them,
treatment and access for U.S. medical device which included data not required to be produced in
manufacturers and to keep the registration fees at a other countries. In 2019, the United States will
reasonable level. The United States also has pressed continue to monitor China’s medical devices pricing
China to establish concrete metrics to ensure that policies to ensure that companies have sufficient
the performance of China’s regulatory authorities in time to comply with new requirements and that
reducing product approval delays, given the submission requirements do not extend beyond
additional resources flowing from the substantial information that is pertinent to a pricing decision.
registration fees. At the November 2015 JCCT
meeting, China agreed to publish annual reports Cosmetics
evaluating how its registration and approval
processes for pharmaceuticals and medical devices In December 2013, CFDA issued a notice requiring
are performing. foreign cosmetics manufacturers to submit a
certificate of free sale (CFS) establishing that an
In January 2017, eight Chinese ministries announced imported product is also being sold in the country of
a new policy that appears to allow no more than two origin. As many cosmetics products are
invoices in the distribution chain for drugs, one from manufactured globally and designed specifically for
the manufacturer to a distributor and another from particular destination markets, this new requirement
the distributor to the end-use hospitals. Although amounted to an effective ban on many imported
this two-invoice system was only meant to apply to cosmetics normally sold in China and contributed to
drugs, multiple local authorities in China also applied severe time-to-market delays. The United States has
this same requirement to medical devices. In raised concerns with China about this requirement in
practice, drug and medical device manufacturers use both bilateral meetings and before the WTO TBT
many distributors for a particular product, Committee.
depending on geographic location, expertise,
competitive pricing and other factors. Meanwhile, In November 2014, CFDA released a draft measure,
to date, China’s regulatory authorities have not the Regulations on the Supervision and
provided a clear definition of the “two invoices” Administration of Cosmetics, for public comment.
system, leaving a great deal of misunderstanding While U.S. industry welcomed China’s plan to align
among medical device manufacturers and with other countries by moving from registration to
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notification given the lower risk profile of cosmetics would be accepted and as to how confidential
versus drugs, concern remained that imported business information would be treated. As of
products would be disadvantaged. The draft December 2018, the Cosmetics Supervision and
measure retained the CFS requirement for imported Administration Regulation remains in draft form.
cosmetics. It also was unclear if China would accept When it originally was circulated, China received
international test data for safety assessments and if hundreds of comments from both Chinese and U.S.
imported products would still have to provide local industry, as well as from the United States and a
animal tests in place of alignment with ISO 22716 on number of other trading partners, reflecting the
good manufacturing practices (GMP). U.S. industry importance of this draft measure to China’s $40
also wanted assurances as to how confidential billion cosmetics industry. It is unclear if or when
business information would be protected. China intends to issue a new draft or a final
measure.
Later that same month, CFDA issued another draft
measure, the Administrative Measures on Cosmetic Meanwhile, China’s domestic industry has been
Labeling, for public comment. This draft measure benefitting from reforms envisioned by the draft
poses many concerns for the U.S. industry, including Cosmetics Supervision and Administration
a blanket ban of over-labels on cosmetics packages, Regulation. Since December 2013, as part of a pilot
which would require foreign manufacturers to re- program, Chinese companies (but not foreign
design packages specifically for the Chinese market. companies) have been able to forgo animal testing
This requirement could result in high production by instead certifying good manufacturing practices
costs and lengthy time-to-market delays, as well as a (GMP). China has sought to justify this apparent
loss of brand equity. national treatment violation by arguing that
domestic manufacturing facilities can be inspected in
In coordination with U.S. industry, the United States country by CFDA. Among other things, this
engaged with CFDA in order to highlight U.S. argument overlooks the fact that other countries
industry’s concerns regarding the two November address this issue either by allowing companies to
2014 draft measures. It appears that China has since self-certify adherence to GMP or by undertaking
placed the draft Administrative Measures on inspections of overseas facilities, like the U.S. Food
Cosmetic Labeling on hold, allowing U.S. companies and Drug Administration does in China. In addition,
to continue to use over-labeling to comply with in June 2014, Chinese companies were provided an
China’s requirements. additional advantage with the issuance of the Notice
on Matters Related to the Adjustment of Cosmetics
In July 2015, the SCLAO released a revised draft of Registration and Filing Management. This measure
the Cosmetics Supervision and Administration allows domestic non-special use cosmetics to change
Regulation for public comment. The revised draft to a notification-based filing system in lieu of
proposes to adopt a number of practices welcomed registration. The Notice on the Circulation of
by international cosmetics companies, including Possible Safety Risk Assessment Guidelines for
changes more in line with international practices Cosmetics Products, issued in December 2016,
relating to product safety determinations and the reiterates that domestic companies can self-
notification of new products, as well as a reduction determine the means by which they assessed the
in the number of cosmetics products classified as safety of their ingredients, in lieu of China’s animal
special and therefore still requiring registration. testing requirements. As a result, domestic non-
However, the revised draft still would retain a special use cosmetics continue to have an
number of provisions on claims and labeling, and it is established competitive advantage compared to
still unclear as to whether international test data foreign non-special use cosmetics. Given that many
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2018 USTR Report to Congress on China’s WTO Compliance
foreign brands choose alternatives to animal testing, “China RoHS.” While both the EU regulations and
and the EU completely forbids animal testing, China’s regulations seek to ban lead and other
China’s decision only to allow domestic companies hazardous substances from a wide range of
to self-determine the means by which they assess electronic products, there are significant differences
the safety of their ingredients not only is between the two regulatory approaches.
discriminatory, but also creates a particularly
significant market access barrier for imported Throughout the process of developing the China
products. RoHS regulations, there was no formal process for
interested parties to provide comments or consult
In March 2017, in response to concerns expressed by with MIIT, and as a result foreign stakeholders had
the United States and U.S. industry, China agreed to only limited opportunity to comment on proposals
extend the pilot program to imported non-special or to clarify MIIT’s implementation intentions. China
use products, not previously registered, until did eventually notify the regulations to the TBT
December 2018. In November 2018, the China Committee, but the regulations did not provide basic
National Medical Products Administration (NMPA), information such as the specific products for which
the successor to CFDA, issued the Notice on mandatory testing will be required or any details on
Implementing the Management of Record-Keeping of the applicable testing and certification protocols,
Imported Non-Special Use Cosmetics Nationwide. generating concern among U.S. and other foreign
This measure announced that registration of first- companies that they would have insufficient time to
imported, non-special cosmetics will be entirely adapt their products to China’s requirements and
replaced by a nationwide filing management or that in-country testing requirements would be
notification system. Under this new regulatory burdensome and costly.
system, U.S. cosmetics companies designate a
domestic contact to file a record via NMPA’s online In July 2012, MIIT posted on its website another
filing system prior to exporting to China. The filing draft revision of the China RoHS regulations for
certification can be obtained in approximately five public comment, and U.S. industry submitted
business days, after which time U.S. cosmetics comments on it. To date, MIIT has not finalized this
companies can begin exporting their products to draft revision.
China.
In January 2016, MIIT announced a new RoHS
Meanwhile, China continues its requirements for measure that expands both the set of restricted
local testing, including animal tests for GMP and, on chemicals as well as the scope of products subject to
occasion, for product ingredient safety. Until China RoHS restrictions, effective July 2016. This
addresses these requirements, many U.S. companies expansion was of serious concern to manufacturers
will be unable to access the China market. in the United States, given that it requires new
labeling and certification procedures for many
China RoHS products. It remains unclear how China will proceed
with implementation of the new RoHS measure.
The United States continues to be concerned by Since then, the United States has engaged China,
China’s Administrative Measures for Controlling urging it to extend the deadline for manufacturers to
Pollution Caused by Electronic Information Products, comply with the requirements set forth in the new
issued by MIIT and several other Chinese agencies RoHS measure and to take steps to ensure that the
effective March 2007. This measure is modeled new RoHS measure will not disrupt commerce. The
after existing EU regulations that restrict hazardous United States will continue to actively engage China
substances in electronic products and is known as in this area going forward.
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2018 USTR Report to Congress on China’s WTO Compliance
However, in 2018, as in prior years, almost all of the STATE-OWNED AND STATE-INVESTED ENTERPRISES
notified measures have emanated from AQSIQ, SAC
or CNCA and have rarely included measures from While many provisions in China’s WTO accession
other agencies that appear to require notification, agreement indirectly discipline the activities of state-
such as MOH, MIIT, the Ministry of Environmental owned and state-invested enterprises, China also
Protection and CFDA. Several years ago, in part to agreed to some specific disciplines. In particular, it
address this problem, China had reportedly formed a agreed that laws, regulations and other measures
new inter-agency committee, with representatives relating to the purchase of goods or services for
from approximately 20 ministries and agencies and commercial sale by state-owned and state-invested
chaired by AQSIQ, to achieve better coordination on enterprises, or relating to the production of goods or
TBT (and SPS) matters, but progress has been supply of services for commercial sale or for non-
inconsistent in this area. governmental purposes by state-owned and state-
invested enterprises, would be subject to WTO rules.
As a result, some of China’s TBT measures continue China also affirmatively agreed that state-owned and
to enter into force without having first been notified state-invested enterprises would have to make
to the TBT Committee, and without foreign purchases and sales based solely on commercial
companies having had the opportunity to comment considerations, such as price, quality, marketability
on them or even being given a transition period and availability, and that the government would not
during which they could make necessary influence the commercial decisions of state-owned
adjustments. In addition, as the United States has and state-invested enterprises.
consistently highlighted during regular meetings and
the annual transitional reviews before the TBT After China’s establishment of SASAC in 2003, it
Committee, the comment periods established by became evident that the Chinese government was
China for the TBT measures that have been actually intent on heavily intervening in a broad range of
notified continue to be unacceptably brief in some decisions related to the strategies, management and
cases. In other cases, some U.S. companies have investments of state-owned enterprises. SASAC was
reported that even when sufficient time was specifically created to represent the state’s
provided, written comments submitted by U.S. and shareholder interests in state-owned enterprises,
other foreign interested parties seemed to be wholly and its basic functions include guiding the reform of
disregarded. In still other cases, insufficient time state-owned enterprises, taking daily charge of
was provided for Chinese regulatory authorities to supervisory panels assigned to large state-owned
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2018 USTR Report to Congress on China’s WTO Compliance
enterprises, appointing and removing chief passed the Law on State-owned Assets of
executives and other top management officials of Enterprises, which became effective in May 2009.
state-owned enterprises, supervising the The objectives of this law are to safeguard the basic
preservation and appreciation of value of state- economic system of China, consolidate and develop
owned assets, reinvesting profits and drafting laws, China’s state-owned enterprise assets, enable state-
regulations and departmental rules relating to the owned enterprises to play a dominant role in the
management of state-owned assets. national economy, especially in “key” sectors, and
promote the development of China’s “socialist
In December 2006, the State Council issued the market economy.” The law calls for the adoption of
Guiding Opinions on Promoting the Adjustment of policies to promote these objectives and to improve
State-owned Assets and the Restructuring of State- the management system for state-owned assets. It
owned Enterprises, which calls on SASAC to also addresses SASAC’s role, the rights and
“enhance the state-owned economy’s controlling obligations of state-owned enterprises, corporate
power,” “prevent the loss of state-owned assets,” governance and major matters such as mergers, the
encourage “state-owned capital to concentrate in issuance of bonds, enterprise restructuring and asset
major industries and key fields relating to national transfers. The law further stipulates that the
security and national economic lifelines” and transfer of state assets to foreigners should follow
“accelerate the formation of a batch of predominant relevant government policies and shall not harm
enterprises with independent intellectual property national security or the public interest.
rights, famous brands, and strong international
competitiveness.” The measure identifies seven In March 2010, SASAC issued the Interim Provisions
“strategic” industries, where state capital must play on Guarding Central State-Owned Enterprises’
a leading role in every enterprise, including the civil Commercial Secrets, effective as of the date of its
aviation, coal, defense, telecommunications, electric issuance. This measure appears to implement the
power and grid, oil and petrochemical, and shipping Law on Guarding State Secrets, which the National
industries. The measure also provides that key People’s Congress amended in 2009. It is unclear
enterprises in “pillar” industries must remain under why the commercial secrets of state-owned
state control. These industries include automotive, enterprises need to be protected through a measure
chemical, construction, equipment manufacturing, applicable only to state-owned enterprises, when
information technology, iron and steel, nonferrous the commercial secrets of all enterprises in China are
metals, and surveying and design, among others. already subject to protection.
Particularly since 2008, state-owned enterprises at In July 2010, the Central Committee of the
the central government level have been aggressively Communist Party and the State Council issued the
acquiring and merging with other central state- Opinions on Further Promoting the Implementation
owned enterprises as well as provincial and local of the “Three-Major One-Large” Decision-making
state-owned enterprises and private enterprises. System. This measure requires state-owned
According to one Chinese government statement, 82 enterprises to establish a collective decision-making
percent of central state-owned enterprises’ assets system in which the Communist Party plays a
are concentrated in the petro-chemicals, electric significant role in major business decisions, major
power and grid, defense, telecommunications, personnel changes and major project arrangements
transport, mining, metallurgy and machinery sectors. (known as the “three majors”). It also requires the
Central state-owned enterprises also supply almost movement of large amounts of funds (the “one
all of the crude oil, natural gas, ethylene and basic large”) to be decided collectively by the leadership
telecommunication services for China’s economy. team, which includes representatives from the
In October 2008, China’s National People’s Congress Communist Party.
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2018 USTR Report to Congress on China’s WTO Compliance
Separately, the Chinese government also has issued play to the core political role of Communist Party
a number of measures that restrict the ability of organizations and strengthen the Communist Party’s
state-owned and state-invested enterprises to responsibility to select corporate officers.
accept foreign investment, particularly in key
sectors. Some of these measures are discussed In September 2016, SASAC and MOF jointly released
below in the Investment section, and include the reportedly State Council-approved Implementing
restrictions on foreign investment not only in the Plan for Perfecting Central Enterprise Functional
public sector but also in China’s private sector. Classification and Performance Evaluation, which
announces that central state-owned enterprises will
In November 2013, as previously reported, the Third be categorized as commercially driven enterprises,
Plenum Decision endorsed a number of far-reaching strategic enterprises or public-interest enterprises,
economic reform pronouncements, which called for subject to different performance evaluation criteria.
making the market ”decisive” in allocating resources, While the focus for commercial state-owned
reducing Chinese government intervention in the enterprises is to be on reasonable returns on capital,
economy, accelerating China’s opening up to foreign this measure also provides that returns will be
goods and services, and improving transparency and satisfactory if these enterprises need to, for
the rule of law to allow fair competition in China’s example, safeguard national security (meaning not
market. It also called for reforming China’s state- only national defense security, but also energy and
owned enterprises. While these pronouncements resource security, food security and cyber and
appeared to signal a high-level determination to information security), provide public services,
accelerate needed economic reforms, which have contribute to the development of strategic emerging
not materialized, it was clear from the beginning industries or implement major “Going Out”
that they were not designed to reduce the presence programs. This approach to commercial state-
of state-owned enterprises in China’s economy. owned enterprises indicates that China likely will not
Rather, in the case of state-owned enterprises, the meet its May 2012 S&ED commitment to develop a
reform objectives were to consolidate and to market environment of fair competition for
strengthen those enterprises and to place them on a enterprises of all kinds of ownership and to provide
more competitive footing, both in China and them with non-discriminatory treatment in terms of
globally. credit provision, taxation incentives and regulatory
policies.
Indeed, since the issuance of the Third Plenum
Decision, new policies have continued to be In recent years, China’s central and provincial
formulated that further strengthen the power of the government authorities have sought to reform state-
Chinese government and the Communist Party in owned enterprises by pressuring private companies
state-owned enterprises. In May 2015, for example, to invest in, or merge with, state-owned enterprises.
the Politburo of the Communist Party issued a This drive toward “mixed ownership” is seen as a
document appearing to require that all organizations way to inject innovative practices into and create
(including private companies) have Communist Party new opportunities for inefficient state-owned
organizations so that Communist Party policy can be enterprises. In October 2017, SASAC’s chairman
implemented across society. In August 2015, the confirmed that mixed ownership is a primary
Communist Party Central Committee and China’s element of SASAC’s reform efforts and instructed
State Council jointly issued the Guiding Opinions on state-owned enterprises to complete their mixed-
Deepening the Reform of State-Owned Enterprises, a ownership reorganizations by the end of 2017.
measure that requires state-owned enterprises to President Xi addressed this same subject in his
adhere to the Communist Party’s leadership, give full remarks at the 19th Party Congress, held in October
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2017, where he stated that further reform of state- China also has not been making notifications under
owned enterprises will include the development of Article XVII:4(a) of the GATT 1994 and paragraph 1 of
mixed-ownership enterprises and will turn these the Understanding on the Interpretation of Article
enterprises into world-class, globally competitive XVII of the GATT 1994, which requires China to notify
enterprises. President Xi added that China will work its state trading enterprises. Prior to 2015, China
to increase the value of state-owned enterprises and had not submitted a notification since 2003, despite
make them stronger, bigger and better. the emergence of new state trading enterprises in
subsequent years.
At present, the number of troubling issues relating
to state-owned enterprises in China is growing. In September 2014, after failing to persuade China to
Various actions of the Communist Party, the Chinese submit an up-to-date notification of its state trading
government and China’s state-owned enterprises enterprises, the United States submitted a counter
continue to impede the ability of U.S. firms to invest notification to the Working Party on State Trading
in China and compete with China’s state-owned Enterprises pursuant to paragraph 4 of the
enterprises in China and other markets, while true Understanding on the Interpretation of Article XVII
state-owned enterprise reform does not appear to of the GATT 1994. In this counter notification, the
be squarely on China’s agenda, even though in United States identified 153 state trading
October 2018 the PBOC began discussing the enterprises, including 44 state trading enterprises
possibility of addressing structural issues and made not previously notified by China, and provided
reference to consideration being given to adopting detailed information on the establishment and
the principle of “competitive neutrality” for state- operations of these enterprises for the benefit of
owned enterprises. other WTO members and the public.
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2018 USTR Report to Congress on China’s WTO Compliance
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2018 USTR Report to Congress on China’s WTO Compliance
the GPA. The negotiations also focused on the with the coverage of GPA parties. In December
coverage of government enterprises under the GPA, 2014, China tabled a revised offer. The revised offer
with the United States requesting that China add was not on the whole commensurate with the
state-owned enterprises to its GPA coverage. coverage of GPA parties and remains far from
acceptable to the United States and other GPA
At the May 2012 S&ED meeting, China committed to parties, as significant deficiencies remain in a
submit “a new comprehensive revised offer that number of critical areas including thresholds, entity
responds to the requests of the GPA parties . . . coverage, services coverage and exclusions.
before the [GPA] committee’s final meeting in
2012.” China subsequently submitted its third No new offer from China has been received since
revised offer in November 2012. This revised offer 2014. In April 2018, a MOFCOM spokesperson
falls short of the coverage provided by the United announced that China is working on a new offer of
States and other GPA parties, as China responded to coverage and will submit it to the WTO for
few requests made by GPA parties. These requests consideration by GPA parties as soon as possible. To
had sought to extend coverage to state-owned date, however, no new offer has been submitted.
enterprises, include additional services coverage,
eliminate broad exclusions and significantly expand
coverage of sub-central entities. The United States, China’s Government Procurement Regime
the EU and other GPA parties described the revised
offer as highly disappointing, both in terms of scope In January 2003, China implemented its Government
and coverage. At the December 2012 JCCT meeting, Procurement Law. However, China’s Government
China agreed to engage seriously with the United Procurement Law directs central and sub-central
States on outstanding core issues relating to the government entities to give priority to “local” goods
scope of projects that qualify as government and services, with limited exceptions, as China is
procurement and the extent to which state-owned permitted to do, because it is not yet a party to the
enterprises in China engage in government GPA. Since the adoption of the Government
procurement activities. Procurement Law, MOF has issued various
implementing measures, including regulations that
In 2013, using a new mechanism for technical set out detailed procedures for the solicitation,
discussions with China established through the S&ED submission and evaluation of bids for government
process, the United States secured two procurement of goods and services and help to
commitments from China in an effort to expedite clarify the scope and coverage of the Government
China’s accession to the GPA while continuing to Procurement Law. MOF also issued measures
push for robust terms that are comparable to the relating to the announcement of government
coverage of the United States and other GPA parties. procurements and the handling of complaints by
At the July 2013 S&ED meeting, China agreed to suppliers relating to government procurement.
submit by the end of 2013 a new revised offer to join
the GPA. China followed through by submitting its It is notable, however, that the Government
fourth revised offer. However, China’s revised offer Procurement Law does not cover most public works
was short of the coverage provided by other GPA projects, which represent at least one-half of China’s
parties. government procurement market. Those projects
are subject to a different regulatory regime,
At the December 2013 JCCT meeting, China established by China’s Tendering and Bidding Law,
committed to accelerate its GPA accession which entered into force in January 2000. In
negotiations and submit in 2014 an additional September 2009, the State Council circulated NDRC’s
revised offer that is on the whole commensurate draft regulations implementing the Tendering and
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2018 USTR Report to Congress on China’s WTO Compliance
Bidding Law for public comment. In October 2009, Meanwhile, in December 2007, one day before
the United States submitted written comments on China tabled its Initial Appendix I Offer in connection
these draft regulations in which it emphasized, with its GPA accession, MOF issued two measures
among other things, the need for greater that would substantially restrict the Chinese
clarification of the relationship between the government’s purchase of foreign goods and
Tendering and Bidding Law and China’s Government services. The first measure, the Administrative
Procurement Law, and the need to define “domestic Measures for Government Procurement on Initial
products.” In December 2011, the State Council Procurement and Ordering of Indigenous Innovative
issued the final implementing regulations for the Products, was directed at restricting government
Tendering and Bidding Law, which entered into force procurement of “indigenous innovative” products to
in February 2012. “Chinese” products manufactured within China. The
central government and provincial governments
As previously reported, beginning in 2003, the followed up by creating catalogues of qualifying
United States expressed concerns about policies that “indigenous innovation products.” The second
China was developing with regard to government measure, the Administrative Measures for
procurement of software. In 2003, the United States Government Procurement of Imported Products,
specifically raised concerns about MOF severely restricted government procurement of
implementing rules on software procurement, which imported foreign products and technologies. While
reportedly contained guidelines mandating that China may maintain these measures until it
central and local governments – the largest completes its GPA accession, the United States has
purchasers of software in China – purchase only raised strong concerns about them, as they run
software developed in China to the extent possible. counter to the liberalization path expected of a WTO
The United States was concerned not only about the member seeking to accede to the GPA.
continuing access of U.S. software exporters to
China’s large and growing market for packaged and In 2009, China reinforced its existing “Buy China”
custom software – $7.5 billion when the MOF rules measures at the central, provincial and local
went into effect – but also about the precedent that government levels. For example, in May 2009, MIIT
could be established for other sectors if China issued a circular entitled Government Procurement
proceeded with MOF’s proposed restrictions on the Administration Measures, which applies to MIIT and
purchase of foreign software by central and local its direct subsidiaries. The measure required entities
governments. At the July 2005 JCCT meeting, China engaging in government procurement to give
indicated that it would indefinitely suspend its priority to domestic products, projects and services
drafting of implementing rules on government as well as to indigenous innovation products, except
software procurement. where the products or services cannot be produced
or provided in China or are for use outside of China.
Subsequently, in 2007 and 2008, the United States Similarly, in May 2009, nine central government
grew concerned with statements and ministries and agencies jointly issued the Opinions
announcements being made by some Chinese on Further Strengthening Supervision of Tendering
government officials indicating that state-owned and Bidding Activities in Construction Projects, which
enterprises should give priority to the purchase of included a “Buy China” directive for all projects
domestic software. In response, at the September under China’s stimulus package. This directive
2008 JCCT meeting, China clarified that its formal specifically requires that priority be given to
and informal policies relating to software purchases “domestic products” for all government-invested
by Chinese enterprises, whether state-owned or projects, unless the products are not available in
private, will be based solely on market terms China, cannot be purchased on reasonable
without government direction. commercial terms in China or are for use abroad.
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2018 USTR Report to Congress on China’s WTO Compliance
During the July 2009 S&ED meeting, China innovation products.” This measure provides for
committed to treat products produced in China by preferential treatment in government procurement
foreign-invested enterprises the same as products to any products that are granted this accreditation.
produced in China by Chinese enterprises for Subsequently, the United States and U.S. industry,
purposes of its Government Procurement Law. along with the governments and industries of many
China later reaffirmed this commitment and further of China’s other trading partners, expressed serious
committed during the October 2009 JCCT meeting to concerns to China about this measure, as it appears
issues rules implementing it. In addition, the United to establish a system designed to provide
States and China agreed to establish a multi-agency preferential treatment in government procurement
working group to conduct regular discussions to products developed by Chinese enterprises.
addressing issues raised by government
procurement and by the purchases of state-affiliated In April 2010, MOST, NDRC and MOF issued a draft
enterprises and organizations and private entities measure for public comment, the Circular on
pursuing national strategic objectives. Launching 2010 National Innovation Product
Accreditation Work. The draft measure would
In 2010, China circulated two draft measures amend certain of the product accreditation criteria
intended to implement its Government Procurement set forth in the November 2009 measure, but would
Law. The first draft measure, the Regulations to leave other problematic criteria intact, along with
Implement the Government Procurement Law, was the accreditation principles, application form and
issued by MOF in January 2010. The United States link to government procurement. In addition, the
submitted comments in February, in which, among draft measure originally was to become effective the
other things, it expressed concern that the draft day after comments were due. The United States
measure did not provide a GPA-consistent regime. submitted comments in May 2010, in which it asked
The United States also expressed concern that the China to suspend the implementation of the
draft measure did not provide more specificity about indigenous innovation accreditation system and to
the conduct of government procurement. The engage in consultations with the United States to
second draft measure, the Administrative Measures address U.S. concerns with the system. To date, the
for Government Procurement of Domestic Products, draft measure has not been finalized, and the
was issued for public comment in May 2010 by MOF, Chinese authorities have not requested or accepted
MOFCOM, NDRC and the General Administration of applications for accreditation.
Customs. In accordance with China’s October 2009
JCCT commitment, this draft measure set out the At the December 2010 JCCT meeting, China
requirements for a product to qualify as a “domestic committed not to maintain any measures that
product.” The United States submitted comments provide government procurement preferences for
on this draft measure in June 2010, in which it goods or services based on the location where the
expressed concerns about the lack of details intellectual property is owned or was developed.
regarding how the draft measure would be One month later, during President Hu’s visit to
implemented as well as its broad application. Washington in January 2011, China went further by
agreeing that it would “not link its innovation
Separately, in November 2009, MOST, NDRC and policies to the provision of government procurement
MOF issued the Circular on Launching the 2009 preferences.” Subsequently, at the May 2011 S&ED
National Indigenous Innovation Product meeting, China also committed to “eliminate all of
Accreditation Work, requiring companies to file its government procurement indigenous innovation
applications by December 2009 for their products to products catalogues” when implementing the
be considered for accreditation as “indigenous agreement reached during President Hu’s visit.
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Finally, at the November 2011 JCCT meeting, China In April 2016, the MOF released a draft of the
announced that the State Council had issued a Administrative Measures for the Bidding and Bids for
measure requiring provincial and local governments Government Procurement of Goods and Services.
to eliminate all links between China’s innovation This draft measure builds on China’s Government
policies and government procurement preferences Procurement Law and lays out information that
by December 2011. Notwithstanding these repeated should be made available to bidders in the
promises, recent reports have identified measures government procurement process and how
that a number of Chinese provincial and local procuring agencies and procurement officials should
governments have adopted, or have continued to evaluate bids to determine a winning bidder. In May
maintain, that call for government procurement 2016, the United States submitted comments on the
preferences for indigenous innovation products. draft measure. These comments asked for
clarifications and provided comments calling on MOF
At the December 2010 JCCT meeting, China also to increase transparency in procedures and timelines
agreed that, in 2011, it would revise a major MIIT for tendering and bidding, create a domestic review
catalogue, which covers heavy equipment and other or challenge procedure for bidders to utilize,
industrial machinery, and that it would not use the increase predictability for bidders by turning
revised catalogue for import substitution or the optional provisions into required ones, and promote
provision of export subsidies or otherwise to consistency with requirements of the GPA in order
discriminate against foreign suppliers. Once again, to provide benefits for potential bidders from the
however, it failed to fulfill this promise. MIIT issued United States. To date, China has not provided any
a draft of the revised catalogue for public comment direct reply to these comments.
shortly before the November 2011 JCCT meeting,
but it has not yet issued a final revised catalogue. In September 2016, SASAC and MOF jointly released
the Implementing Plan for Perfecting Central
In 2014, the United States engaged with China on Enterprise Functional Classification and Performance
the draft Implementation Rules of the Government Evaluation, which divides China’s central
Procurement Law and the draft Administrative government level state-owned enterprises into three
Measures for Government Procurement of Domestic categories for purposes of regulation, i.e.,
Goods. The United States recommended that China commercial, strategic and public interest. Ensuring
ensure that the provisions contained in these coverage of state-owned enterprises that conduct
measures allow enough flexibility for Chinese procurements for governmental purposes is critical
government agencies to continue to procure high- to China’s successful GPA accession. This issue will
quality items with complex international supply continue to receive attention from the United States
chains at a reasonable price and to avoid disruptions and others going forward.
of trade. In January 2015, China issued the final
version of the implementing rules, which took effect In April 2017, MOF issued the Notice on Further
in March 2015. Consistent with its commitment at Improving the Information Disclosure Work on
the 2011 S&ED meeting, the implementing rules Government Procurement, a measure that seeks to
remove a provision calling for measures that accord improve transparency. It establishes a single official
preferences to indigenous innovation products. The national government procurement information
implementing rules also removed a provision that website, makes provincial government procurement
would have treated all intellectual property as a information websites components of the national
good. However, they still contain a non-exhaustive government website, requires provincial
list of bases according to which future rules and government finance departments to uniformly
policies could be adopted that discriminate against follow the central domain name system and requires
foreign goods and services. the public disclosure of transaction-specific
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information. It also calls for the conduct of a third- expressly requires elimination of measures such as
party assessment of the transparency of the those that require or provide benefits for the
government procurement process. incorporation of local inputs (known as local content
requirements) in the manufacturing process, or
In May 2018, the Central Government Procurement measures that restrict a firm’s imports to an amount
Center issued a draft Notice Soliciting Comments on related to its exports or related to the amount of
2018-2019 Central Government Organ Supply and foreign exchange a firm earns (known as trade
Procurement Agreement Items for the Information balancing requirements). In its WTO accession
Product (Hardware) and Air Conditioner Categories, agreement, China also agreed to eliminate export
which covers products such as servers, computers, performance, local content and foreign exchange
printers, exchanges and air conditioners. With balancing requirements from its laws, regulations
regard to servers, only three indigenous Chinese and other measures, and not to enforce the terms of
suppliers of central processing units (CPU) for any contracts imposing these requirements. In
servers are recognized as qualified, meaning that addition, China agreed that it would no longer
server manufacturers would have to cooperate with condition importation or investment approvals on
the listed Chinese CPU makers to become eligible these requirements or on requirements such as
central government server suppliers if this measure technology transfer and offsets.
were to become final. Previously qualifying server
suppliers used U.S. CPUs. In recent years, China has repeatedly affirmed its
plans to further open China to foreign investment,
In June 2018, the Ministry of Finance issued draft including in the November 2013 Third Plenum
Measures for the Administration of Government Decision and in other key policy documents, such as
Procurement of Services, which requires service the November 2015 Fifth Plenum Decision and the
providers to be legally established in China to be 13th Five-year Plan, released in March 2016. China
eligible. The Chinese government is still to provide a has not taken steps to follow through on these
guiding catalogue to define the scope and categories promises, except in limited instances, and in the case
of services covered for procurement purposes. of some promises it seems to be going backwards on
access. China also has pursued other actions that
Going forward, the United States will continue to discriminate against or otherwise disadvantage
examine the treatment being accorded to U.S. foreign investors, including an administrative
suppliers under China’s government procurement approval system providing a case-by-case review of
regime. The United States also will continue to urge any foreign investment. Foreign investors also have
China to apply its regulations and implementing expressed great concern that draft Chinese laws and
rules in a transparent, non-discriminatory manner. policy statements seem to suggest that China
intends to pursue a broad definition of “national
security,” to include “economic security,” under its
INVESTMENT national security review regime.
Upon its accession to the WTO, China assumed the In addition, China’s investment restrictions are often
obligations of the Agreement on Trade-Related accompanied by other problematic industrial
Investment Measures (TRIMS Agreement), which policies, such as the development of China-specific
prohibits investment measures that breach GATT standards (see the Standards and Technical
Article III obligations to treat imports no less Regulations section above) and the increased use of
favorably than domestic products or the GATT subsidies. Many of these policies appear to
Article XI obligation not to impose quantitative represent protectionist tools created by the Chinese
restrictions on imports. The TRIMS Agreement thus government’s industrial planners to shield inefficient
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restrictive national security review process and, certain sectors to foreign investment, although
along with the subsequently enacted Cybersecurity notable exceptions involved the importation and
Law, provides the underpinnings for other significant distribution of copyright-intensive products such as
restrictions on foreign investment, such as books, newspapers, journals, theatrical films, DVDs
restrictions on the purchase, sale and use of foreign and music (see the Trading Rights section above). In
ICT products and services, cross-border data flow addition, while China continued to allow foreign
restrictions and data localization requirements. investment in a number of sectors not covered by its
WTO accession agreement, one notable exception to
More generally, U.S. industry has expressed serious this progress continued to be the area of production
concerns about China’s increasing use of these and and development of genetically modified plant
other investment restrictions, which are often seen seeds, which China continued to place in the
as protectionist tools used by China’s economic “prohibited” category.
planners to shield selected Chinese domestic
enterprises, including inefficient or monopolistic In 2007, the State Council issued a revised Foreign
enterprises, from foreign competition. U.S. industry Investment Catalogue. Unfortunately, this revised
views China’s investment restrictions as deeply catalogue placed new restrictions on several
worrisome and counter to the market-oriented industries, including chemicals, auto parts, rare
principles that should govern the behavior of a WTO earths processing, biofuel production and edible oil
member. U.S. industry has observed that these processing, while the prohibitions and restrictions
investment restrictions are more likely to retard the facing copyright-intensive products and genetically
growth and development of the Chinese economy modified plant seeds remained in place.
than to accomplish the state planners’ ultimate
objective of creating internationally competitive In December 2011, China published another revised
domestic enterprises. Foreign Investment Catalogue, which entered into
force in January 2012. This revised catalogue made
In 2018, as in prior years, the United States raised its only minor improvements.
concerns about China’s investment restrictions on
multiple occasions. The United States also raised China’s Foreign Investment Catalogue, as revised in
investment-related concerns in committee and March 2015, did not provide liberalization in most of
council meetings at the WTO, as it will continue to the areas important to foreign investors. In addition,
do in the future. in some cases, it seemed to go backwards on access.
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parts, once it had become clear that dialogue would informed foreign automobile manufacturers that
not lead to a satisfactory resolution. A WTO panel their joint ventures must commit to launch Chinese
and the WTO’s Appellate Body both issued decisions NEV brands in order to get approval for new or
in 2008 in favor of the United States and the other expanded production facilities.
complaining parties, finding that China’s treatment
of automobile parts was WTO-inconsistent. China China has also pursued related policies apparently
repealed its discriminatory rules on automobile parts designed to promote the development of a Chinese
in 2009. NEV industry at the expense of foreign enterprises.
For example, in March 2011, NDRC issued a draft
Additional problems began to arise, however, after Foreign Investment Catalogue that proposes a new
China’s economic planners decided that the Chinese limitation on foreign ownership in NEV parts
auto industry should focus on developing expertise manufacturing facilities in China to no more than 50
in manufacturing so-called new energy vehicles, or percent. Previously, foreign automobile parts
NEVs. NEVs include alternative fuel vehicles such as manufacturers could establish in China as wholly
electric, fuel cell and bio-diesel vehicles. In recent foreign-owned enterprises. Ultimately, in the
years, China has been devoting substantial resources Foreign Investment Catalogue that went into effect
– and creating new policies – to assist Chinese in January 2012, China narrowed the scope of these
automobile enterprises in developing cutting-edge proposed investment restrictions, and it applied the
NEV technologies and building domestic brands that 50-percent foreign investment cap only to NEV
could succeed in global markets. battery manufacturing facilities.
The most significant policies pursued by China can China also has used a catalogue of approved NEV
be traced to regulations issued by NDRC in 2007 and models to determine eligibility for consumer
by MIIT in 2009 that required manufacturers of NEVs subsidies and other incentive programs maintained
in China to “demonstrate mastery” over, and hold by the Chinese government. It appears that to date
intellectual property rights in, one of three core NEV domestic but not imported NEVs are included in this
technologies: batteries, drive systems or control catalogue.
systems. In 2017, these regulations were replaced
by new regulations requiring manufacturers of NEVs Similarly, some municipal government-level
in China to “demonstrate mastery” over the restrictions allegedly intended to reduce pollution
development and manufacturing technology of a also raise concerns. For example, in November
complete NEV, rather than just one of three core 2013, the Beijing municipal government introduced
technologies, and to possess key R&D capacities. new license plate restrictions that reserve a
Because China allows foreign automobile proportion of Beijing license plates for Chinese-made
manufacturers to operate in China only through joint NEVs, beginning in 2014. Since then, additional
ventures with Chinese enterprises, and none of Chinese municipalities have adopted or are
these joint ventures can be majority foreign-owned, considering similar measures.
this requirement effectively requires foreign
automobile manufacturers to transfer their core NEV In 2011, the United States repeatedly raised serious
technologies to their Chinese joint venture partners. concerns about China’s NEV policies in bilateral
meetings. The United States also highlighted its
Reportedly, China also is considering additional concerns about China’s NEV policies during the final
regulations that would require all NEVs transitional review before the WTO’s TRIMS
manufactured in China to be sold under Chinese, Committee in October 2011. At the November 2011
rather than foreign, brands. These same reports JCCT meeting, China committed that it would not
indicate that China’s regulators may have already require foreign automobile manufacturers to
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transfer technology to Chinese enterprises or to light of China’s November 2011 JCCT commitment
establish Chinese brands in order to invest in China’s not to mandate technology transfer and China’s May
market for NEVs. China also committed that foreign- 2012 S&ED commitment to treat intellectual
invested enterprises would have equal access to property rights owned or developed in other
subsidies and other preferential policies for NEVs countries the same as Chinese-owned or Chinese-
and that these policies would conform to WTO rules. developed intellectual property rights.
Public announcements by several foreign In recent years, it appears that China has begun to
automobile manufacturers indicate that their joint tie subsidies and other support for manufacturers of
ventures with Chinese enterprises have been NEVs and NEV batteries to lists of qualified
approved by NDRC and MIIT to establish new manufacturers located in China. For example, the
production facilities in China, and these approvals central government and certain local governments
have coincided with public commitments by the provide subsidies in connection with the purchase of
foreign automobile manufacturers to launch new NEVs, but they only make these subsidies available
Chinese NEV brands and to establish or expand when certain Chinese-made NEVs, not imported
research and development in China. This pattern of NEVs, are purchased. China appears to pursue
investment approvals suggests that Chinese similar policies involving NEV batteries, leading to
regulators may be pressuring foreign automobile lost sales by U.S.-based manufacturers. The United
manufacturers to establish Chinese brands and to States continues to press China to eliminate this
make additional research and development discriminatory treatment.
investments in China as conditions for approving
new production facilities. A number of other foreign Steel Sector
automobile manufacturers have announced plans to
manufacture NEVs in China, and therefore the In July 2005, China issued its Steel and Iron Industry
United States will closely examine developments Development Policy. As previously reported, this
related to China’s commitment not to require policy contains many government mandates
technology transfer, as these automobile pertaining to the commercial behavior of Chinese
manufacturers seek regulatory approval for the steel enterprises. The policy also appears to
launch of their NEV models, particularly in light of discriminate against foreign equipment and
USTR’s Section 301 investigation. technology imports. Like other measures, this policy
encourages the use of local content by calling for a
In October 2012, MOF, MIIT and MOST issued two variety of government financial support for steel and
new measures establishing a fiscal support fund for iron projects utilizing newly developed domestic
manufacturers of NEVs and NEV batteries. It equipment. Despite the commitment that China
appears that, in order to qualify for funding under made in its WTO accession agreement not to
these measures, an enterprise must demonstrate condition the right of investment or importation on
ownership of intellectual property and “mastery” of whether competing domestic suppliers exist, the
core NEV technologies and also meet a minimum policy also calls for the use of domestically produced
level of investment in China-based research and steel-manufacturing equipment and domestic
development. As foreign automobile manufacturers technologies.
are required to form 50-percent joint ventures with
Chinese partners, these requirements could China’s 2005 steel policy is also striking because of
effectively require them to transfer core NEV the extent to which it attempts to dictate industry
technology to their Chinese joint-venture partners in outcomes and involve the government in making
order to receive the available government funding. decisions that should be made by market
These measures therefore raise serious questions in participants. This high degree of government
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direction regarding the allocation of resources into export markets and significant Chinese steel
and out of China’s steel industry raises concerns not company losses, steel production in China continued
only because of the commitment that China made in to grow throughout the period of the 12th Five-year
its WTO accession agreement that the government Plan. Indeed, the steel industry’s rate of growth
would not influence, directly or indirectly, during this period exceeded the growth rates of the
commercial decisions on the part of state-owned or Chinese economy as a whole as well as the global
state-invested enterprises, but also more generally steel industry, and China shifted from being a net
because it represents another significant example of importer of steel to being a large net exporter of
China reverting to a reliance on government steel. These developments led many analysts to
management of market outcomes instead of moving raise concerns that significant excess capacity in
toward a reliance on market mechanisms. China may cloud the prospects for the steel
industry’s profitability, both in China and in other
In June 2010, the State Council published the economies.
Opinions on Strengthening Energy Saving and
Emission Reduction and Accelerating Structural China’s 12th Five-year Plan for the steel industry
Adjustment in the Iron and Steel Sector. This raised a number of specific concerns. In particular,
measure reiterated policies such as controlling steel the plan continued to place the government in the
industry growth, strengthening efforts to eliminate role of closely managing the development of the
outdated capacity, promoting energy savings and steel industry. The plan specified where to build,
emissions reduction, technical innovation, close or relocate steelmaking capacity, how much to
accelerating mergers, disciplining access to iron ore spend on research and development, and even what
imports and promoting domestic iron ore mining, products Chinese steel producers are to make. In
and encouraging domestic steel producers to addition, the plan continued to emphasize “self-
explore mining and steel investments abroad. sufficiency” in steel production, setting specific
targets for Chinese producers’ share of the domestic
In July 2010, MIIT released the Regulations and market in high-grade steel products that were
Conditions of Production and Operation of the Iron supplied primarily by foreign steelmakers, including
and Steel Industry. These regulations are intended U.S. steelmakers. In the case of automotive steel
to support the objectives laid out in the State and silicon steel sheets, the plan set a goal of
Council’s June 2010 measure. They also indicate Chinese producers supplying 90 percent of the
that small steel mills will be shut down, establish domestic market by 2015. At the same time, the
operating standards for larger steelmakers and plan laid out objectives for overseas investment by
address issues such as product quality and China’s steel producers and explained that
environmental protection. At the time, steel incentives will be provided to support investment in
analysts viewed these regulations as a prelude to foreign iron ore mines and steel plants to create
China’s next five-year steel plan. groups with “powerful international competitive
strength.” Additionally, as envisioned by the plan,
In October 2011, MIIT published China’s 12th Five- China continued to support its largest steel
year Plan for the steel industry, covering the period companies through subsidies, raw materials export
from 2011 to 2015. As the plan itself notes, China’s restrictions and other preferential government
steel production grew from 350 million MT in 2005 policies.
to 684 million MT in 2011, with the steel industry
accounting for 10 percent of national industrial Effective October 2012, MIIT issued the Iron and
output. Despite China’s goal of eliminating Steel Industry Normative Conditions, which served as
inefficient steel capacity, and despite slowing growth the guiding norms for the steelmaking industry in
in domestic steel demand, stagnant demand in China and contained both incentives for compliance
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and disincentives for non-compliance. Qualifying Over the years, throughout the push and pull of
enterprises are entitled to preferential support these myriad central government policies, sub-
policies, including bank loans and government grants central governments often have pursued
for technology upgrades, while non-qualifying contradictory efforts, as they typically seek to
enterprises may be forced to restructure. In 2013, support and even expand local steel capacity and
China announced two batches of qualifying production regardless of market dynamics because
steelmaking enterprises that are entitled to of the tax revenues and jobs that they represent. In
government support. While China has heralded the any event, China’s steelmaking capacity and crude
use of industry norms as a move toward a more steel production has grown dramatically over the
“market-oriented” approach to guiding the industry, years.
the MIIT norms maintain a high degree of
government direction regarding the allocation of Between 2000 and 2016, China accounted for 75
resources toward China’s steel industry, percent of the growth in global steelmaking capacity,
demonstrating China’s continued reliance on an increase well in excess of the growth in China’s
government management of market outcomes. domestic demand for steel over the same period.
China’s capacity reached 1,150 million MT in 2015, a
In October 2013, China’s State Council issued the figure that represented just over one-half of global
Guiding Opinions on Resolving the Problem of Severe capacity. Although China reportedly eliminated
Excess Capacity to address excess capacity in the some of its official capacity in 2016 and 2017, China
steel, cement, electrolytic aluminum, plate glass and also accounted for the largest share of new capacity
shipbuilding industries. As the measure itself noted, additions during this same period. It is also not clear
China’s then-current steel capacity dramatically whether and how China’s official reporting on
exceeded market demand. While ostensibly the capacity accounts for the large number of facilities
measure aimed to rein in excess capacity, it raised a producing steel in China without official sanction
number of concerns. For example, it encouraged from the central government. Moreover, while
banks to provide financing for technology upgrades, China may have achieved modest reductions in its
and it called for policies to encourage Chinese official capacity, its levels of production (and
steelmakers with excess capacity to relocate their therefore its potential for export) continued to
excess capacity outside China, such as tax rebates for increase into 2018, despite weakening internal
equipment and products used in relocating excess demand. Currently, China’s steelmaking capacity
capacity. alone is roughly double the combined steelmaking
capacity of the EU, Japan, the United States and
In November 2013, MOF issued a new subsidy Russia, even though China has no comparative
measure that provides grants for the advantage with regard to the energy and raw
“transformation and upgrade” of centrally controlled material inputs that make up the majority of costs
state-owned enterprises in a handful of industries, for steelmaking.
including steel. This measure provides grants of up
to RMB 500 million ($82 million) for large projects. At the WTO, the United States, with support from
other WTO members, has pressed its concerns
In February 2016, China’s State Council issued regarding China’s steel policies, including in
another measure directed at the excess capacity meetings before the Committee on Import Licensing,
problem, the Opinions on Resolving Overcapacity in the TRIMS Committee, the Subsidies Committee and
the Iron and Steel Industry to Gain Profits and the Council for Trade in Goods. The United States
Development. This measure calls for the reduction also co-sponsored with the EU sessions examining
of crude steel capacity in China by 100 to 150 MMT subsidies that contribute to excess capacity. The
within five years, beginning in 2016. United States also has focused intently on China’s
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steel policies in connection with China’s first seven that have harmed U.S. producers and workers.
Trade Policy Reviews at the WTO, held in 2006, Large new facilities were built in China with
2008, 2010, 2012, 2014, 2016 and 2018, and in government support, while a variety of policy tools
plurilateral fora such as the OECD. promote exports of Chinese value-added aluminum
products, including through energy subsidies. As a
The United States and other WTO members have result of these market-distorting measures, China’s
called for China to eliminate subsidies to its steel aluminum capacity and production have more than
industry, to implement steel industry policies that do doubled in the last decade, and estimates suggest
not discriminate against imports and to allow market that China’s current excess aluminum capacity is
forces to determine steelmaking raw material input equivalent to the entire U.S. demand for aluminum.
supply. Several steel industry associations from
around the world have expressed similar concerns. The United States’ bilateral engagement of China on
this issue yielded no progress. In the past, securing
In the past, China has made a series of bilateral commitments from China merely to discuss the
commitments to reduce its excess steel capacity. severe excess aluminum capacity situation and begin
For example, at the July 2014 S&ED meeting, China exchanging information required months of
committed to establish mechanisms that strictly haggling, and the responsible Chinese ministries
prevent the expansion of crude steelmaking capacity demonstrate no interest in implementing even those
and that are designed to achieve major progress in commitments.
addressing excess production capacity in the steel
sector. Similarly, at the June 2016 S&ED meeting, In January 2018, the Secretary of Commerce
China committed to take effective steps to address transmitted to the President a report of his
the challenges of excess capacity so as to enhance investigation into the effects of imports of aluminum
market function and encourage adjustment. These on the national security of the United States
commitments have not meaningfully impacted the pursuant to Section 232 of the Trade Expansion Act
severe excess capacity situation in China’s steel of 1962. The Secretary of Commerce found that the
sector. quantity and circumstances of aluminum imports
into the United States – including the circumstances
In January 2018, the Secretary of Commerce of global excess capacity for producing aluminum –
transmitted to the President a report of his threaten to impair U.S. national security. The
investigation into the effects of imports of steel President concurred in the Secretary of Commerce’s
articles on the national security of the United States findings and, in March 2018, took action to adjust
pursuant to Section 232 of the Trade Expansion Act imports of aluminum into the United States.
of 1962. The Secretary of Commerce found that the
quantity and circumstances of steel imports into the AGRICULTURE
United States – including the circumstances of global
excess capacity for producing steel – threaten to Upon its accession to the WTO, China assumed the
impair U.S. national security. The President obligations of the WTO Agreement on Agriculture,
concurred in the Secretary of Commerce’s findings which contains commitments in three main policy
and, in March 2018, took action to adjust imports of areas for agricultural products: market access,
steel articles into the United States. domestic support and export subsidies. In some
instances, China also made further commitments, as
Aluminum Sector specified in its accession agreement.
Excess capacity in China’s aluminum sector In the area of market access, WTO members
contributes to global imbalances and price effects committed to the establishment of a tariff-only
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regime, tariff reduction and the binding of all tariffs. legitimate human, animal and plant health concerns,
As a result of its accession negotiations, China do not arbitrarily or unjustifiably discriminate
agreed to significant reductions in tariff rates on a between WTO members’ agricultural and food
wide range of agricultural products. China also products, and are not disguised restrictions on
agreed to eliminate quotas and implement a system international trade. The SPS Agreement requires
of TRQs designed to provide significant market that the measures in question be based on scientific
access for certain bulk commodities upon accession. grounds, developed through risk assessment
This TRQ system is very similar to the one governing procedures and adopted with transparency, while at
fertilizers (discussed above in the Import Regulation the same time it preserves each member’s right to
section). China’s goods schedule sets forth detailed choose the level of protection it considers
rules intended to ensure appropriate administration appropriate with regard to sanitary and
of the agriculture TRQ administrator – originally the phytosanitary risks.
State Development and Planning Commission
(SDPC), which is now called NDRC – and to require it Other WTO agreements also place significant
to operate with transparency and according to obligations on China in the area of agriculture.
precise procedures for accepting quota applications, Three of the most important ones are GATT 1994,
allocating quotas and reallocating unused quotas. the Import Licensing Agreement and the TBT
Agreement, which are discussed above (in the
In the area of domestic support, the WTO objective sections on Import Regulation and Internal Policies
is to encourage a shift in policy to the use of Affecting Trade).
measures that minimize the distortion of production
and trade. China committed to a cap for trade- and China also made several additional commitments
production-distorting domestic subsidies that is intended to rectify other problematic agricultural
lower than the cap permitted for developing policies, either upon accession or after limited
countries and that includes the same elements that transition periods. For example, China agreed to
developed countries use in determining whether the permit non-state trading enterprises to import
cap has been reached. specified TRQ shares of certain products that
previously had been subject to import monopolies
WTO members also committed to avoid the use of by state trading enterprises, i.e., rice, wheat, corn,
export subsidies unless they fall within one of four cotton, wool and vegetable oil.
categories of exceptions. China agreed to eliminate
all export subsidies upon its accession to the WTO Since China’s accession to the WTO, a variety of non-
and did not take any exceptions. tariff barriers continue to impede U.S. agricultural
trade with China, particularly in the area of sanitary
Another important agricultural area is covered by and phytosanitary measures, where China’s actions
the WTO Agreement on the Application of Sanitary often have not appeared to be guided by scientific
and Phytosanitary Measures (SPS Agreement). The principles, and in the administration of tariff-rate
SPS Agreement establishes rules and procedures quotas for certain bulk agricultural commodities,
regarding the formulation, adoption and application where low quota fill persists despite domestic
of sanitary and phytosanitary measures, i.e., demand for imported products. The United States
measures taken to protect against risks associated and China have only been able to resolve some of
with plant or animal borne pests and diseases, these issues, and those resolutions have required
additives, contaminants, toxins and disease-causing protracted negotiations.
organisms in foods, beverages or feedstuffs. The
rules and procedures in the SPS Agreement require In 2018, U.S. exporters continued to be confronted
that sanitary and phytosanitary measures address with non-transparent application of sanitary and
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phytosanitary measures, many of which have China’s ports from the General Administration of
appeared to lack scientific bases and have impeded Customs are now assessing duties on U.S. products
market access for many U.S. agricultural products. based on higher “reference prices,” rather than the
China’s seemingly unnecessary and arbitrary declared value, effectively resulting in even higher
inspection-related import requirements also tariffs. There is no legitimate basis for these actions.
continued to impose burdens and regulatory
uncertainty on U.S. agricultural producers exporting Independent of China’s retaliatory tariffs, the full
to China in 2018, as did the registration and market access potential of the tariff cuts that China
certification requirements that China imposes, or made pursuant to the terms of its accession
proposes to impose, on U.S. food manufacturers. agreement has never been realized for some
Although China finally lifted its illegal AD and CVD products. As discussed below, a variety of non-tariff
duties on imports of U.S. chicken broiler products, barriers continue to impede market access for
trade did not resume because China separately various U.S. agricultural exports to China,
continued to maintain an unwarranted and particularly exports of consumer-ready and value-
unscientific avian influenza-related ban on imports added products.
of U.S. poultry.
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In 2003, NDRC issued new regulations for shipments Exports of U.S. rice to China have long been
beginning January 2004. Key changes included the hampered by the lack of an agreed phytosanitary
elimination of separate allocations for general trade protocol. Even though the United States and China
and processing trade, the elimination of certain finally signed a rice protocol in July 2017, China
unnecessary licensing requirements, and the delayed its implementation. Following the meeting
creation of a new mechanism for identifying between Presidents Trump and Xi in Buenos Aires in
allocation recipients. At the same time, December 2018, China began to implement the rice
transparency continued to be problematic, although protocol, although the United States remains
some improvement did take place for some of the concerned that market access for U.S. rice will still
commodities subject to TRQs. be hampered by low fill rates for China’s rice TRQs.
While these systemic changes were taking place, In February 2016, China submitted its WTO
spurred on by sustained U.S. engagement, exports of notification on TRQ fill rates for 2013 and 2014. In
some bulk agricultural commodities from the United both 2013 and 2014, China filled less than 50
States showed substantial increases, as changes in percent of its TRQ allocation for rice. Currently, the
market conditions created import demand and the United States does not have market access to fill
TRQ system, at least in part, was used to facilitate China’s quota for rice. While the United States and
imports. China have come to completion of a phytosanitary
protocol to allow imports of rice from the United
For example, while U.S. exports of wheat to China States, China has not given a timeline for signing the
totaled an unusually high amount of $495 million in protocol, despite numerous high-level requests from
2004, as the TRQ allocations for wheat did not the United States.
appear to act as a limiting factor, in subsequent
years they declined dramatically. Beginning in 2011, For several years, the United States raised concerns
U.S. exports of wheat to China started to climb about NDRC’s TRQ administration, both bilaterally
again, reaching $1.3 billion in 2013 before dropping and at the WTO. These concerns related to
precipitously in 2014 to $194 million and in 2015 to allocation principles and transparency, among other
$160 million, before increasing to $205 million in matters. The TRQs for rice, wheat and corn have
2016 and $351 million in 2017. U.S. exports of been of particular concern. Due to China’s poorly
wheat to China decreased by 70 percent during the defined criteria for applicants, unclear procedures
first nine months of 2018, compared to the same for distributing TRQ allocations, and failure to
period in 2017. announce quota allocation and reallocation results,
traders are unsure of available import opportunities
U.S. exports of corn to China grew from $11 million and producers worldwide have reduced market
in 2007 to $1.3 billion in 2012, before declining to access opportunities.
$974 million in 2013. In 2014, due to China’s
biotechnology policies, and concurrent with China’s In order to improve this situation, in December
decision to liquidate substantial domestic corn 2016, the United States launched a WTO case
stocks, corn exports tumbled to $84 million. In 2015, challenging China’s administration of TRQs for rice,
U.S. corn exports to China nearly doubled, but wheat and corn. Consultations took place in
remained relatively low compared to previous years. February 2017. A WTO panel was established to
U.S. corn exports to China dropped to $40 million in hear the case at the United States’ request in
2016 and then rose to $142 million in 2017. Through September 2017, and 17 other WTO members joined
the first nine months of 2018, U.S. corn exports to as third parties. Hearings before the panel took
China dropped again, decreasing by 64 percent, place in July and October 2018, and the panel is
compared to the same period in 2017. expected to issue its decision in mid-2019.
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numerous biotechnology events. At the same time, At the September 2015 summit meeting between
investment restrictions continued to constrain President Obama and President Xi, China made
foreign companies’ ability to increase product significant commitments. Specifically, China
development in China and to maintain control over committed to review applications of agricultural
important genetic resources. biotechnology products in a timely, ongoing and
science-based manner and to implement specific
In 2014, China’s regulatory system for biotechnology changes to the review process.
products became increasingly problematic. For
example, China stalled several applications by issuing At the November 2015 JCCT meeting, the United
notices temporarily suspending their approval, citing States pressed China to reaffirm its commitment to
public opinion and other non-scientific reasons. adopt a timely, transparent, predictable and science-
based approval process. The United States also
At the December 2014 JCCT meeting, the United pressed China to move expeditiously to approve
States and China agreed on a new Strategic backlogged biotech event applications. Despite this
Agricultural Innovation Dialogue (SAID), which was engagement, delays in China’s approvals of
intended to implement an agreement reached agricultural products derived from biotechnology
between President Obama and President Xi worsened in 2016, creating increased uncertainty
regarding agricultural innovation. This new dialogue among traders and resulting in adverse trade impact,
was designed to bring together a diverse set of particularly for U.S. exports of corn. In addition, the
Chinese ministries and U.S. agencies at the Vice asynchrony between China’s product approvals and
Minister level and focus on science-based other countries’ product approvals widened.
agricultural innovation and the increased use of
innovative technologies in agriculture. In February 2016, China issued safety certificates for
only three of the 11 products of agricultural
In April 2015, China published a draft proposal to biotechnology under final review. However, China
revise elements of its biotechnology regulatory continued to delay approvals for eight other
process. China’s proposed revisions included a products, with applications dating as far back as
reduction in the frequency of regulatory decisions 2011, even though more than a dozen other
and the use of factors other than science, including countries previously deemed them to be safe.
politics and public opinion, when evaluating new
biotechnology applications. These changes, if made At the November 2016 JCCT meeting, China
permanent, would further slow the regulatory indicated that it would have the opportunity to
review process beyond the systemic delay already review the status of its safety evaluation for these
brought about by China’s asynchronous approvals products in December 2016. However, China gave
policy. no indication as to whether it would issue safety
certificates for them.
In 2015, MOA started routinely asking biotechnology
seed companies for new data relating to acute oral In May 2017, as part of the initial results of the CED’s
toxicity studies, even though international best 100-day action plan, China committed to accelerate
practices as outlined by the OECD recommends that its long-delayed review of eight pending U.S.
new data should be requested only in exceptional biotechnology product applications. Specifically,
circumstances. To date, in other countries where China committed to hold frequent meetings of the
the regulatory authorities have approved expert body that reviews biotechnology product
biotechnology products, the regulatory authorities applications – the NBC − and to ensure that this
have never asked for new data, which is a body assesses the safety of a product based solely
particularly onerous requirement. on its intended use. It further committed to ensure
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that any additional information requested by this restrictions on U.S.-origin products. For example,
body similarly pertains solely to the safety of a China has been unable to provide a science-based
product for its intended use. By the time of the CED rationales for import restrictions on U.S. poultry
plenary meeting in July 2017, China had only products and some U.S. beef and pork products, as
approved four of the eight applications, and its described below. In addition, China’s regulatory
expert body continued to ask applicants for authorities continued to issue significant new SPS
information unrelated to the intended use of the measures without first notifying them to the SPS
products. Following the July 2017 CED meeting, Committee and providing WTO members with an
work on the remaining four applications stalled, as opportunity to comment or without taking WTO
the expert body did not appear to hold any further members’ comments into account when it did notify
meetings in 2017 or most of 2018. In December a measure. As a result, traders remain concerned
2018, following the meeting between President because China’s SPS measures often lack clarity and
Trump and President Xi in Buenos Aires, China do not appear to be based on risk-based approaches.
announced that it had granted one of the four
remaining applications, plus four other pending BSE-related Import Bans
applications for product approval. Nevertheless,
many other applications remain pending at the final In December 2003, China and other countries
approval stage of NBC review. imposed a ban on imports of U.S. cattle, beef and
processed beef products in response to a case of BSE
Nevertheless, fundamental problems with China’s found in the United States. Since that time, on
approval process remain. Even though China has numerous occasions, the United States has provided
repeatedly committed to review applications of China with extensive technical information on all
agricultural biotechnology products in a timely, aspects of its BSE-related surveillance and mitigation
ongoing and science-based manner since 2014, measures, internationally recognized by the World
China’s approval process remains troubling. The Organization for Animal Health (known by its
Chinese regulatory authorities continue to review historical French acronym OIE) as effective and
applications slowly and without scientific rationale, appropriate, for both food safety and animal health.
and many product applications remain pending at
the final approval stage of NBC review. Meanwhile, At the April 2006 JCCT meeting, China committed to
Chinese companies continue to build their own conditionally reopen the Chinese market to U.S.
capabilities in the area of agricultural biotechnology. beef, subject to the negotiation and finalization of a
protocol by technical experts. Jointly negotiated
protocols, and accompanying export certificates, are
Sanitary and Phytosanitary Issues normal measures necessary for the export of any
livestock products from the United States to any
In 2018, SPS measures maintained by China trading partner. However, further negotiations in
continued to create significant obstacles for U.S. 2006 and 2007 made it clear that China was only
agricultural producers exporting to China. As in prior contemplating a limited market opening, rather than
years, the United States engaged China on a number displaying a willingness to begin accepting U.S. beef
of SPS issues, both bilaterally and during meetings of and beef products in a manner consistent with the
the WTO’s SPS Committee. Despite these efforts, OIE’s classification, and China provided no scientific
China did not respond constructively to U.S. justification for the limitation.
concerns, which covered SPS measures on a wide
range of products. In many instances, progress was At the December 2010 JCCT meeting, the United
made difficult by China’s inability to provide relevant States and China agreed to resume talks on U.S. beef
science-based rationales for maintaining its market access. The two sides subsequently held a
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series of meetings, which did not produce removed one regulatory barrier, it did not include
agreement on market access terms. other regulatory changes that are necessary for a
resumption of market access for U.S. beef, as China’s
In May 2013, the United States received the lowest regulatory agencies were demanding that any export
risk status for BSE from the OIE, i.e., negligible risk. protocol include unscientific requirements that
Using the JCCT process, the United States again deviate from current U.S. government and industry
pressed for a science-based market opening by standards.
China for U.S. beef, and China agreed to re-engage,
and further meetings took place in 2013 and 2014. In May 2017, one month after the April 2017 Mar-a-
Lago summit meeting between President Trump and
In 2014, U.S. officials at all levels pressed China to China’s President Xi, China committed to allow the
follow through on its 2013 JCCT commitment. In resumption of U.S. beef shipments into its market
June 2014, a team of Chinese officials visited the consistent with international food safety and animal
United States to study the BSE issue. Further health standards as part of the initial results of the
discussions were subsequently held in October and CED’s 100-day action plan. However, China back-
November 2014 in an effort to reach agreement on tracked one month later and insisted that it would
the terms and conditions for U.S. beef to access retain certain conditions that were inconsistent with
China’s market, but these discussions did not yield a international food safety and animal health
positive outcome. China’s requirements remained standards. For example, China insisted on limiting
inconsistent with OIE guidelines and continue to market access only to U.S. beef and beef products
contrast sharply with U.S. requirements. At the JCCT from cattle less than 30 months of age, and even
meeting in December 2014, the United States then it did not allow a full scope of products within
continued to press China to re-consider its approach, that age range, maintaining a ban on certain offal
given the negligible risk status that U.S. beef has items and processed products. In addition, China
obtained from the OIE, and to propose alternative continued to maintain non-BSE-related restrictions
terms and conditions that are consistent with OIE such as prohibitions on the detection of ractopamine
guidelines. However, China remained unwilling to and hormones in U.S. beef and beef products at
alter its approach. China’s ports of entry. As a result, only about three
percent of U.S. cattle qualify for importation into
In 2015 and 2016, the United States continued to China under these conditions.
urge China to agree to an OIE-consistent market
opening for U.S. beef. Despite these efforts, the ban In 2018, the United States pressed China to allow full
remained in place, and the United States continued market access for U.S. beef by eliminating age-
pressing its concerns with China. related, product-scope and veterinary drug
restrictions that are not consistent with OIE
In September 2016, China’s Premier Li stated that guidelines and Codex standards. These efforts were
China was willing to re-open its market for U.S. beef. unsuccessful.
This statement was preceded by a Chinese
delegation visit to the United States to verify the Pathogen Standards and Residue Standards
status of U.S. animal health, food safety and
traceability systems. Following Premier Li’s Since 2002, as previously reported, China has applied
statement, MOA and AQSIQ published a joint SPS-related requirements on imported raw meat and
announcement lifting the ban on bone-in and poultry that are not based on science or current
boneless beef under 30 months, conditioned on the scientific testing practices. For example, China
United States meeting certain animal health and established a zero tolerance limit for the presence of
traceability requirements. While the announcement Salmonella bacteria in raw meat and poultry. Similar
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zero tolerance standards exist for Listeria and other been tested for ractopamine, and the pork product
pathogens. China apparently does not apply the is tracked from plant entry to issuance of an export
same standards to domestic raw meat and poultry. certificate and shipment to China. While the
program description originally discussed with China
In 2008, despite assurances from China’s regulatory states that ractopamine test results will not
authorities that they were in the process of revising accompany shipments, China has been insisting that
China’s pathogen standards, little progress was seen. shipments include those test results. In addition, in
At the September 2008 JCCT meeting, China did September 2014, China suspended 12 production
agree to re-list several U.S. poultry plants that had and cold storage facilities due to ractopamine
earlier been de-listed for alleged violations of zero detections that predated the implementation of the
tolerance standards for pathogens. Although this Never Fed Beta Agonist program. In November
step did not address the important underlying need 2014, China suspended an additional establishment.
for China to revise its pathogen standards, it did
enable some U.S. poultry plants to resume shipment In December 2015, China released several hundred
to China. new MRLs for horticultural products. In a positive
sign, the majority of these limits were adopted at
In December 2008, the United States hosted a team Codex levels. About six months later, China released
of Chinese government officials and academic another set of MRLs, the majority of which also were
experts to observe how the U.S. government and in line with Codex standards. However, many of
U.S. industry regulate the use of veterinary drugs these MRLs were set as “temporary” MRLs, and
related to animal health. This visit was intended to China has indicated that it may change the limits at a
address China’s continuing ban on ractopamine later date.
residue in pork. China maintains that it has serious
concerns about the safety of ractopamine, but to To date, China continues to maintain without
date it has not provided any evidence that it has scientific justification maximum limits for certain
conducted a risk assessment despite repeated U.S. heavy metals, MRLs for veterinary drugs and
requests. regulatory action levels for other residues that are
inconsistent with Codex guidelines and other
During several subsequent JCCT working group international standards. China also enforces a zero
meetings, the United States requested that China tolerance for some residues, even where Codex has
adopt an interim maximum residue level (MRL) for adopted guidelines that many of China’s major
ractopamine in order to address the problems trading partners have adopted. U.S. regulatory
presented by China’s current zero-tolerance policy, officials have encouraged their Chinese counterparts
while China awaited the results of deliberations at to adopt MRLs that are scientifically based, safe and
the Codex Commission regarding the finalization of minimally trade-disrupting.
international MRLs for ractopamine. However, even
though Codex subsequently adopted MRLs for Avian Influenza Import Suspensions
ractopamine in 2012, China has refused to take any
steps to address its zero-tolerance policy. In January 2015, China announced a suspension of
imports of U.S. poultry and poultry products from all
Since July 2014, pork products have been exported U.S. states in response to the U.S. Department of
from the United States to China under the Never Fed Agriculture’s December 2014 notification of the
Beta Agonist program of the U.S. Department of presence of HPAI in several U.S. states. China has
Agriculture’s Agricultural Marketing Service (AMS). been unwilling to follow OIE guidelines and accept
Through this program, the AMS certifies that a pork poultry from regions in the United States unaffected
product has been produced from pigs that have by this disease.
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As of December 2018, China is the only major of low pathogenicity avian influenza (LPAI),
market that maintained a nationwide suspension of consistent with OIE guidelines. To date, however,
imports of U.S.-origin poultry and poultry products in China has not been willing to follow OIE guidelines
direct response to the HPAI outbreak, which was regarding LPAI.
eradicated from the United States in 2017. China is
the largest of these trading partners, blocking U.S.
poultry exports that had totaled as high as $427 Dairy Certification Requirements
million in 2013.
In April 2010, China’s AQSIQ notified the United
U.S. officials have continued to urge China to take States that it would begin imposing new conditions
steps to remove or limit the suspension, which on the import of dairy products under a December
remains in place. In this regard, the United States 2009 measure, which was to become effective in
increasingly has stressed the importance of May 2010. Of specific concern were requirements
regionalization as a long-term solution in a that the United States certify on export certificates
globalized economy. Avian influenza outbreaks, for dairy shipments that they are free of many
both low pathogenicity and high pathogenicity, are diseases that are not of concern in pasteurized milk
occurring with greater frequency due to migratory products. Responding to requests from the United
bird movements and globalized trade flows. The States, China delayed the effective date to June 2010
United States has continued to press for OIE- and subsequently allowed the United States to
approved regionalization measures in cases of continue to ship products to China after the new
isolated outbreaks of HPAI, like those in the United effective date, so long as technical discussions were
States. To date, although U.S. regulators have met ongoing. However, this situation was still creating a
with China to discuss regionalization, China has heightened level of uncertainty for U.S. exporters
remained unwilling to adopt regionalization and their potential Chinese buyers. In December
measures. Nevertheless, at the November 2016 2012, the United States and China provisionally
JCCT meeting, China agreed to exchange information agreed upon a bilateral certificate, and it was fully
and collaborate with the United States on efforts to implemented in early 2013. Since then, the United
move toward a regionalization approach for HPAI States has maintained close contact with U.S.
consistent with OIE guidelines in place of the current industry, and it appears that the finalized certificate
nationwide ban that China has imposed on the is generally helping to facilitate market access for
United States. exports of U.S. dairy products to China.
In July 2017, Chinese regulatory officials from AQSIQ In June 2017, the United States and China signed an
and MOA traveled to the United States and MOU identifying the third-party certification bodies
conducted an audit of the U.S. avian influenza that are authorized to audit U.S. dairy facilities to
regionalization system. In August 2017, the United ensure that they comply with Chinese food safety
States notified the OIE that it had fulfilled its requirements. This MOU should lead to increased
requirements and could self-declare freedom from market access for U.S. dairy exporters. Since the
HPAI. Despite the fact that the United States is now signing of the MOU, the United States has been
recognized as HPAI-free, China continues to maintain closely examining its implementation, as part of the
its restrictions on U.S. poultry exports without United States’ continuing efforts to ensure the
scientific justification. unhindered access of U.S. dairy exports to China’s
market. To date, China has been slow to certify U.S.
Separately, the United States also has urged China dairy facilities, preventing this MOU from reaching
not to impose import suspensions due to outbreaks its full potential.
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2018 USTR Report to Congress on China’s WTO Compliance
members continued to raise concerns with China production of Chinese agricultural products that
about the broad scope of and lack of clarity in the compete with imports from the United States.
certificate requirement. In September 2017, China
notified the TBT Committee that it would allow a In 2015, the United States pressed China to address
two-year transitional period for the certificate the mounting concerns about its increased domestic
requirement, as it was changing the enforcement support spending, which are negatively impacting
date from October 2017 to October 2019. The global trade flows. In May 2015, China submitted a
United States is using this time period to continue to notification concerning domestic support measures
press China for clarifications regarding the scope of to the WTO, but it only provided information up to
products subject to the certificate requirement and 2010. In December 2018, China notified domestic
the applicable scientific justifications. support measures for the period 2011-2016.
Meanwhile, reports commissioned by certain U.S.
farm groups to calculate support levels for certain
Domestic Support commodities, including rice, wheat, corn and
soybeans, concluded that China was substantially
After its accession to the WTO, China began making exceeding its WTO-agreed domestic support
significant changes to its domestic subsidies and spending limits.
other support measures for its agricultural sector.
China has established direct payment programs, In September 2016, the United States initiated a
instituted minimum support prices for basic WTO case against China, challenging government
commodities and sharply increased input subsidies. support for the production of rice, wheat and corn
China has implemented a cotton reserve system, as being in excess of China’s commitments. Like
based on minimum purchase prices, although, since other WTO members, China committed to limit its
2014, facing large stocks of cotton reserves, China support for producers of agricultural commodities.
has moved away from minimum purchase prices to a China’s market price support programs for these
target price-based support approach. China also has agricultural commodities appear to provide support
begun several new support schemes for hogs and far exceeding the agreed levels. This excessive
pork, along with a purchasing reserve system for support creates price distortions and encourages
pork. overproduction. Consultations took place in October
2016. In January 2017, a WTO panel was established
In October 2011, China submitted its overdue to hear the case at the United States’ request, and
notification concerning domestic support measures 27 other WTO members joined as third parties.
for the period 2005 through 2008. Even though this Hearings before the panel took place in January and
notification documented an increase in China’s April 2018, and the panel is expected to issue its
support levels, the United States was concerned that decision in early 2019.
the methodologies used by China to calculate
support levels, particularly with regard to China’s Throughout 2018, the United States continued to
price support policies and direct payments, resulted review closely China’s use of domestic subsidies and
in underestimates of those support levels. Indeed, other support measures for other agricultural
since China’s accession to the WTO, it appeared that commodities. The United States also continued to
China’s agriculture system had transformed from a press China to provide an up-to-date notification of
system focused on generating tax revenues from its domestic support measures to the WTO and also
agricultural producers into a system that provided to provide more clarity regarding its methodologies
substantial net subsidies to agricultural producers, for calculating support levels in order to ensure
with many of the subsidy mechanisms tied to proper reporting and China’s adherence to its WTO
production incentives and resulting in increased commitments.
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In December 2018, China notified domestic support limited exceptions, WTO members provide national
measures for the period 2011-2016. This and most favored nation treatment to the nationals
notification showed that China had exceeded its de of other WTO members with regard to the
minimis level of domestic support for soybeans (in protection and enforcement of intellectual property
2012, 2014 and 2015), cotton (from 2011 to 2016), rights.
corn (from 2013 to 2016), rapeseed (from 2011 to
2013) and sugar (2012). The situation was likely Since its accession to the WTO, China has
even worse, as the methodologies used by China to established a framework of laws, regulations and
calculate domestic support levels result in departmental rules relating to its WTO
underestimates. The notification also identified commitments. However, reforms are needed in key
changes to its domestic support programs for cotton areas, including by amending China’s laws and
and corn. regulations in the area of trade secrets, providing
regulatory data protection for pharmaceutical
Export Subsidies products in a manner consistent with international
research and development practices and legal
It is difficult to determine whether or to what extent standards, improving China’s measures for copyright
China maintains export subsidies in the agricultural protection on the Internet following China’s
sector, in part because China has not notified all of accession to the World Intellectual Property
its subsidies to the WTO. For example, China has not Organization Internet treaties, and addressing
notified subsidies provided in connection with deficiencies in China’s criminal IPR enforcement
agricultural export bases, which appear to include measures. In addition, a growing number of draft
subsidies contingent upon export performance. The and final Chinese measures present market access
United States will continue to investigate the challenges or otherwise contribute to an uneven
Chinese government’s subsidization practices in playing field in China for U.S. and other foreign
2019, although China’s incomplete subsidy intellectual property rights holders.
notifications hinder those efforts. The United States
will make every effort to ensure that any use of Even though China’s State Council released the 13th
export subsidies is eliminated. National Five-Year Plan for Intellectual Property
Right Protection and Utilization in January 2017 and
INTELLECTUAL PROPERTY RIGHTS the State Council Leading Group to Combat
Intellectual Property Rights Infringement and the
With its acceptance of the TRIPS Agreement, China Sale of Shoddy Goods published an Action Plan on IP
agreed to adhere to generally accepted international Protection of Foreign-Invested Enterprises in
norms to protect and enforce the intellectual September 2017, effective IPR enforcement remains
property rights held by U.S. and other foreign a serious problem throughout China. There have
companies and individuals. Specifically, the TRIPS been individual reports of welcome cooperation
Agreement sets minimum standards of protection between certain rights holders and local authorities,
for copyrights and related rights, trademarks, and several court decisions that appear to uphold
geographical indications, industrial designs, patents, the rights of U.S. mark holders. Nevertheless,
integrated circuit layout designs and undisclosed overall IPR enforcement is hampered by gaps in
information. The TRIPS Agreement also sets rights protection as well as by civil and
minimum standards for IPR enforcement in administrative recourse mechanisms that fail to
administrative and civil actions and, in regard to deter widespread IPR infringement and by a still
copyright piracy and trademark counterfeiting, in insufficient enforcement commitment overall, as
criminal actions and actions at the border. The demonstrated by resource constraints, lack of
TRIPS Agreement requires as well that, with very training, lack of initiative, lack of transparency in the
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enforcement process and its outcomes, procedural regulations across all critical areas, including
obstacles to civil enforcement, lack of coordination criminal, civil and administrative IPR enforcement
among Chinese government ministries and agencies, and legislative and regulatory reform. For example,
and local protectionism and corruption. obstacles that have been noted in the area of
criminal enforcement include China’s high
Legal Framework thresholds for criminal prosecution, the lack of
criminal liability for certain acts of copyright
Overview infringement, the profit motive requirement in
copyright cases, the requirement of identical
As previously reported, at the time of its accession trademarks in counterfeiting cases, and the absence
to the WTO, China was in the process of modifying of minimum, proportional sentences and clear
the full range of IPR laws, regulations and standards for initiation of police investigations in
departmental rules. Within several months after its cases where there is a reasonable suspicion of
accession, China had completed amendments to its criminal activity. The United States also has been
Patent Law, Trademark Law and Copyright Law, pressing China to adopt a variety of improvements
along with regulations and departmental rules to to its administrative and civil enforcement regimes.
implement them. China also had issued regulations For example, China’s failure to clarify that sports
and departmental rules covering specific subject broadcasts are eligible for copyright protections is an
areas, such as integrated circuits, computer software ongoing concern. While not all of these issues raise
and pharmaceuticals. U.S. experts, together with specific WTO concerns, all of them will continue to
experts from other WTO members, subsequently detract from China’s enforcement efforts until
participated in a comprehensive review of these addressed.
measures as part of the first transitional review
before the TRIPS Council in 2002. Technology Transfer and Technology Localization
As China has continued to issue new IPR measures, The United States remains concerned about a range
there are still instances when it issues measures in of Chinese policies and practices that condition
final form without having provided an opportunity market access or the receipt of government benefits
for public comment. Many of these measures are or preferences on relevant intellectual property
considered “normative documents” within China’s being owned or developed in China or on key
legal system and are styled as “opinions” or intellectual property being disclosed to Chinese
“guidance,” but they still have a decisive effect on government authorities. These policies and
how policies that affect IPR are implemented and practices are objectionable not only because of their
therefore should be published in proposed form for apparently discriminatory treatment of foreign rights
public comment. The United States routinely has holders, but also because they seem to be calculated
provided detailed written comments on various draft to pressure foreign companies to transfer their
Chinese measures relating to intellectual property technologies to enterprises in China. These policies
rights. The United States also has followed up with and practices also seem to discourage Chinese
bilateral meetings where necessary. enterprises from developing their own innovative
technologies. Concerns among U.S. and other
In addition, the United States repeatedly has urged foreign stakeholders are growing because of new
China to pursue additional legislative and regulatory and proposed measures being issued by China in this
changes, using both bilateral meetings and the area.
annual transitional reviews before the WTO’s TRIPS
Council. The focus of the United States’ efforts has As previously reported, in prior years, China has
been to persuade China to improve its laws and made JCCT and S&ED commitments not to maintain
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any measures that condition eligibility for or licensing of intellectual property that results from
government procurement preferences for goods or research and development activities in China. The
services based on where associated intellectual measure is gravely concerning because it appears
property is owned or was developed, and to treat that the requirements relating to the transfer of
IPR owned or developed in other countries the same scientific data and intellectual property apply to all
as IPR owned or developed in China. China also has companies operating in China, including foreign
agreed to revise or eliminate various measures that companies.
appeared to be inconsistent with these
commitments. Another technology transfer issue involves the
innovation-impeding restrictions relating to the
Earlier engagement through the July 2014 S&ED licensing of intellectual property imposed by the
meeting had focused on the need for China to State Council’s Regulations on Technology Import
address U.S. concerns about China’s pursuit of and Export, which went into effect in 2002. Among
intellectual property localization. At that time, China other things, these regulations appear to impose
committed that its Ministry of Science and contractual restrictions on the licensing of foreign
Technology would develop a pilot program technology into China, such as by requiring
addressing an eligibility condition for a tax measure mandatory indemnities against third party
requiring high technology enterprises to, as an infringement and mandatory ownership of
alternative to IP ownership, hold a global exclusive improvements by domestic licensees. At the same
license to the relevant technology. Nevertheless, time, no similar restrictions appear to apply to
this work stream has not resulted in the necessary license agreements between two Chinese
amendments to the measure at issue, and U.S. enterprises or when a Chinese enterprise is
concerns therefore remain unaddressed. exporting technology. At the November 2016 JCCT
meeting, China committed to actively research how
Meanwhile, China has continued to issue new and to revise these regulations to address U.S. concerns
proposed policies and practices discriminating and to hold a joint seminar with the United States on
against foreign rights holders and pressuring foreign this topic, but to date China has not published any
companies to transfer their technologies to proposed revisions, and therefore the United States’
enterprises in China. A number of measures issued concerns remain unaddressed. Accordingly, in
in the name of enhancing cybersecurity or protecting March 2018, USTR challenged these regulations in
national security impose unwarranted IP disclosure the WTO. A dispute settlement panel was
conditions and contain provisions requiring related established in November 2018, and proceedings are
IP rights to be owned and developed in China. Of ongoing.
additional concern are recently issued measures
affecting the pharmaceuticals and medical devices Trade Secrets
industries, including the provision of expedited
regulatory treatment for localized manufacturing or In November 2017, China’s National People’s
owning a Chinese patent. Congress adopted amendments to the Anti-unfair
Competition Law that took effect on January 1, 2018.
One example is the Measures for the Administration Despite strong encouragement from the United
of Scientific Data, issued by the State Council in States, China did not take this opportunity to create
March 2018 without first providing an opportunity a stand-alone law governing trade secrets, which
for public comment. The broad scope and vague could have reduced the existing confusion
language used in this measure appears to require surrounding the numerous laws and administrative
the transfer of scientific data under a wide range of regulations that impact the protection of trade
circumstances, and it may also require the transfer secrets in China. The amended law raises some
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concerns. For example, it contains a definition of parties’ “squatting” on foreign company names,
trade secrets that could exclude certain types of designs, trademarks and domain names, the
proprietary information from its scope of protection, registration of other companies’ trademarks as
and it continues to limit its application to actions of design patents and vice versa, the use of falsified or
entities engaged in competitive commercial activity, misleading license documents or company
rather than actions taken by any natural or legal documentation to create the appearance of
person. The amended law also does not provide for legitimacy in counterfeiting operations, false
higher damages in cases of willful misappropriation. indications of geographic origin of products, and
The United States has provided specific input to trademark registrations that are made in bad faith
China as to the appropriate changes that should be by unscrupulous Chinese registrants. The United
made to improve trade secrets protection. States also has raised concerns with China about key
unresolved questions, such as the need to clarify the
Online Copyright Protection constructive knowledge standard applied in landlord
liability proceedings.
Since China acceded to the WTO, U.S. engagement
has focused on China’s online copyright protection. Of particular and growing concern is the continuing
This engagement has seen important but incomplete registration of trademarks in bad faith, as disputes
steps put forward by China. involving bad faith trademark filings persisted in
2018. U.S. companies across industry sectors
In December 2016 and November 2017, China continue to face Chinese applicants registering their
published drafts of a new E-Commerce Law for marks and “holding them for ransom” or seeking to
public comment. In written comments, the United establish a business building off of the U.S.
States stressed that the final version of this law company’s global reputation. These incidents have
should not undermine the existing notice-and- caused consumer confusion, commercial harm and
takedown regime and should promote effective costly legal proceedings. While China’s National
cooperation in deterring online piracy and People’s Congress amended China’s Trademark Law
counterfeiting. Unfortunately, the law as enacted in in 2013, including through the addition of provisions
August 2018 does not address these concerns. to combat bad faith trademark filings, expanding
protection to sound marks, permitting multi-class
Progress toward the amendment of the Copyright registration and streamlining application and appeal
Law appears to have stalled, despite the pressing proceedings, the amended law has not been
need to address major gaps in copyright protection, sufficient to surmount the great challenges facing
particularly online copyright protection. Reports of a rights holders, particularly in curbing bad faith
possible intention to move forward with only registrations of foreign marks. Indeed, the number
uncontroversial changes underscore concern of a of bad faith trademark registrations appears to have
missed opportunity to address major deficiencies in grown. At the same time, bad faith trademark
China’s copyright framework. owners have grown increasingly aggressive. They
sue legitimate brand owners in Chinese courts for
Trademark Issues trademark infringement, direct China’s customs
authorities to seize goods of U.S. companies en
The United States has pressed China to address a route to foreign markets and register infringing
variety of weaknesses in China’s legal framework business names in foreign jurisdictions to support
that do not effectively deter, and that may even their fraudulent trademark activities in China – all of
encourage, certain types of infringing activity. For which expands the economic impact of bad faith
example, U.S. companies continue to face numerous trademark registrations well beyond China’s borders.
trademark challenges in China, such as unauthorized This issue continues to be raised with China.
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agreement, China committed to ensure that no 55. While draft Notice 55 is conceptual in nature
subsequent applicant may rely on the undisclosed and lacks essential details, the United States is
test or other data submitted in support of an concerned that draft Notice 55 will reduce the
application for marketing approval of new duration of data protection to the extent that an
pharmaceutical products for a period of at least six application for marketing approval in China has been
years from the date of marketing approval in China. received more than one year after first approval by
However, Chinese law does not include an regulatory authorities in the United States, the EU or
appropriate definition of the term “new chemical Japan.
entity” for purposes of identifying test or other data
entitled to protection. There are reports that, as a In October 2017, China also published limited draft
result of the definition, generic manufacturers of revisions to the Drug Administration Law and stated
pharmaceutical products have been granted that future proposed revisions to the remainder of
marketing approvals by China’s CFDA prior to the this law would be forthcoming. In November 2017,
expiration of the six-year protection period and, in CFDA issued the draft Drug Registration Regulations,
some cases, even before the originator’s product has which purported to promote reform and
been approved. development, but actually reinforce a dated policy of
only providing data protection for drugs first
This concern has remained unresolved despite the marketed in China. Drugs first marketed outside
issuance of a number of proposed and final China would not qualify under CFDA’s definition of
measures by Chinese authorities. At the December “new drug” and therefore would not be eligible for
2012 JCCT meeting, for example, China committed data protection. The United States has conveyed its
to define the term “new chemical entity” in a serious concerns about this and other draft
manner consistent with international research and measures to China’s regulatory authorities.
development practices in order to ensure regulatory
data of pharmaceutical products are protected In general, the numerous draft measures issued by
against unfair commercial use and unauthorized China with regard to pharmaceuticals contain both
disclosure. However, in the August 2015 Opinions positive and adverse aspects and often lack critical
on Reforming the Review and Approval System for definitions and other details, which will need to be
Drugs and Medical Devices, China proposed a developed. Accordingly, in 2019, the United States
definition for “new drug” that could significantly will remain in close contact with U.S. industry and
affect the introduction of foreign pharmaceuticals will continue to examine developments carefully and
into China’s market and that would be inconsistent seek to ensure that U.S. interests are protected in
with international best practices. In addition, this this area.
measure called for providing accelerated review and
approval for innovative new pharmaceuticals where Other Patent Issues
the applicant has shifted manufacturing activities to
China. It also called for the expedited review and In recent years, China’s regulatory authorities have
approval of pharmaceuticals listed in a catalogue issued draft updates to its Standardization Law, as
determined, in part, by MIIT – an agency without a well as proposed and final measures relating to
direct link to determining safety and efficacy or standards that incorporate patents and relating to
public health priorities. “secure and controllable” concepts, departmental
rules on competition enforcement as it relates to
In May 2017, CFDA issued the draft Policies Relevant intellectual property from Anti-monopoly Law
to the Protection of the Rights and Interests and enforcement agencies, draft Patent Law
Innovators for the Encouragement of Innovation in amendments, and a judicial interpretation on patent
Drugs and Medical Devices, known as draft Notice infringement proceedings. Individually and
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collectively, these proposed and final measures with the European Union. The announcement
continue to generate concerns among U.S. and other offered a 60-day period for interested parties to file
foreign stakeholders. The United States has been oppositions. The United States raised a number of
carefully examining developments and has raised procedural questions regarding this process and
concerns with China about particular aspects of encouraged AQSIQ to give full consideration to
these various measures in both draft and final form. stakeholder input. The United States also asked
AQSIQ to abide by China’s existing bilateral
Geographical Indications commitments to the United States relating to GIs. In
2018, the United States continued to engage China
At the December 2014 JCCT meeting, China agreed to ensure that China complies with its bilateral and
that a term, or its translation or transliteration, is multilateral commitments and adheres to best
not eligible for protection as a GI in its territory practice standards.
where the term is generic in its territory. China also
committed that the relationship between Enforcement
trademarks and GIs is to be handled in accordance
with relevant articles in the TRIPS Agreement and Overview
that legal means are available for interested third
parties on the above grounds to object to and to The TRIPS Agreement requires China to ensure that
cancel any registration or recognition granted to a enforcement procedures are available so as to
GI. In addition, where a component of a compound permit effective action against any act of IPR
GI is generic in its territory, China agreed that the GI infringement covered by the TRIPS Agreement,
protection is not to extend to that generic including expeditious remedies to prevent
component. At the November 2015 JCCT meeting, infringement and remedies that constitute a
China further clarified that these commitments apply deterrent to further infringement. Effective IPR
to all GIs, including those protected pursuant to enforcement has not been achieved, and IPR
international agreements. China also committed to infringement remains a serious problem throughout
follow transparent procedures for developing China. IPR enforcement is hampered by insufficient
cancellation procedures for already-granted GIs and deterrence offered by civil and administrative
targeted the end of 2016 for publishing these recourse mechanisms as well as a still insufficient
procedures in draft for public comment. commitment overall, as demonstrated by resource
constraints, lack of training, lack of initiative, lack of
In March 2016, AQSIQ issued the Measures on transparency in the enforcement process and its
Protection of Foreign Geographical Indication outcomes, procedural obstacles to civil enforcement,
Products, which lists circumstances for the lack of coordination among Chinese government
revocation of foreign GIs. The United States has ministries and agencies, and local protectionism and
been raising questions and making suggestions to corruption. In particular, in recent years, it appears
improve this system and continues to work with that the actions of China’s IPR enforcement
AQSIQ on ways to help ensure that common names authorities, including China’s courts, at times may
are not disadvantaged in China and to address have been guided by industrial policy objectives,
possible inconsistencies between AQSIQ’s treatment resulting in U.S. companies receiving unfair and
of GIs and the trademark and GI systems maintained biased treatment and often leading to the loss or
by SAIC and MOA. significant devaluation of a U.S. company’s
technology, intellectual property or know-how.
In June 2017, AQSIQ issued a notice listing numerous
geographical indications to be considered for Largely as a reflection of enforcement concerns, the
potential recognition through a bilateral agreement United States elevated China to the Special 301
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“Priority Watch List” in April 2005, where it has remedies as well as the need to improve the
remained through 2018. Challenges have evolved effectiveness of civil and administrative enforcement
over time, and important new concerns have arisen. mechanisms. In addition, a variety of U.S. agencies
The Special 301 Report for 2018 notes that the state has held regular bilateral discussions with their
of IP protection and enforcement in China reflects Chinese counterparts, which have been periodically
the country’s failure to implement promises to supplemented by technical assistance programs.
strengthen IP protection. While some positive
developments have emerged, ongoing concerns Meanwhile, the United States has continued to
extend not only to gaps in legal authorities and weak pursue a comprehensive initiative to combat the
enforcement channels, but also to investment and enormous global trade in counterfeit and pirated
other regulatory requirements that promote the goods, including exports of infringing goods from
acquisition of foreign technology by domestic China to the United States and the rest of the world.
companies at the expense of providing reciprocity, a The Intellectual Property Enforcement Coordinator,
level playing field, transparency and predictability. a White House position, coordinates these and other
The United States, other countries and the private efforts. U.S. Customs and Border Protection (CBP)
sector have stressed the urgent need for China to and U.S. Immigration and Customs Enforcement
embrace meaningful and deep reform as it proceeds (ICE) seized a record number of 34,143 shipments of
with a years-long overhaul of its IP-related legal and IPR-infringing goods fiscal year 2017. IPR seizures
regulatory framework. increased 8 percent over fiscal year 2016 and for the
second year in a row, CBP and ICE seized more than
No longer published concurrently with the Special 30,000 shipments of counterfeit and pirated goods.
301 report, the Notorious Markets List identifies The total estimated manufacturers’ suggested retail
online and physical markets that exemplify key price (MSRP) would have been $1.2 billion if the
challenges in the global struggle against piracy and goods had been genuine. The top two economies
counterfeiting. The 2018 Notorious Markets List, as for seized goods in fiscal year 2017 were China and
in prior years, included several examples of Hong Kong. Overall, approximately 48 percent of
notorious physical and online markets located in the seizures involved goods originating from China,
China. as CBP seized 16,538 shipments from China with a
total estimated MSRP of $554.6 million.
The United States continues to place the highest Approximately 39 percent of the seizures involved
priority on addressing IPR protection and goods originating from Hong Kong, as CBP seized
enforcement problems in China. Nevertheless, it is 13,357 shipments from Hong Kong with an
clear that there will continue to be a need for estimated MSRP of $386.2 million.
sustained efforts from the United States and other
WTO members and their industries, along with the Over the years, China has pursued policies that
devotion of considerable resources and political will continue to impede effective enforcement. Several
to IPR protection and enforcement by the Chinese of these policies were the focus of a WTO case
government, if significant improvements are to be initiated by the United States in April 2007, seeking
achieved. changes to China’s legal framework that would
facilitate the utilization of criminal remedies against
The United States has worked with central, piracy and counterfeiting, enhance border
provincial and local government officials in China in a enforcement against counterfeit goods and provide
sustained effort to improve China’s IPR enforcement, copyright protection for works that have not
with a particular emphasis on the need for obtained approval from China’s censorship
dramatically increased utilization of criminal authorities. As discussed above, China did not
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appeal WTO panel rulings in favor of the United involving U.S. companies and Chinese competitors
States and subsequently modified the measures at go unreported, both because U.S. companies want
issue, effective March 2010. to avoid both reputational harm and because they
weigh the costs of pursuing legal relief against the
At the same time, other changes were needed to likelihood of obtaining no redress through Chinese
address market access concerns. As the WTO ruled legal channels and possible commercial
in 2009 in a WTO case brought by the United States, repercussions for shining light on the conduct at
China maintains market access barriers, such as issue. Largely for these reasons, according to a 2015
import and distribution restrictions, which industry survey, approximately 50 percent of U.S.
discourage and delay the introduction of numerous companies doing business in China choose not to
types of legitimate foreign products into China’s transfer key technologies into China. The taking of
market. These barriers have created additional trade secrets is a key concern raised in USTR’s
incentives for infringement of copyrighted products Section 301 investigation.
like books, newspapers, journals, theatrical films,
DVDs and music and inevitably lead consumers to Ensuring that companies are able to protect and
the black market, compounding the severe problems enforce their IPR in China effectively, including trade
already faced by China’s enforcement authorities. secrets, is essential to promoting successful
The United States welcomed the steps that China commercial relationships between U.S. and Chinese
took in 2011 to comply with the WTO rulings in this companies. In bilateral exchanges, the United States
case with regard to books, newspapers, journals, has urged China to take a holistic approach and to
DVDs and music. The United States also welcomed address many critically needed elements to
the U.S.-China MOU covering theatrical films, which strengthen its trade secrets regime, including in the
so far has provided significant increases in the areas of enhancing access to preliminary injunctions
number of foreign films imported and distributed in and evidence preservation orders, increasing
China each year and significant additional revenue damages, and protecting trade secrets from
for U.S. film producers. Further developments damaging disclosure by government bodies.
relating to the films MOU are discussed above in the
Trading Rights section. Going forward, protection against trade secret
misappropriation in China will continue to be a top
Trade Secrets priority for the United States. The United States
expects China to fully implement its past
The United States remains seriously concerned commitments and to make further needed
about continued instances in which the trade secrets improvements in its trade secrets regime.
of U.S. companies have been stolen by, or for the
benefit of, Chinese competitors. U.S. companies Software Piracy
investing in research and development in China are
particularly at risk that locally hired engineers and For several years, the United States has raised
other employees with access to their trade secret serious concerns about software piracy in China. A
information will steal that information and transfer it major focus of the United States’ engagement of
to a competing state-owned enterprise or private China in this area has focused on Chinese
Chinese enterprise. It has been difficult for some government agencies and state-owned enterprises.
U.S. companies to obtain legal relief through China’s
legal system against those who have benefitted from As previously reported, in response to U.S. concerns
this type of theft, despite apparently compelling about software piracy raised during the run-up to
evidence demonstrating guilt. The United States is the April 2006 JCCT meeting, China issued rules
also concerned that many more trade secrets cases requiring that computers be pre-installed with
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licensed operating system software and that remain substantially below levels in other markets,
government agencies purchase only computers measured in a variety of ways, ranging from
satisfying this requirement, and a series of other spending on legitimate music as a percentage of GDP
JCCT and S&ED commitments relating to software to software sales per personal computer. The
piracy, including ones requiring Chinese government United States accordingly has urged China to
agencies at all levels of government and central continue its efforts to improve both protection and
state-owned enterprises to purchase and use enforcement and to ensure that they result in an
legitimate software, and to promote the centralized increase of sales of legitimate goods and services
procurement of software. from all sources, including imports.
Nevertheless, the relatively modest progress made One problem is that television and radio tariffs for
by China over the last several years in reducing the the broadcast of musical works were not adopted in
rate of end-user business software piracy rates is of China until January 2010, nine years after it was
continuing concern to the United States and to a obligated to do so. These tariffs remain remarkably
variety of software developers. The United States low.
will insist upon timely, meaningful and verifiable
implementation of China’s JCCT and S&ED In addition, piracy of movies (including during the
commitments to eliminate the use of unauthorized pre-release phase), television programming and
software at all levels of government and to music remains widespread, particularly online, as
discourage the use of unauthorized software by China’s Internet users are increasingly turning to
enterprises, including major state-owned and state- streaming media to watch foreign movies and
invested enterprises, beginning with pilot projects television programming. The encouraging growth of
encouraging automated software asset management legitimate platforms streaming licensed content
and increased deterrent penalties for violators. experienced a damaging setback when Chinese
regulations governing content review imposed
China exacerbated the challenges facing U.S. and procedural obstacles that have resulted in extensive
other foreign suppliers of software in 2013 when the delays in legitimate platforms obtaining broadcast
State Council and MOF issued measures that impose permissions. In 2018, these content-based
price controls and related requirements on software restrictions increased, further restricting legitimate
purchases by government entities and possibly platforms from offering foreign content to Chinese
state-owned enterprises that appear to promote the consumers and further pushing Chinese consumers
purchase of domestic software over foreign to illegal and unauthorized online sources. The
software. The United States has raised serious United States has strongly encouraged China to
concerns with China about these measures, streamline procedures to avoid impediments to the
particularly in light of China’s JCCT and S&ED streaming of licensed content.
commitments relating to intellectual property
localization. An additional growing concern involves illegal online
content distribution via over-the-top set-top-boxes,
known as media boxes. Not only is this illegal
Other Piracy Issues practice widespread in China, but also China is
reported to be the source of a substantial share of
Despite many special campaigns in China over the media boxes pre-adapted to connect the user to
years to combat piracy, repeated bilateral online sources providing unlicensed content. China’s
commitments by China to increase enforcement and regulatory authorities have taken some initial
an increase in civil IPR cases, sales of U.S. copyright- enforcement steps, but more steps are needed, as is
intensive goods and services in the China market closer cooperation with their U.S. counterparts.
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In its Services Schedule, China committed to the commitments was scheduled to have been phased in
substantial opening of a broad range of services by December 11, 2007.
sectors over time through the elimination of many
existing limitations on market access, at all levels of At present, 17 years after China’s accession to the
government, particularly in sectors of importance to WTO, significant challenges still remain in securing
the United States, such as banking, insurance, the benefits of many of China’s services
telecommunications, distribution and professional commitments. Through WTO dispute settlement,
services. At the time, these commitments were the United States was able to fully open China’s
characterized as a good start toward opening up financial information services sector in 2009, as
China’s services sectors. China followed through on the terms of a settlement
agreement requiring China to create an independent
China also made certain “horizontal” commitments, regulator and to remove restrictions that had been
which are commitments that apply to all sectors placed on foreign financial information service
listed in its Services Schedule. The two most suppliers. Similarly, through WTO dispute
important of these cross-cutting commitments settlement, the United States was able to secure the
involve acquired rights and the licensing process. removal of importation and distribution restrictions
Under the acquired rights commitment, China applicable to copyright-intensive products such as
agreed that the conditions of ownership, operation books, newspapers, journals, DVDs and music, while
and scope of activities for a foreign company, as set also entering into a commercially beneficial MOU
out in the respective contractual or shareholder with China relating to the importation and
agreement or in a license establishing or authorizing distribution of theatrical films.
the operation or supply of services by an existing
foreign service supplier, will not be made more Beginning in 2017, China introduced a series of
restrictive than they were on the date of China’s measures that would ease or remove foreign equity
accession to the WTO. In other words, if a foreign caps over time in the securities, fund management,
company had pre-WTO accession rights that went futures and life insurance sectors. However, foreign
beyond the commitments made by China in its investors continue to face restrictions in these and
Services Schedule, the company could continue to other financial services sectors due to
operate with those rights. discriminatory, unpredictable and non-transparent
licensing procedures that effectively limit foreign
In the licensing area, prior to China’s WTO accession, participation.
foreign companies in many services sectors did not
have an unqualified right to apply for a license to In addition, strong concerns remain with regard to
establish or otherwise provide services in China. the implementation of other important services
They could only apply for a license if they first commitments, such as in the area of electronic
received an invitation from the relevant Chinese payment services, where China has not yet opened
regulatory authorities, and even then the decision- up its market to permit foreign companies to supply
making process lacked transparency and was subject electronic payment services for domestic currency
to inordinate delay and discretion. In its accession credit and debit card transactions, even though it
agreement, China committed to licensing procedures lost a WTO dispute on this issue and agreed to come
that were streamlined, transparent and more into compliance with its GATS commitments by July
predictable. 2013.
Under the terms of its Services Schedule, China was In 2018, China also continued to maintain or erect
allowed to phase in many of its services restrictive or cumbersome terms of entry in some
commitments over time. The last of these sectors that prevent or discourage foreign suppliers
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from gaining market access. Many of these actions China, i.e., to provide wholesaling, commission
raise questions about commitments made by China agents’, retailing or franchising services or to provide
in its Services Schedule. For example, China related services, such as repair and maintenance
maintains an informal ban on entry in the basic services. These services were largely restricted to
telecommunications sector, and despite its Chinese enterprises, although some foreign-invested
commitments to open this sector, China has not enterprises were allowed to engage in distribution
granted any new licenses since acceding to the WTO services within China under certain circumstances.
on December 11, 2001. The requirement that any
joint venture partners for basic telecommunications In its WTO accession agreement, China committed to
services be majority government-owned shuts off eliminate national treatment and market access
foreign suppliers from working with Chinese restrictions on foreign enterprises providing these
enterprises that are not majority government- services through a local presence within three years
owned. China also has issued very few licenses for of China’s accession (i.e., by December 11, 2004),
foreign value-added telecommunications suppliers subject to limited product exceptions. In the
and continues to seek to regulate this sector meantime, China agreed to progressively liberalize
according to a very restrictive listing of licenses that its treatment of wholesaling services, commission
does not correspond to the innovative nature of the agents’ services and direct retailing services (except
services involved. In addition, although China for sales away from a fixed location), as described
announced that it was removing registered capital below.
requirements for many sectors (on a non-
discriminatory basis) in 2014, the subsequently Overall, China has made progress in implementing its
issued implementing rules are somewhat vague and distribution services commitments. As discussed
the impact on foreign suppliers in many sectors is below, however, significant concerns remain in some
still not clear. Moreover, in sectors such as banking, areas.
insurance and legal services, uneven and sometimes
discriminatory application of branching regulations
limit or delay market access for foreign suppliers. In Wholesaling Services
other sectors, particularly construction services,
problematic measures appear to be taking away China committed that, immediately upon its
previously acquired market access rights. accession to the WTO, it would begin to eliminate
national treatment and market access limitations on
Overall, the U.S. share of China’s services market foreign enterprises providing wholesaling services
remains well below the U.S. share of the global and commission agents’ services through a local
services market. Any successes that U.S. services presence pursuant to an agreed schedule of
suppliers have experienced in China’s market have liberalization. Within three years after accession
been attributable largely to the incremental market (i.e., by December 11, 2004), almost all of the
openings phased in by China pursuant to its WTO required liberalization should have been
commitments, with China providing few additional implemented. By this time, China agreed to permit
significant market openings beyond those to which it foreign enterprises to supply wholesaling services
committed 17 years ago in its WTO accession and commission agents’ services within China
agreement. through wholly foreign-owned enterprises. In
addition, exceptions that China had been allowed to
DISTRIBUTION SERVICES maintain for books, newspapers, magazines,
pharmaceutical products, pesticides and mulching
Prior to its WTO accession, China generally did not films were to be eliminated. Exceptions for chemical
permit foreign enterprises to distribute products in fertilizers, processed oil and crude oil (but not salt
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and tobacco) were to be eliminated within five years products such as books, newspapers, journals,
after accession (i.e., by December 11, 2006). theatrical films, DVDs and music. As discussed above
in the Trading Rights section, a WTO panel issued its
As previously reported, MOFCOM issued the decision in August 2009, ruling in favor of the United
Measures on the Management of Foreign Investment States on all significant claims, and China appealed.
in the Commercial Sector in April 2004. Among other The WTO’s Appellate Body rejected China’s appeal
things, these regulations lifted market access and on all counts in December 2009, and China agreed to
national treatment restrictions on wholly foreign- come into compliance with these rulings by March
owned enterprises and removed product exceptions 2011. China subsequently issued several revised
for books, newspapers, magazines, pesticides and measures, and repealed other measures, relating to
mulching films as of the scheduled phase-in date of its distribution restrictions on imported books,
December 11, 2004. The regulations also required newspapers, journals, DVDs and music, although
enterprises to obtain central or provincial-level these steps have not yet brought China into full
MOFCOM approval before providing wholesale compliance with the WTO’s rulings, particularly with
services, and they appeared to set relatively low regard to the online distribution of music.
qualifying requirements, as enterprises needed only
to satisfy the relatively modest capital requirements With regard to theatrical films, China proposed
of the Company Law rather than the high capital bilateral discussions with the United States in order
requirements found in many other services sectors. to seek an alternative solution. After months of
Since the issuance of the regulations, U.S. companies negotiations, which included discussions between
have been able to improve the efficiency of their the two sides’ Vice Presidents, the United States and
China supply chain management. In addition, many China reached agreement in February 2012 on an
of them have been able to restructure their legal MOU designed to provide for substantial increases in
entities to integrate their China operations into their the number of foreign films imported and
global business more fully and efficiently, although distributed in China each year, substantial additional
problems remain in certain areas. revenue for U.S. film producers and the opening up
of distribution opportunities relating to imported
Books, Movies and Music films. The MOU also provided that it would be
reviewed after five years in order for the two sides
As in the area of trading rights, China continued to to discuss issues of concern, including additional
impose restrictions on foreign enterprises’ compensation for the U.S. side.
distribution of copyright-intensive products such as
books, newspapers, journals, theatrical films, DVDs To date, China has not yet fully implemented certain
and music, despite its commitments to remove most of its MOU commitments, including a critical
market access and national treatment restrictions commitment to open up film distribution
applicable to the distribution of these products by opportunities relating to imported revenue-sharing
no later than December 11, 2004. China’s films. In addition, U.S. industry reports that China
restrictions were set forth in a complex web of has been imposing an informal quota on the total
measures issued by numerous agencies, including number of U.S. revenue-sharing films and flat-fee
the State Council, NDRC, MOFCOM, the Ministry of films that can be imported each year, which, if true,
Culture, SARFT and GAPP. would undermine the terms of the MOU. As a
result, the United States has been pressing China for
As previously reported, the United States initiated a full implementation of the MOU.
WTO dispute settlement case against China in April
2007 challenging the importation and distribution The films MOU provided that it would be reviewed in
restrictions applicable to copyright-intensive calendar year 2017 in order for the two sides to
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discuss issues of concern, including additional Shortly before this deadline, as previously reported,
meaningful compensation for the U.S. side in terms China issued regulations that prevent U.S. and other
of the number of revenue-sharing films to be foreign enterprises from realizing the full benefits of
imported each year and the share of gross box office this important commitment. In particular, China’s
receipts received by U.S. enterprises. At the regulations impose high thresholds and other
November 2016 JCCT meeting, China promised that potential impediments on foreign enterprises
those discussions not only would seek to increase seeking to enter the wholesale distribution sector,
the number of imported revenue-sharing films and such as requirements relating to levels of storage
the U.S. share of gross box office receipts, but also capacity, pipelines, rail lines, docks and supply
would seek to address outstanding U.S. concerns contracts. It appears that some of these
relating to other policies and practices that may requirements can only be satisfied by China’s state-
impede the U.S. film industry’s access to China’s owned enterprises. The United States has raised
market, such as importation rights, the number of concerns about these regulations in connection with
distributors of imported films and the independence past transitional reviews before the Council for
of distributors, among other issues. In 2017, in Trade in Services, while U.S. industry has attempted
accordance with the terms of the MOU, the two to compete under difficult circumstances.
sides began discussions regarding the provision of
further meaningful compensation to the United Automobiles
States. These discussions continued until March
2018, when China embarked on a major government China began to implement several measures related
reorganization that involved significant changes for to the distribution of automobiles by foreign
China’s Film Bureau. The discussions have not yet enterprises in 2005, including the February 2005
resumed. Implementing Rules for the Administration of Brand-
Specific Automobile Dealerships, jointly issued by
Pharmaceuticals MOFCOM, NDRC and SAIC. In November 2005,
NDRC followed up with the Rules for Auto External
China committed to allow foreign suppliers to Marks, and in January 2006 MOFCOM issued the
distribute pharmaceuticals by December 11, 2004, Implementing Rules for the Evaluation of Eligibility of
and it began accepting applications from and issuing Auto General Distributors and Brand-specific Dealers.
wholesale licenses to foreign pharmaceutical While U.S. industry has generally welcomed these
companies about six months after that deadline. measures, they do contain some restrictions on
However, many restrictions affecting the foreign enterprises that might not be applied to
pharmaceuticals sector continue to make it difficult domestic enterprises. The United States has been
for foreign pharmaceutical companies to realize the closely reviewing how China applies these measures
full benefits of China’s distribution commitments. in an effort to ensure that foreign enterprises are
The United States is continuing to engage the not adversely affected by these restrictions.
Chinese regulatory authorities in these areas as part
of a broader effort to promote comprehensive Retailing Services
reform and to reduce the unnecessary trade barriers
that foreign companies face. China committed that, immediately upon its
accession to the WTO, it would begin to eliminate
Crude Oil and Processed Oil national treatment and market access limitations on
foreign enterprises providing retailing services
China committed to permit foreign enterprises to through a local presence pursuant to an agreed
engage in wholesale distribution of crude oil and schedule of liberalization. Within three years after
processed oil, e.g., gasoline, by December 11, 2006. accession (i.e., by December 11, 2004), almost all of
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the required liberalization should have been a situation exacerbated by China’s restrictions on
implemented. By this time, China agreed to permit foreign enterprises that seek to engage in wholesale
foreign enterprises to supply retailing services distribution of crude oil.
through wholly foreign-owned enterprises. In
addition, by this time, exceptions that China had Franchising Services
been allowed to maintain for pharmaceutical
products, pesticides, mulching films and processed As part of its distribution commitments, China
oil were to be eliminated. An exception for chemical committed to permit the cross-border supply of
fertilizers was to be eliminated within five years franchising services immediately upon its accession
after accession (i.e., by December 11, 2006). to the WTO. It also committed to permit foreign
enterprises to provide franchising services in China,
The April 2004 distribution regulations issued by without any market access or national treatment
MOFCOM lifted market access and national limitations, by December 11, 2004.
treatment limitations on wholly foreign-owned
enterprises and removed the product exceptions for In December 2004, as previously reported, MOFCOM
pesticides and mulching films as of the scheduled issued new rules governing the supply of franchising
phase-in date of December 11, 2004. These services in China, which included a requirement that
regulations also removed the product exception for a franchiser own and operate at least two units in
chemical fertilizer as of the scheduled phase-in date China for one year before being eligible to offer
of December 11, 2006. In addition, in the 2011 franchises in China. In 2007, China eased the
Catalogue Guiding Foreign Investment in Industry, requirement that a franchiser own and operate at
China removed the retailing of over-the-counter least two units in China by allowing a franchiser to
medicines from the “restricted” category of foreign offer franchise services in China if it owns and
investments. In the 2017 revision of this Catalogue, operates two units anywhere in the world.
which includes China’s Foreign investment Negative
List, China lifted its restrictions on the retailing of Direct Selling Services
pharmaceutical products more broadly. The 2018
version of China’s Foreign Investment Negative List In its WTO accession agreement, China did not agree
maintains this approach by removing all restrictions to any liberalization in the area of direct selling, or
on wholesale and retail trade (except for wholesale sales away from a fixed location, during the first
and retail of tobacco and tobacco products). three years of its WTO membership. By December
11, 2004, however, China committed to lift market
Processed Oil access and national treatment restrictions in this
area.
China committed to allow wholly foreign-owned
enterprises to sell processed oil, e.g., gasoline, at the Although the business volume of direct sales
retail level by December 11, 2004, without any companies in China continues to grow, the growth
market access or national treatment limitations. potential of this sector remains hindered by
However, to date, China has treated retail gas restrictions in the regulations governing direct selling
stations as falling under the chain store provision in services in China. These regulations were issued
its Services Schedule, which permits only joint more than 10 years ago and do not reflect the more
ventures with minority foreign ownership for “those relaxed regulatory approach governing emerging
chain stores which sell products of different types models of retailing services, such as online
and brands from multiple suppliers with more than marketing, which are competing directly with direct
30 outlets.” This treatment has severely restricted sales. Problematic provisions in the direct selling
foreign suppliers’ access to China’s retail gas market, regulations include restrictions on the types of
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capital requirements and other continuing effect in December 2006. For example, Chinese
impediments to entry into the domestic currency regulators did not act on the applications of foreign
business, participation of U.S. and other foreign banks incorporated in China to issue domestic
banks in the domestic currency business expanded currency credit and debit cards, or to trade or
tremendously after China acceded to the WTO on underwrite commercial paper or long-term listed
December 11, 2001, first with regard to foreign- domestic currency bonds.
invested enterprises and foreign individuals and later
with regard to Chinese enterprises, subject to Since 2007, China has made various bilateral
geographic restrictions allowed by China’s WTO commitments to implement incremental
commitments. China had committed to allow improvements in the access of U.S. banks to its
foreign banks to conduct domestic currency business market. Significant market openings have been
with Chinese individuals by December 11, 2006, but elusive, however.
it was only willing to do so subject to a number of
problematic restrictions. For example, in 2007, China committed to act on the
applications of foreign banks incorporated in China
In November 2006, the State Council issued the seeking to issue their own domestic currency credit
Regulations for the Administration of Foreign-funded and debit cards. However, the PBOC insists as a
Banks. Among other things, these regulations condition of its approval that the banks move the
mandated that only foreign-funded banks that have data processing for these credit and debit cards
had a representative office in China for two years onshore, a costly step that has limited foreign
and that have total assets exceeding $10 billion can participation in the market to date.
apply to incorporate in China. After incorporating,
moreover, these banks only become eligible to offer In 2011, China’s interbank bond market oversight
full domestic currency services to Chinese individuals body issued qualifying criteria for underwriters and
if they can demonstrate that they have operated in opened up a window for applications. Many U.S.
China for one year and have had two consecutive and other foreign institutions subsequently applied,
years of profits. The regulations also restricted the although the application procedures were
scope of activities that can be conducted by foreign discriminatory and non-transparent, and initially
banks seeking to operate in China through branches only one foreign bank was approved to underwrite.
instead of through subsidiaries. In particular, the Years later, during the run-up to the July 2017 CED
regulations restricted the domestic currency meeting, China issued bond settlement Type A
business of foreign bank branches. While foreign licenses and “sub” underwriting licenses to two
bank branches can continue to take deposits from qualified U.S. financial institutions. However, U.S.
and make loans to Chinese enterprises in domestic financial institutions continue to face restrictions in
currency, they can only take domestic currency terms of acquiring “lead” underwriting licenses.
deposits of RMB 1 million ($164,000) or more from
Chinese individuals and cannot make any domestic In 2011, China committed to allow locally
currency loans to Chinese individuals. In addition, incorporated U.S. and other foreign banks in China
unlike foreign banks incorporated in China, foreign to distribute mutual funds, act as custodians for
bank branches cannot issue domestic currency credit mutual funds, and serve as margin depository banks
and debit cards to Chinese enterprises or Chinese for qualified foreign institutional investors engaging
individuals. in financial futures transactions. However, there
does not appear to be an open and transparent
Other problems arose once the Regulations for the process that would allow U.S banks to obtain this
Administration of Foreign-funded Banks went into license.
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In 2013, China pledged that locally incorporated ownership in securities firms from 33 percent to 49
foreign banks and securities firms will be able to percent. Later, at subsequent S&ED meetings, China
directly trade government bond futures, but has not committed to gradually raise the permitted equity
yet allowed domestic or foreign banks to trade these holding of qualified foreign financial institutions in
hedging instruments. China also has not followed securities and fund management companies. China
through on a commitment to implement measures also committed to allow wholly foreign-owned
to recognize the enforceability of close-out netting, qualified foreign financial institutions to apply for
and as a result financial institutions continue to incur registration of private fund management entities to
sharply increased costs. engage in private securities fund management
business. Since then, China has taken limited steps
The continued existence of these various formal and to follow up on these commitments. As of
informal barriers to foreign participation in the December 2018, China had approved two foreign
Chinese banking sector has disadvantaged foreign companies to establish a majority (i.e., 51 percent)
banking institutions. Indeed, it has contributed, in foreign-owned joint venture in the securities sector,
part, to a decline in foreign banking assets’ share of and applications from other foreign companies
overall Chinese banking system assets since 2006. reportedly are under consideration. In addition,
China has licensed more than a dozen wholly
In November 2017, immediately after President foreign-owned companies to provide private fund
Trump’s visit to Beijing, China unilaterally announced management services to high-wealth individuals and
that it would be taking steps to ease restrictions on large institutional investors, although these services
foreign banks’ access to China’s market, including by represent only a subset of the services normally
lifting the equity caps on single and multiple foreign provided by securities and asset management
investors in existing Chinese-owned banks and companies.
financial asset management companies and by
beginning to apply the same set of rules for domestic Notably, foreign equity caps are not the only
and foreign investment in these banks. In 2018, restrictions that China imposes on foreign securities
China issued measures that remove these foreign firms and fund management firms. China also
equity caps and that remove some market access maintains non-transparent, burdensome and
limitations and ease some regulatory requirements discriminatory licensing practices that limit foreign
for foreign banks. However, the measures do not participation in these sectors.
clearly set out a path for U.S. investors to obtain
licenses needed to serve their clients effectively. In November 2017, immediately after President
The United States continues to press these issues Trump’s visit to Beijing, China unilaterally announced
with China. that it would phase out existing foreign equity caps
for securities, fund management and futures
SECURITIES AND ASSET MANAGEMENT SERVICES companies over the next three years to allow access
for wholly foreign-owned companies. With regard
Over the years, the United States has pressed China to securities, in April 2018, China issued an
for further liberalization of its securities and fund implementing measure that immediately raises the
management services sector beyond its original foreign equity cap to 51 percent and, in three years,
WTO commitments, where China capped foreign removes the foreign equity cap and scope of
ownership interests in securities firms at 33 percent business restrictions. However, other concerns
and in asset (i.e., fund) management firms at 49 remain, including with regard to the ability of foreign
percent. Following a commitment made at the May companies to obtain necessary licenses. With regard
2012 S&ED meeting, China raised permissible foreign to fund management, China has not yet issued an
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implementing measure. With regard to futures, in invited to apply for a license by China’s insurance
May 2018, China issued a draft implementing regulator, the China Insurance Regulatory
measure that states, in an explanatory note, that Commission.
China plans to allow 51 percent foreign equity
ownership immediately and to remove the foreign In its WTO accession agreement, China agreed to
equity cap in three years. Since then one foreign phase out existing geographic restrictions on all
company has received approval to establish a types of insurance operations during the first three
majority-owned securities company in China and years after accession. It also agreed to expand the
other companies’ applications have been accepted ownership rights of foreign companies over time.
for review. Specifically, China committed to allow foreign life
insurers to hold a 50-percent equity share in a joint
venture upon accession. China also committed to
MOTOR VEHICLE FINANCING SERVICES allow foreign property, casualty and other non-life
insurers to establish as a branch or as a joint venture
In its WTO accession agreement, China agreed to with a 51-percent equity share upon accession and
open up the motor vehicle financing sector to to establish as a wholly foreign-owned subsidiary
foreign non-bank financial institutions for the first two years after accession. In addition, foreign
time, and it did so without any limitations on market insurers handling large scale commercial risks,
access or national treatment. These commitments marine, aviation and transport insurance, and
became effective immediately upon China’s reinsurance were to be permitted to establish as a
accession to the WTO. As previously reported, China wholly foreign-owned subsidiary five years after
finally implemented the measures necessary to accession. China further agreed to permit all foreign
allow foreign financial institutions to obtain licenses insurers to expand the scope of their activities to
and begin offering auto loans in October 2004, include health, group and pension/annuities lines of
nearly three years after its accession to the WTO. insurance within three years after accession.
At the May 2012 S&ED meeting, China committed to China also made additional significant commitments
approve applications by qualified auto financing relating specifically to branching. China committed
companies (AFCs), including foreign-invested to allow non-life insurance firms to establish as a
entities, to issue financial bonds in China, so that branch in China upon accession and to permit
they have regular access to financing in the internal branching in accordance with the lifting of
interbank bond market. In addition, China China’s geographic restrictions. China further
committed that foreign-invested and Chinese- agreed that foreign insurers already established in
invested AFCs would enjoy the same treatment in China that were seeking authorization to establish
issuing asset-backed securities during the trial period branches or sub-branches would not have to satisfy
of asset securitization in China. the requirements applicable to foreign insurers
seeking a license to enter China’s market.
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restrictions or obstacles that hinder them from S&ED meeting, China announced that it planned to
expanding their presence in China’s market. expand its pilot projects for tax-deferred insurance
pension products to additional regions and that it
Since China’s accession to the WTO, U.S. would treat domestic enterprises and foreign-
engagement has led to improvements with regard to invested enterprises equally with regard to
capital requirements and licensing, although many participation and any future expansion, but it has
other needed improvements remain. For example, not followed through on this commitment. At the
China continues to use formal and informal policies July 2014 S&ED meeting, China announced that it
and practices to maintain market access barriers that welcomes foreign companies to submit applications
limit the market share of foreign-invested insurance for internal branches and that it would follow the
companies in China following China’s accession to timeframes set forth in its own regulations in
the WTO. At present, in the life and pension reviewing and approving those applications.
insurance sectors, where China only permits foreign
companies to participate in Chinese-foreign joint In November 2017, immediately after President
ventures, with foreign equity capped at 50 percent, Trump’s visit to Beijing, China unilaterally announced
the market share of these foreign-invested that it would allow foreign investors to hold up to 51
companies is about seven percent. China also caps percent equity in the life insurance sector in three
foreign equity at 50 percent in the health insurance years, with this cap removed entirely in five years, in
sector. The market share of foreign-invested order to allow access for wholly foreign-owned
companies in the non-life (i.e., property and companies. In May 2018, China issued a draft
casualty) insurance sector is only two percent, measure that would raise the foreign equity cap for
despite the absence of foreign equity caps. In life, pension and health insurance to 51 percent.
addition, although China’s Foreign Investment However, this draft measure provides no pathway
Catalogue indicates that China has liberalized its for full removal of the cap on foreign equity
insurance brokerage services sector, China has not investment.
provided clarification to confirm that foreign
insurance brokers will be subject to the same rules
as domestic insurance brokers, which is necessary to ENTERPRISE ANNUITIES SERVICES
enable foreign brokers to take advantage of the
promised market opening. Meanwhile, China has China maintains a complex approval process for the
entirely closed its market for political risk insurance licensing of suppliers of enterprise annuities
to foreign participation. services, and China’s regulatory authorities – which
include the Ministry of Human Resources and Social
Over the years, the United States has pressed China Security as well as the China Banking Regulatory
regarding the need for CIRC to follow non- Commission, the China Securities Regulatory
discriminatory procedures to approve U.S. Commission and CIRC – have not granted any new
companies for internal branches and sub-branches, licenses in more than seven years. Even under
following established regulatory time frames and previous licensing windows, China licensed very few
recognizing the right to obtain approval for multiple, foreign suppliers, and only for limited elements of
concurrent branches. The United States also has enterprise annuities services. The United States has
pressed CIRC to further open up the life, health and urged China to re-open its licensing process for
pension insurance, insurance brokerage and other suppliers of enterprise annuities services and to
insurance sectors, and to follow non-discriminatory ensure that its licensing procedures are transparent
procedures when approving new licensing requests and do not discriminate against qualified foreign
and internal branching requests. At the July 2013 suppliers.
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the typical payment card transaction in China, in an effort to ensure that U.S. suppliers would enjoy
which a Chinese consumer makes a payment in the full benefits of the market-opening
China’s domestic currency, the RMB. Instead, commitments that China made in its Services
through a variety of measures, the PBOC created a Schedule. Consultations were held in October 2010.
national champion, allowing only one domestic At the United States’ request, a WTO panel was
entity, China Union Pay, a state-owned entity established to hear this case in March 2011, and six
created by the PBOC and owned by participating other WTO members joined the case as third parties.
Chinese banks, to provide these services. Hearings before the panel took place in October and
December 2011, and the panel issued its decision in
Beginning in 2006, as the deadline for July 2012. The panel found the challenged
implementation of China’s commitments restrictions to be inconsistent with China’s
approached, a number of troubling proposals were commitments under the GATS. China decided not to
attributed to China Union Pay and apparently appeal the panel’s decision and subsequently agreed
supported by the PBOC. The common theme of to come into compliance with the WTO’s rulings by
these proposals was that China Union Pay would July 2013. China did take some steps toward
continue to be designated as a monopoly supplier of complying with the WTO’s rulings. China repealed
electronic payment services for domestic currency certain challenged measures, but imposed a new
transactions involving Chinese consumers, and that licensing requirement for foreign suppliers to be able
no other suppliers would be able to enter this to supply electronic payment services, without also
market. Through a series of bilateral meetings taking the critical step of establishing a process for
beginning in September 2006, the United States foreign suppliers to obtain the needed licenses.
cautioned China that none of the proposals being
attributed to China Union Pay seemed to satisfy the In October 2014, China’s State Council announced
commitments that China had made to open up its that China would be opening its market to foreign
market to foreign providers of electronic payment suppliers of electronic payment services, but it did
services. The United States reinforced this message not issue an official decision confirming the opening
during the transitional reviews before the until April 2015. In that decision, the State Council
Committee on Trade in Financial Services, held in set out various requirements that must be satisfied
November 2006. The United States also raised this by a company in order to receive a license, including
issue on the margins of the first SED meeting, held in a two-step application process, and authorized the
December 2006. PBOC to issue regulations to implement this licensing
process.
After China’s deadline of December 11, 2006, which
passed without any action having been taken by In August 2015, the PBOC issued draft licensing
China, the United States again pressed China. The regulations for public comment, and the United
United States raised its concerns in connection with States and U.S. stakeholders submitted comments.
SED meetings and other bilateral meetings in 2007 However, it was not until June 2016 during the S&ED
and 2008 as well as at the WTO during the meeting that the PBOC issued final licensing
transitional reviews before the Committee for Trade regulations. The PBOC followed up with the
in Financial Services in 2007, 2008 and 2009 and issuance of additional guidance for potential
China’s second and third Trade Policy Reviews, held applicants in October 2016 and June 2017. Through
in 2008 and 2010, without making progress. these measures, the PBOC created a two-step
licensing process, with a supplier first being required
In September 2010, the United States brought a to secure approval to begin one year of preparatory
WTO case challenging China’s various restrictions on work before it can even apply for a license to supply
foreign suppliers of electronic payment services in electronic payment services in China’s market.
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To date, no foreign supplier has been able to secure Importantly, China also accepted key principles from
a license, as the PBOC continues to delay. Indeed, the WTO Reference Paper on regulatory principles.
one major U.S. supplier submitted its application to As a result, China became obligated to separate the
begin its preparatory work in November 2017, and regulatory and operating functions of the
more than one year later the PBOC still had not even telecommunications regulatory agency in China
accepted that application for consideration. Another (now known as MIIT), which was the operator of
major U.S. supplier faces a similar situation with the China Telecom at the time of China’s accession to
application that it filed in April 2018. the WTO. China also became obligated to adopt
pro-competitive regulatory principles, such as cost-
Throughout the time that China has actively delayed based pricing and the right of interconnection, which
opening up its market to foreign suppliers, China’s are necessary for foreign-invested joint ventures to
national champion, China Union Pay, has used its compete with incumbent suppliers such as China
exclusive access to domestic currency transactions in Telecom, China Unicom and China Mobile.
the China market, and the revenues that come with
it, to support its efforts to build out its electronic Even though China appears to have nominally
payment services network abroad, including in the implemented its WTO commitments on schedule, no
United States. In one telling example, China Union meaningful market-opening progress has taken place
Pay reportedly has reached 100 percent penetration in the telecommunications services sector through
at U.S. automated teller machines and between 80 2017. As previously reported, with regard to basic
and 90 percent penetration at U.S. stores that accept services, MIIT’s imposition of informal bans on new
credit cards. This history shows how China has been entry, limitations on foreign suppliers’ selection of
able to maintain market-distorting practices that Chinese joint venture partners and high capital
benefit its own companies, even in the face of requirements, have continued to present formidable
adverse rulings at the WTO. The United States barriers to market entry for foreign suppliers. In
continues to raise its serious concerns about this addition, the approach that China has taken to
matter with China. regulating value-added services, including its
insistence on classifying certain value-added services
as basic services when provided by foreign suppliers,
Telecommunications Services and other uncertainties presented by China’s
classification of value-added services, have
In the Services Schedule accompanying its WTO presented similarly formidable barriers to foreign
accession agreement, China committed to permit entry.
foreign suppliers to provide a broad range of
telecommunications services through joint ventures In March 2016, China issued a revised Catalogue of
with Chinese companies, including domestic and Telecommunications Services. Among other things,
international wired services, mobile voice and data the catalogue seeks to expand the scope of value-
services, value-added services (such as electronic added telecommunications services to include a
mail, voice mail and on-line information and range of Internet-related services, including cloud
database retrieval) and paging services. The foreign computing services, thereby subjecting them to the
equity stake permitted in the joint ventures was to foreign equity caps that apply to the
increase over time, reaching a maximum of 49 telecommunications sector, even though these
percent for basic telecommunications services and services are not telecommunications services, as
50 percent for value-added services. In addition, all discussed in the Internet-related Services section
geographical restrictions were to be eliminated below. In addition, the catalogue continues to
within two to six years after China’s WTO accession, maintain for licensing purposes a rigid and overly
depending on the particular services sector. specific classification of what is understood as value-
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added telecommunications services instead of The United States continues to raise its many
adopting a broad, functional definition of these telecommunications concerns with China, using
services that better supports innovation. bilateral engagement and WTO meetings, including
the annual transitional reviews before the Council
As China completes its 17th year as a WTO member, for Trade in Services and China’s Trade Policy
the United States is unaware of any domestic or Reviews, where the United States has received
foreign application for a new stand-alone license to support from other WTO members. These efforts,
provide basic telecommunications services that has however, achieved virtually no progress.
completed the MIIT licensing process, even in
commercially attractive areas such as the re-sale of Audio-visual and Related Services
basic telecommunications services, leased line
services or corporate data services. At present, the As discussed in the Distribution Services section
number of suppliers of basic telecommunications above, in 2011, China removed various importation
services appears to be frozen at three Chinese state- and distribution restrictions affecting books,
owned enterprises, limiting the opportunities for newspapers, journals, sound recordings and DVDs in
new joint ventures and reflecting a level of response to a successful WTO case brought by the
competition that is extraordinarily low given the size United States. China also entered into an MOU with
of China’s market. Meanwhile, with regard to value- the United States in 2012 providing increased and
added services, the Chinese regulator – MIIT – had improved market access for imported theatrical
licensed more than 29,000 domestic suppliers as of films. At the same time, China’s regulation of other
November 2013, but only 41 foreign suppliers. audiovisual and related services, including services
associated with theatres (where China made a WTO
With regard to satellite services, such as video commitment to allow 49 percent foreign ownership)
transport services for Chinese broadcasters or cable as well as television and radio stations, production
companies, U.S. satellite operators remain severely and programming (for which China made no
hampered by Chinese policies that prohibit foreign commitments), has remained highly restricted.
satellite operators from obtaining licenses to provide
these services in China and that instead only allow a With regard to theatres, China’s ownership
foreign satellite operator to use a licensed Chinese restrictions have made it unattractive for foreign
satellite operator as an agent to provide these companies to enter into joint ventures with Chinese
services. These policies have made it difficult for partners. Currently, no U.S. company is involved in
foreign satellite operators to develop their own the ownership or operation of a Chinese theatre. In
customer base in China, as Chinese satellite addition, China prohibits foreign investment in the
operators essentially have a “first right of refusal” production and distribution of theatrical films. In
with regard to potential customers. contrast, all of these sectors in the United States are
open to foreign investment, and Chinese companies
Many of the difficulties faced by foreign suppliers in own both large film production companies and film
accessing China’s telecommunications market seem distributors in the United States.
directly attributable to the actions of MIIT, China’s
telecommunications regulator. While MIIT is The restrictions applicable to China’s television and
nominally separate from China’s radio sectors are myriad. China does not permit
telecommunications firms, it maintains extensive private capital, whether domestic or foreign, to be
influence and control over their operations and used to establish or operate a television station or a
continues to use its regulatory authority to radio station. It similarly closes private capital out of
disadvantage foreign firms. radio and television signal broadcasting and relay
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stations, satellite networks and backbone networks. broadcasting institutions and online audiovisual-
For television production, Chinese-foreign joint content platforms.
ventures must have a minimum capital requirement
of RMB 2 million (approximately $330,000), foreign Internet Regulatory Regime
ownership is capped at 49 percent, and two-thirds of
the programs of the joint venture must have Chinese China’s Internet regulatory regime is restrictive and
themes. non-transparent and impacts a broad range of
commercial services activities conducted via the
With regard to television programming generally, Internet. While China is experiencing rapid
China imposes highly restrictive quotas. The development in online businesses such as retail
Administrative Measures on the Import and websites, search engines, network education, online
Broadcast of Extraterritorial Television Programs, advertisements, audio-video services, paid electronic
effective since 2004, restricts foreign television mail, short messages, online job searches, Internet
drama and film programming to no more than 25 consulting, mapping services, applications, web
percent of total airtime, and other foreign domain registration, electronic trading and online
programming to no more than 15 percent of total air gaming, Chinese companies dominate the China
time. Foreign programming, including animated market, due primarily to restrictions imposed on
programs, is banned between 7:00 p.m. and 10:00 foreign companies by the Chinese government.
p.m. on terrestrial stations, which are Chinese-
owned. In addition, Chinese cable operators are China continues to engage in extensive blocking of
effectively prohibited from carrying foreign legitimate websites, imposing significant costs on
channels, as these channels only can be accessed in both suppliers and users of web-based services and
hotels and other areas inhabited by foreigners. An products. According to the latest data, China
additional concern arose in October 2014, when currently blocks 12 of the top 30 global sites, and
China started restricting foreign content on Chinese U.S. industry research has calculated that up to
streaming sites, which is the fastest growing means 3,000 sites in total are blocked, affecting billions of
for Chinese consumers to access television shows. dollars in business, including communications,
U.S. industry estimates that, as of October 2015, U.S. networking, app stores, news and other sites. While
content is limited to 12 percent of all content on becoming more sophisticated over time, the
Chinese streaming sites. In a related restriction, technical means of blocking, dubbed the Great
China now requires an entire season of a TV series to Firewall, still often appears to affect sites that may
be submitted for content approval before a single not be the intended target, but that may share the
episode can be made available. This restriction same Internet Protocol address. In addition, there
encourages the pirating of individual episodes as have been reports that simply having to pass all
they are aired during the season. Internet traffic through a national firewall adds
delays to transmission that can significantly degrade
In September 2018, the NRTA issued a concerning the quality of the service, in some cases to a
draft measure that would impose new restrictions in commercially unacceptable level, thereby inhibiting
China’s already highly restricted market for foreign or precluding the cross-border supply of certain
creative content. Specifically, it would require that services. In the past, consumers and business have
foreign content account for no more than 30 percent been able to avoid government-run filtering through
of available programming in each of several the use of VPN services, but a crackdown in 2017 has
categories, including foreign movies, TV shows, all but eliminated that option, with popular VPN
cartoons, documentaries and other foreign TV applications now banned. This development has had
programs, made available for display via a particularly dire effect on foreign businesses,
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which routinely use VPN services to connect to to flourish. Encryption is also regulated, and the
locations and services outside of China, and which frequent blocking of websites (including those of a
depend on VPN technology to ensure confidentiality commercial nature) inhibits the predictability and
of communications. reliability of using electronic networks as a medium
of commerce.
U.S. and other foreign stakeholders also continue to
express concern over rules proposed in 2016 to A number of technical problems also have inhibited
regulate Internet Domain Names, a critical input into the growth of electronic commerce in China over the
many web-based services offered in China. While years. Examples include the rates charged by
China explained that initial fears that the rules Chinese government-approved ISPs, slow connection
sought to block access to any website not registered speeds and relatively low Internet penetration in
in China were based on a misreading of the intent of China, although these problems are being
the proposed rules, concerns remain with regard to addressed.
how China intends to implement requirements for
registering and using domain names and other With regard to content control, Chinese government
Internet resources. officials from as many as 12 separate agencies, led
by CAC, closely monitor and routinely filter Internet
In a development of concern relative to China’s GATS traffic entering China, focusing primarily on the
commitments, China issued draft Network Publishing content that they deem objectionable on political,
Service Management Regulations in December 2012. social, religious or other grounds. During politically
This draft measure would prohibit Chinese-foreign sensitive periods, such as surrounding meetings of
contractual joint ventures, Chinese-foreign the National Party Congress or the National People’s
cooperative joint ventures and wholly foreign- Congress, the restrictions typically increase
owned enterprises from engaging in “network significantly. Specific foreign websites can be
publishing services,” which China appears to have completely blocked, while overall Internet access
defined broadly to cover a wide range of Internet- can be extremely limited, and Virtual Private
based distribution services. The United States Networks, on which many foreign firms rely to
submitted written comments on the draft measure conduct their online functions, can be largely
in January 2013. The final version of this measure, blocked. While the purpose of the Internet
issued in February 2016, did not respond to any of restrictions purportedly is to address public interest
the United States’ concerns. concerns enumerated in Chinese law, China’s
regulatory authorities frequently take actions that
Overall, while the Chinese government recognizes appear to be arbitrary, rarely issue lists of banned
the potential of electronic commerce to promote search terms or banned sites and provide little or no
exports and increase competitiveness, a variety of justification or means of appeal when they block
Chinese government policies and practices impede access to all or part of a website, putting providers
progress toward establishing a viable commercial of Internet-enabled services in a precarious position,
environment, adversely affecting both Chinese as they attempt to comply with Chinese law that can
companies and foreign companies. For example, seem arbitrary.
several Chinese ministries have jurisdiction over
electronic commerce and impose a range of This extensive regulatory regime for content control
burdensome restrictions on Internet use (such as directly and indirectly affects the range of foreign
registration requirements for web pages and suppliers seeking to deliver online services. It also
arbitrary and nontransparent content controls), squarely affects foreign news agencies, which
stifling the free flow of information and the operate in a services sector in which China made no
consumer privacy needed for electronic commerce GATS commitments. China actively restricts who
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may report news and what may be reported. These services into China on a cross-border basis. In 2017,
restrictions also can interfere with the normal China’s regulator issued a circular entitled On
business reporting operations of non-news Cleaning up and Regulating Internet Access Services
organizations, such as multinational corporations, if Market, which prohibits Chinese telecommunication
they use the Internet to keep clients, members, their operators from offering consumers leased lines or
headquarters or others informed about events in VPN connections reaching overseas data centers –
China. eliminating the key access mechanism companies
use to connect to foreign cloud computing service
Cross-border Data Transfer Restrictions providers and related resources. The United States
and Data Localization Requirements is evaluating this restriction in the context of China’s
WTO GATS obligation to ensure access to and use of
Various draft and final measures being developed by leased lines for cross-border data processing
China’s regulatory authorities to implement China’s services. The United States will work to ensure that
Cybersecurity Law, which took effect in June 2017, legitimate cross-border services can continue to be
and China’s National Security Law, which has been in offered into China.
effect since 2015, would prohibit or severely restrict
cross-border transfers of information that are Online Video and Entertainment Software
routine in the ordinary course of business and are Services
fundamental to any business activity. These
measures also would impose local data storage and China restricts the online supply of foreign video and
processing requirements on companies in “critical entertainment software through measures affecting
information infrastructure sectors,” a term that the both content and distribution platforms. With
Cybersecurity Law defines in broad and vague terms. respect to content, the most burdensome
Given the wide range of business activities that are restrictions are implemented through exhaustive
dependent on cross-border transfers of information content review requirements, based on vague and
and flexible access to global computing facilities, non-transparent criteria. In addition, with respect to
these developments have generated serious online video, the State Administration of Press,
concerns among governments as well as among Publication, Radio, Film and Television (SAPPRFT) has
stakeholders in the United States and other required Chinese online platform suppliers to spend
countries, particularly in services sectors. no more than 30 percent of their acquisition budget
on foreign content. With respect to distribution
Cloud Computing Services platforms, SAPPRFT has instituted numerous
measures, such as requirements that video
In major markets, including China, cloud computing platforms all be state-owned, that prevent foreign
services are typically offered through commercial suppliers from qualifying for a license. At the same
presence in one of two ways. They are offered as an time, several Chinese companies (including Alibaba)
integrated service in which the owner and operator appear exempt from these requirements. SAPPRFT
of a telecommunication network also offers and other Chinese regulatory authorities also have
computing services, including data storage and taken actions to prevent the cross-border supply of
processing function, over that network, or they are online video services, which may implicate China’s
offered as a stand-alone computer service, with GATS commitments relating to video distribution.
connectivity to the computing service site provided
separately by a telecommunications service supplier. Voice-over-Internet Protocol (VOIP) Services
China also is proposing to severely restrict the ability While computer-to-computer VOIP services are
of foreign enterprises to offer cloud computing permitted in China, China’s regulatory authorities
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have restricted the ability to offer VOIP services foreign representative offices may act as “foreign
interconnected to the public switched legal consultants” who advise clients on foreign legal
telecommunications network (i.e., to call a matters and may provide information on the impact
traditional phone number) to basic of the Chinese legal environment, among other
telecommunications service licensees. There is no things. They may also maintain long-term
obvious rationale for such a restriction, which “entrustment” relationships with Chinese law firms
deprives consumers of a useful communication and instruct lawyers in the Chinese law firm as
option, and thus the United States continues to agreed between the two law firms. In addition, all
advocate for eliminating it. quantitative and geographic limitations on
representative offices were to have been phased out
Educational Services within one year of China’s accession to the WTO,
which means that foreign law firms should have
In its accession agreement, China made limited GATS been able to open more than one office anywhere in
commitments relating to educational services. China beginning on December 11, 2002.
Currently, China only permits foreign educators and
trainers to engage in nonprofit educational activities As previously reported, the State Council issued the
that do not compete with the Ministry of Education- Regulations on the Administration of Foreign Law
supervised nine years of compulsory education, Firm Representative Offices in December 2001, and
thereby inhibiting much-needed foreign investment the Ministry of Justice issued implementing rules in
in this part of the education sector. Foreign July 2002. While these measures removed some
universities may set up nonprofit operations, but market access barriers, they also generated concern
must have a Chinese university host and partner to among foreign law firms doing business in China. In
ensure that programs bar subversive content and many areas, these measures were ambiguous.
that imported informational material is adapted to Among other things, these measures could be
suit local conditions. In addition, China bans foreign interpreted as imposing an economic needs test for
organizations and companies from offering foreign law firms that want to establish offices in
educational services via satellite networks. China, which raises WTO concerns. In addition, the
procedures for establishing a new office or an
Legal Services additional office seem unnecessarily time-
consuming. For example, a foreign law firm may not
Prior to its WTO accession, the Chinese government establish an additional representative office until its
had imposed various restrictions in the area of legal most recently established representative office has
services. The Chinese government maintained a been in practice for three consecutive years.
prohibition against representative offices of foreign Furthermore, new foreign attorneys must go
law firms practicing Chinese law or engaging in through a lengthy approval process that can take
profit-making activities of any kind. It also imposed more than one year.
restrictions on foreign law firms’ formal affiliation
with Chinese law firms, limited foreign law firms to These measures also include other restrictions that
one representative office and maintained geographic make it difficult for foreign law firms to take
restrictions. advantage of the market access rights granted by
China’s WTO accession agreement. For example,
China’s WTO accession agreement provides that, foreign attorneys may not take China’s bar
upon China’s accession to the WTO, foreign law examination, and foreign law firms may not hire
firms may provide legal services through one profit- registered members of the Chinese bar as attorneys
making representative office, which must be located to provide advice on Chinese law, nor may foreign
in one of several designated cities in China. The attorneys working in China otherwise provide advice
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on Chinese law to clients. Foreign law firms have MOFTEC jointly issued the Rules on the
also reported that they are not given the uniform Administration of Foreign-invested Construction
right to attend or provide consultancy services to Enterprises (known as Decree 113) and the Rules on
clients during regulatory proceedings administered the Administration of Foreign-invested Construction
by Chinese government agencies and that at times Engineering Design Enterprises (known as Decree
they are barred from accompanying their clients to 114). These decrees provide schedules for the
certain government meetings, raising concerns in opening up of construction services and related
light of China’s GATS commitments. In addition, construction engineering design services to joint
foreign law firms are subject to taxes at both the ventures with majority foreign ownership and wholly
firm and individual levels, while domestic law firms foreign-owned enterprises. Implementing rules for
are only taxed as partnerships. Decree 113 were issued in 2003, but Decree 114
implementing rules were delayed until 2007.
The United States has raised its concerns in this area
both bilaterally and at the WTO during meetings Decrees 113 and 114 created concerns for U.S. firms
before the Council for Trade in Services and China’s by imposing new and more restrictive conditions
Trade Policy Reviews, with support from other WTO than existed prior to China’s accession to the WTO,
members. To date, although a number of U.S. and when U.S. firms were permitted to work in China on
other foreign law firms have been able to open a project-by-project basis pursuant to MOC rules. In
additional offices in China, little progress has been particular, these decrees for the first time require
made on the other issues affecting access to China’s foreign firms to obtain qualification certificates. In
legal services market. addition, the decrees for the first time require
foreign-invested enterprises to incorporate in China.
The decrees also impose high minimum registered
Construction and Related Engineering capital requirements as well as technical personnel
Services staff requirements that are difficult for many
foreign-invested enterprises to satisfy.
Upon its WTO accession, China committed to permit
foreign enterprises to supply construction and With regard to the Decree 113 regulatory regime for
related engineering services through joint ventures construction enterprises, the United States has
with foreign majority ownership, subject to the actively engaged China, both bilaterally and at the
requirement that those services only be undertaken annual transitional reviews before the Council for
in connection with foreign-invested construction Trade in Services, in an effort to obtain needed
projects and subject to registered capital improvements. In particular, the United States has
requirements that were slightly different from those urged China to maintain non-discriminatory
of Chinese enterprises. China agreed to remove procedures under Decree 113 to enable foreign-
those conditions within three years of accession, and invested enterprises to carry out the same kinds of
it also agreed to allow wholly foreign-owned projects that domestic companies can provide. The
enterprises to supply construction and related United States also has sought a reduction in the
engineering services for four specified types of registered minimum capital requirements under
construction projects, including construction Decree 113 or the use of other arrangements, such
projects wholly financed by foreign investment, as bonds or guarantees in lieu of the capital
within three years of accession. requirements. In practice, China restricts wholly
owned foreign-invested enterprises to undertaking
As previously reported, in 2002, the Ministry of foreign-funded construction projects, except in cases
Construction (MOC), re-named the Ministry of where Chinese enterprises are not able to provide
Housing and Urban-Rural Development in 2008, and the necessary construction services. The United
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States and U.S. industry have urged China to end this management services without possessing separate
discrimination. construction, engineering or design qualifications,
but the absence of implementing rules has resulted
With regard to the Decree 114 regulatory regime for in inconsistent interpretations of this measure. The
construction engineering design enterprises, the United States and U.S. industry have been urging
United States generally welcomed the implementing China to clarify the requirements that must be
rules issued by MOC in 2007, as they temporarily satisfied by enterprises that do not hold construction
lifted foreign personnel residency and staffing or engineering and design licenses if they seek to
requirements imposed by Decree 114, and provide project management services.
recognized the foreign qualifications of technical
experts when considering initial licensing. The Express Delivery Services
United States has since continued to press China to
make these improvements permanent, using both The specific commitments that China made in the
the March 2008 U.S.-China Best Practices Exchange area of express delivery services did not require
on Architecture, Construction and Engineering and China to take implementation action upon its
the transitional reviews before the Council for Trade accession to the WTO. Basically, China agreed to
in Services in 2007, 2008 and 2009. Separately, the increase the stake allowed by foreign express
United States also has urged China to give foreign delivery companies in joint ventures over a period of
construction engineering design companies the right years, with wholly foreign-owned subsidiaries
to immediately apply for a comprehensive “Grade A” allowed within four years of accession.
license, like domestic design companies can do.
Under existing rules, set forth in Circular 202, the Since its WTO accession, foreign express delivery
Implementation of the Administrative Provisions on companies have continued to operate in China’s
the Qualification of Construction and Engineering express delivery sector, and China has implemented
Supervision and Design, issued by MOC in August its commitment to allow wholly foreign-owned
2007, foreign companies are subjected to more subsidiaries. However, China still needs to expand
restrictive licensing procedures than domestic the scope of access for foreign-invested companies
companies. China also needs to clarify its licensing for domestic express delivery to include the delivery
requirements relating to partnerships by confirming of documents.
that investors other than individuals, such as foreign
design companies, can act as partners. In addition, over the years, China has issued a variety
of measures that have appeared to undermine
Meanwhile, in the area of project management market access for foreign companies and have raised
services, the conflicting regulatory regimes of NDRC questions in light of China’s WTO obligations. As
and MOHURD have allowed market access barriers previously reported, through sustained and high-
for foreign-invested enterprises to persist. In 2004, level engagement, the United States was able to
MOC issued the Provisional Measures for persuade China to forego a series of restrictive
Construction Project Management. Known as measures.
Decree 200, this measure requires, among other
things, local establishment and the possession of In August 2006, the State Council finalized its Postal
separate qualifications in the area of construction, Reform Plan, which called for the separation of
engineering or design. In contrast, a measure issued China’s postal operations from the administrative
by MOC and MOFCOM in 2007 – the Regulations on function of regulating China’s postal system, with
the Administration of Foreign-invested Construction the State Postal Bureau (SPB) to serve as the
and Engineering Service Enterprises – appears to regulator and a new state-owned enterprise – the
allow foreign-invested enterprises to provide project China Post Group Corporation – to be set up to
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conduct postal business. China promptly put this for this company and refuses to approve any co-
plan into effect, and since then the United States has terminalization routes at all for other U.S.
been regularly reviewing how SPB has been companies. The United States continues to press its
exercising its new authority to license and regulate concerns in this sector.
the express delivery sector.
Logistics Services
In August 2008, the draft of a problematic new
Postal Law went before the National People’s Logistics services include a number of the services
Congress. This draft excluded foreign suppliers from sectors listed in China’s GATS Schedule, including
the document segment of China’s domestic express road transport services, rail transport services and
delivery market and also contained other troubling freight forwarding agency services, among others.
provisions. Despite extensive engagement by the Generally, at this time, foreign suppliers should be
United States, the National People’s Congress permitted to supply these services in China without
approved this law, effective October 2009, without geographic limitations or restrictions on the
significant changes. percentage of foreign ownership.
The United States has worked intensively with China Over the years, the Ministry of Transport has been
to alleviate problems that foreign companies have slow to approve applications by foreign companies
encountered when trying to obtain permits under a seeking to supply road transport and related logistics
new permitting system that SPB imposed for all services and has been unwilling to issue nationwide
suppliers of domestic express package delivery trucking licenses, which has limited the ability of
services in China. In May 2012, China committed foreign companies to build economies of scale. In
that it would take specific steps to provide fair addition, while regulations issued by almost all major
access to its market for foreign suppliers of these Chinese cities restrict daytime access by trucks,
services and that it would protect existing operations enforcement of these restrictions is often
as that process unfolded. Since then, the Chinese discriminatory. Local regulatory authorities often
regulator, SPB, has moved forward with the issuance target their enforcement efforts at foreign
of more permits. The United States has pressed SPB companies, while permitting local companies to
to quickly review and approve any new permits that operate freely.
U.S. companies request, and the United States will
continue to do so for as long as is needed. Separately, the Chinese government has directed
that support be provided to the domestic logistics
SPB’s regulation of the express delivery sector in industry as part of various industry revitalization
China has been problematic in other ways. For plans. Foreign companies invested in China have
example, China imposes overly burdensome and raised concerns about inadequate transparency with
inconsistent regulatory approaches, including with regard to implementing measures, inequitable
regard to security inspections. In addition, China treatment of foreign companies and unnecessary
prevents foreign suppliers from performing any industry standardization efforts.
sorting of packages within China, making the hubs
that U.S. companies have invested much less Air Transport and Related Services
valuable. In addition, while China does allow one
U.S. company the ability to pick up and deliver WTO members, including China, undertake the vast
packages from domestic legs of a trip with an majority of their international commitments relating
international start or endpoint for certain routes to civil air transport, including traffic rights, through
(known as co-terminalization routes), China refuses bilateral agreements. As previously reported, China
to approve any additional co-terminalization routes made significant commitments in 2004 and 2007
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agreements with the United States to increase their subsidiaries, affiliates and joint ventures, are
market access for U.S. providers of air transport also able to establish branch offices in China without
services. However, since 2007, China increasingly geographic limitation.
has constrained this sector and a lack of clarity in
China’s airport slot allocation process, among other Tourism and Travel-related Services
issues, has prevented U.S. airlines from fully
exercising rights granted in the 2007 agreement. In order to obtain a license, foreign travel agencies
The United States has made clear that the current doing business in China must register with the China
operational impediments need to be fixed and that Ministry of Culture and Tourism (CMCT), formerly
any future expansion of rights would need to be the China National Travel Administration, and must
based on mutual benefit. submit an initial feasibility study and annual reports
on future investment and possible expansion to
U.S. and European companies have expressed GATS CMCT and MOFCOM. In addition, China continues to
and other concerns regarding China’s regulation of impose an annual sales requirement on foreign
foreign suppliers of global distribution system travel agencies, even though it does not impose the
services. Although China issued new regulations same requirement on domestic travel agencies.
addressing global distribution system services in
2012, these regulations only called for a modest In December 2007, the United States and China
opening to foreign suppliers, as they allow foreign signed an MOU to facilitate Chinese group leisure
suppliers to handle domestic segments of an travel to the United States. The MOU permitted
international flight but not the most lucrative part of marketing and sales activities in a limited number of
China’s market, which is purely domestic travel Chinese provinces to promote U.S. destinations and
within China. However, China has since undercut U.S. travel-related businesses. Subsequent
even this modest opening by imposing commercially engagement, led to China’s agreement to expand
unattractive requirements on foreign suppliers, the MOU to cover 27 of China’s 31 provinces. In
including a requirement to partner with Chinese 2013, China announced that it had broadened the
state-owned enterprises. The United States has scope of access under the MOU to include two of the
used bilateral discussions without success to urge four remaining provinces. As of December 2018,
China to remove the significant restrictions facing China has not yet expanded the MOU to the two
foreign companies in this sector. remaining provinces.
Maritime Services
LEGAL FRAMEWORK
As previously reported, even though China made
only limited WTO commitments relating to its In order to address major concerns raised by WTO
maritime services sector, it took a significant step in members during its lengthy WTO accession
December 2003 to increase market access for U.S. negotiations, China committed to broad legal
service providers. The United States and China reforms in the areas of transparency, uniform
signed a far-reaching, five-year bilateral agreement, application of laws and judicial review. Each of these
with automatic one-year extensions, which gives reforms, if fully implemented, will strengthen the
U.S.-registered companies the legal flexibility to rule of law in China’s economy and help to address
perform an extensive range of additional shipping pre-WTO accession practices that made it difficult
and logistics activities in China. U.S. shipping and for U.S. and other foreign companies to do business
container transport services companies, along with and invest in China.
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In 2002, following its accession to the WTO, China In the September 2012 WTO case challenging
did not establish or designate an official journal. numerous subsidies provided by the central
Rather, China relied on multiple channels, including government and various sub-central governments in
ministry websites, newspapers and a variety of China to automobile and automobile-parts
journals and gazettes, to provide information on enterprises located in regions in China known as
trade-related measures. “export bases,” the United States included claims
alleging that China had failed to abide by various
As previously reported, following sustained U.S. WTO transparency obligations, including China’s
engagement, the State Council issued a notice in obligation to publish the measures at issue in an
March 2006 directing all central, provincial and local official journal. Following consultations in this case,
government entities to begin sending copies of all of the two sides engaged in further discussions as China
their trade-related measures to MOFCOM for began to take steps to address U.S. concerns.
immediate publication in the China Foreign Trade
and Economic Cooperation Gazette, known as the In the December 2015 WTO case challenging
MOFCOM Gazette. The United States subsequently discriminatory Chinese government measures
reviewed the effectiveness of this notice, both to exempting sales of certain aircraft produced in
assess whether all government entities regularly China, including general aviation aircraft, agricultural
publish their trade-related measures in the aircraft and regional jets, from the VAT while
MOFCOM Gazette and whether all types of imposing that same tax on sales of imported aircraft,
measures are being published. It appeared that the United States included claims alleging that China
adherence to the State Council’s notice was far from had failed to publish the measures at issue as
complete. As a result, the United States continued required by China’s WTO transparency obligations.
to engage China bilaterally on the need for a fully Consultations took place in January 2016. In
compliant single official journal, and at the October 2016, the United States announced that it
December 2007 SED meeting China re-confirmed its had confirmed that China had terminated the
WTO commitment to publish all final trade-related discriminatory tax measures. The United States also
measures in a designated official journal before made these measures publicly available.
implementation.
TRANSLATIONS
The United States has been regularly reviewing the
effectiveness of China’s official journal commitment Another important transparency commitment that
since the December 2007 SED meeting. To date, it China made in its WTO accession agreement involves
appears that some but not all central government translations. China agreed to make available
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translations of all of its laws, regulations and other included a claim alleging that China had failed to
measures affecting trade in goods, services, TRIPS or make available translations of the measures at issue
the control of foreign exchange into one or more of into one or more WTO languages. The United States
the WTO languages (English, French and Spanish). also included a similar claim in the December 2015
China further agreed that, to the maximum extent WTO case challenging China’s discriminatory tax
possible, it would make translations of these laws, treatment of imported aircraft.
regulations and other measures available before
implementation or enforcement, but in no case later Bilaterally, at the July 2014 S&ED meeting, China
than 90 days afterwards. committed that it would translate trade-related
departmental rules into English within a reasonable
China has a poor record of compliance with its period of time. Subsequently, in March 2015, China
translation commitment. Indeed, after 15 years of issued a measure requiring trade-related
WTO membership, China still has not established an departmental rules to be translated into English.
appropriate infrastructure to undertake the agreed- This measure also provides that the translation of a
upon translations of its trade-related measures in a departmental rule normally should be published
timely manner. Although China has complained that before implementation, but no later than 90 days
it is too difficult for it to live up to this commitment, after implementation. Following the issuance of this
this excuse lacks credibility. As the United States has measure, the United States pressed China to ensure
pointed out, other WTO members translate all of that it similarly publishes translations of trade-
their legal measures. Indeed, one of these members related laws and administrative regulations before
– the EU – publishes its measures in 24 official implementation, as required by China’s WTO
languages. accession agreement. China has not yet met its
commitment on translation.
Prior to 2015, China had only compiled translations
of trade-related laws and administrative regulations PUBLIC COMMENT
(into English), but not other types of measures. In
addition, China has remained years behind in One of the most important of the transparency
actually publishing translations of trade-related laws commitments that China made in its WTO accession
and administrative regulations. agreement concerned the procedures for adopting
or revising laws, regulations and other measures
The United States has raised this issue at the WTO affecting trade in goods, services, TRIPS or the
during the annual transitional reviews, including control of foreign exchange. China agreed to
during final transitional reviews before several provide a reasonable period for public comment on
committees and councils that took place in 2011. In these new or modified laws, regulations and other
addition, the United States has raised this issue in measures before implementing them, except in
WTO cases against China. In the December 2010 certain specific instances, enumerated in China’s
WTO case challenging what appeared to be accession agreement.
prohibited import substitution subsidies being
provided by the Chinese government to support the As previously reported, in the first few years after
production of wind turbine systems in China, the China acceded to the WTO, China’s ministries and
United States included a claim alleging that China agencies had a poor record of providing an
had breached its WTO accession agreement by not opportunity for public comment before new or
translating the measures at issue into a WTO modified laws, regulations and other measures were
language. China repealed those measures following implemented. Although the State Council issued
consultations. In the September 2012 WTO case regulations in December 2001 addressing the
challenging export base subsidies, the United States procedures for the formulation of administrative
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regulations and rules and expressly allowing public comment. China also agreed that it would publish
comment, many of China’s ministries and agencies in these proposed measures either in its designated
2002 continued to follow the practice prior to official journal or on an official website.
China’s WTO accession, and no notable progress
took place in 2003. Typically, the ministry or agency At the June 2008 SED meeting, China then
drafting a new or revised measure consulted with committed to publish all proposed trade- and
and submitted drafts to other ministries and economic-related regulations and departmental
agencies, as well as Chinese experts and affected rules for public comment, subject to specified
Chinese companies. At times, it also consulted with exceptions, and to provide a comment period of no
select foreign companies, although it would not less than 30 days. China indicated that it would
necessarily share drafts with them. As a result, only publish these proposed measures on the Legislative
a small proportion of new or revised measures were Information Website maintained by the SCLAO.
issued after a period for public comment, and even
in those cases the amount of time provided for Two months earlier, in April 2008, the NPC’s
public comment was generally too short. Standing Committee had instituted notice-and-
comment procedures for draft laws. Comments on
In 2004, some improvements took place, particularly the draft laws are to be submitted to the NPC’s
on the part of MOFCOM, which began following the Legislative Affairs Commission, and a new dedicated
rules set forth in its Provisional Regulations on website provides information about the comments
Administrative Transparency, issued in November that have been submitted.
2003. Nevertheless, basic compliance with China’s
notice-and-comment commitment continued to be Subsequently, while the NPC began regularly
uneven in the ensuing years, as numerous major publishing draft laws for public comment, and the
trade-related laws and regulations were finalized State Council began regularly publishing draft
and implemented without the NPC or the regulations for public comment, it appeared that
responsible ministry circulating advance drafts for China was having more difficulty implementing
public comment. China’s new policy regarding trade- and economic-
related departmental rules. After 2008, China did
In numerous bilateral meetings with the State increase the number of proposed departmental rules
Council, MOFCOM and other Chinese ministries published for public comment on the SCLAO
since China’s WTO accession, including high-level website. However, a significant number of
meetings, the United States emphasized the departmental rules were still issued without first
importance of China’s adherence to the notice-and- having been published for public comment on the
comment commitment in China’s accession SCLAO website. While some ministries published
agreement, both in terms of fairness to WTO departmental rules on their own websites, they
members and the benefits that would accrue to often allowed less than 30 days for public comment,
China. Together with other WTO members, the making it difficult for foreign interested parties to
United States also raised this issue repeatedly during submit timely and complete comments.
regular WTO meetings and as part of the annual
transitional reviews conducted before various WTO In October 2010, the State Council issued the
councils and committees. Opinions on Strengthening the Building of a
Government Ruling by Law. This measure calls on
At the December 2007 SED meeting, China ministries and agencies at the central and provincial
specifically committed to publish, when possible, levels of government to solicit public comment when
proposed trade-related measures and provide developing regulations, rules and normative
interested parties a reasonable opportunity for documents, subject to certain exceptions. However,
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the measure does not dictate the procedures or time comment period for draft normative documents.
periods to be used. However, this measure leaves much to the discretion
of agency officials, as it only proposes to require
At the May 2011 S&ED meeting, China committed public comment for normative documents issued by
that it would issue a measure in 2011 to implement MOFCOM that are “binding” and involve “major
the requirement to publish all proposed trade- and matters.” Subsequently, in May 2018, the State
economic-related administrative regulations and Council issued a notice calling for more public
departmental rules on the SCLAO website for a consultation in the drafting process for normative
public comment period of not less than 30 days from documents and requiring drafts of normative
the date of publication, subject to certain documents that “involve vital interests of the
exceptions. In April 2012, the SCLAO published two people” or “have significant impact on the rights and
measures, the Interim Measures on Solicitation of obligations of citizens, legal persons, and other
Public Comment on Draft Laws and Regulations and organizations” to be published for public comment,
the Notice on Related Issues Regarding Solicitation of subject to certain exceptions. The notice also calls
Public Comments on Draft Departmental Rules, on its for final normative documents to be published.
website. These two measures provide that, in
general, administrative regulations and ENQUIRY POINTS
departmental rules have to be posted on the
Legislative Information Website of the SCLAO. Another important transparency commitment in its
WTO accession agreement requires China to
Since the issuance of the two SCLAO measures in establish enquiry points, where any WTO member or
2012, no noticeable improvement in the publishing foreign company or individual may obtain
of departmental rules for public comment appears information. As previously reported, China complied
to have taken place. At the July 2014 S&ED meeting, with this obligation by establishing a WTO Enquiry
China confirmed that these two measures are and Notification Center, now operated by
binding on central government ministries, but it MOFCOM’s Department of WTO Affairs, in January
remains clear that China needs to make more 2002. Other ministries and agencies have also
progress in this area. established formal or informal, subject-specific
enquiry points. In addition, some ministries and
For several years, the United States has pressed agencies have created websites to provide answers
China to improve its handling of so-called to frequently asked questions, as well as further
“normative documents,” which are regulatory guidance and information.
documents that do not fall into the category of
administrative regulations or departmental rules but Uniform Application of Laws
still impose binding obligations on enterprises and
individuals. To date, while China continues to In its WTO accession agreement, China committed,
consider reforms relating to the handling of at all levels of government, to apply, implement and
normative documents, most normative documents administer its laws, regulations and other measures
are still not published for public comment. In relating to trade in goods and services in a uniform
October 2017, MOFCOM did issue a draft Measure and impartial manner throughout China, including in
on the Formulation and Administration of Normative special economic areas. In support of this
Documents, which proposes to require the use of commitment, China further committed to establish
notice-and-comment procedures for certain types of an internal review mechanism to investigate and
normative documents issued by MOFCOM. In April address cases of non-uniform application of laws
2018, MOFCOM issued the final measure, which based on information provided by companies or
provided that, in general, there should be a 30-day individuals.
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As previously reported, in China’s first year of WTO of International Trade Administrative Cases, which
membership, the central government launched an went into effect in October 2002, have handled
extensive campaign to inform and educate both cases involving administrative agency decisions
central and local government officials and state- relating to trade in goods or services. So far,
owned enterprise managers about WTO rules and however, there continues to be little data, as few
their benefits. In addition, several provinces and U.S. or other foreign companies have had experience
municipalities established their own WTO centers, with these courts.
designed to supplement the central government’s
efforts and to position themselves so that they Other Legal Framework Issues
would be able to take full advantage of the benefits
of China’s WTO membership. In 2002, China also Other areas of China’s legal framework can adversely
established an internal review mechanism, now affect the ability of the United States and U.S.
overseen by MOFCOM’s Department of WTO Affairs, exporters and investors to enjoy fully the rights to
to handle cases of non-uniform application of laws, which they are entitled under the WTO agreements.
although the actual workings of this mechanism Key areas include administrative licensing,
remain unclear. competition policy, commercial dispute resolution,
labor laws and laws governing land use. Corruption
During 2018, as in prior years, some problems with among Chinese government officials, enabled in part
uniformity persisted. These problems are discussed by China’s incomplete adoption of the rule of law, is
above in the sections on Customs and Trade also a key concern.
Administration, Taxation, Investment and
Intellectual Property Rights. ADMINISTRATIVE LICENSING
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approval requirements in the Shanghai Free Trade reviewing cartel activities, abuse of dominance and
Zone in 2014. In addition, at the July 2014 S&ED abuse of administrative power when they involve
meeting, China committed to treat applicants for pricing, while SAIC reviewed these same types of
administrative licenses and approvals under the activities when they were not price-related.
same rules and standards as the United States with
regard to the resources available to accept and After the Anti-monopoly Law was enacted,
process applications and the number of applications MOFCOM, NDRC, SAIC and other Chinese
permitted at one time from an applicant, and to government ministries and agencies began to
strictly implement existing laws and regulations to formulate implementing regulations, departmental
adequately protect any trade secret or sensitive rules and other measures. Throughout this process,
commercial information provided by the applicant the United States urged China to implement the
during the administrative licensing or approval Anti-monopoly Law in a manner consistent with
process, as required by law. global best practices and with a focus on consumer
welfare and the protection of the competitive
Nevertheless, despite these changes and continued process, rather than consideration of industrial
reform efforts, U.S. companies continue to policy or other non-competition objectives. The
encounter significant problems with a variety of United States also specifically pressed China to
administrative licensing processes in China, including ensure that its implementation of the Anti-monopoly
processes to secure product approvals, investment Law does not create disguised or unreasonable
approvals, business expansion approvals, business barriers to trade and does not provide less favorable
license renewals and even approvals for routine treatment to foreign goods and services or foreign
business activities. While U.S. companies are investors and their investments.
encouraged by the overall reduction in license
approval requirements and the focus on The Chinese government’s interventionist economic
decentralizing licensing approval processes, U.S. policies and practices and the large role of state-
companies report that these efforts have only had a owned enterprises in China’s economy created
marginal impact on their licensing experiences so tensions with the Anti-monopoly Law. One provision
far. According to U.S. companies, problems continue in the Anti-monopoly Law “protects the lawful
to be most prevalent at the central government level operations” of state-owned enterprises and
and generally involve foreign companies government monopolies in industries deemed
encountering more significant delays and receiving nationally important, although the meaning of this
less favorable treatment vis-à-vis domestic provision remains unclear. Indeed, China has
companies, raising concerns in light of the WTO rules enforced the Anti-monopoly Law against state-
relating to national treatment. owned enterprises. For example, MOFCOM has
imposed conditions on at least one state-owned
COMPETITION POLICY company forming a joint venture, NDRC has
conducted an investigation into anti-competitive
In August 2007, China enacted its Anti-monopoly price discrimination by two large state-owned
Law, which became effective in August 2008. telecommunications companies and has imposed
Pursuant to this law, the State Council established an fines for Anti-monopoly Law violations on two state-
anti-monopoly commission with oversight and owned liquor companies, and SAIC has undertaken
coordinating responsibilities, drawing its members enforcement against provincial state-owned
from several Chinese ministries and agencies. enterprises. However, some U.S. companies have
Enforcement responsibilities were divided among expressed concerns that enforcement against state-
three agencies. MOFCOM assumed responsibility for owned enterprises is more limited than against
reviewing mergers. NDRC assumed responsibility for private enterprises.
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Provisions on the abuse of administrative (i.e., engaging in conduct that would violate the Anti-
government) power included in the Anti-monopoly monopoly Law. For example, while trade
Law, which also appeared in NDRC’s and SAIC’s associations can usefully function to assist their
implementing regulations, are potentially important members with information on opportunities and
instruments for reducing the government’s contacts in different markets, they also can facilitate
interference in markets and promoting the cartel activity if appropriate guidelines are not
establishment and maintenance of increasingly followed. In March 2017, NDRC published draft
competitive markets in China. In recent years, NDRC Guidelines on Trade Association Pricing Activity for
and SAIC took a number of enforcement actions in public comment. These draft guidelines address
this area to reduce government restraints on issues that trade association conduct can raise from
competition. a competition law perspective but could be clarified
and strengthened.
In June 2016, the State Council issued the Opinions
on Establishing a Fair Competition Review System, The treatment of intellectual property rights by
which created a new system that could widen China’s anti-monopoly enforcement agencies is of
Chinese anti-monopoly enforcement agencies’ concern for U.S. and other foreign stakeholders. For
oversight over undue government restraints on example, Article 55 of the Anti-monopoly Law, which
competition and anti-competitive regulation of relates to conduct associated with intellectual
competition. Given the state-led nature of China’s property rights that eliminates or restricts
economy, the need for careful scrutiny of anti- competition, has raised questions for U.S. industry
competitive government restraints and regulation is about the scope of enforcement since its initial
high. inclusion in the law. In April 2015, SAIC adopted a
measure, the Rules on the Prohibition of Conduct
In October 2017, NDRC, SAIC, MOFCOM, MOF and Eliminating or Restricting Competition by Abusing
SCLAO jointly issued, without a public comment Intellectual Property Rights, which contains
process, the Provisional Rules for Implementing the concerning provisions relating to essential facilities
Fair Competition Review System. These rules require and standards-essential patents on which
issuing agencies at the central and sub-central levels stakeholders have submitted comments.
of government to conduct reviews of a relevant Subsequently, in late 2015, draft versions of Anti-
proposed measure before introducing it so as to monopoly Guidelines on Abuse of Intellectual
verify that the proposed measure will not limit Property Rights separately prepared by the NDRC
competition. However, the rules also contain a and by SAIC became public. China has stated that
broad list of exemptions from this restriction, these drafts, as others, will form the basis for the
including national economic security, cultural State Council’s Anti-monopoly Commission to adopt
security, national defense construction, poverty guidelines addressing the treatment of conduct
alleviation, disaster relief and general “public involving intellectual property rights under the Anti-
interest” considerations. monopoly Law. In March 2017, the Anti-monopoly
Commission published draft Anti-monopoly
Another tension in China’s organizational structure Guidelines against Abuse of Intellectual Property
involves trade associations, which in China Rights and invited the public to provide comments
frequently appear to have strong government ties. on them. These draft guidelines would adopt several
The United States has encouraged the Chinese core principles on competition and intellectual
agencies charged with enforcing the Anti-monopoly property law similar to principles applied in the
Law to work with Chinese regulatory agencies with United States, but also appear to support the
sectoral responsibilities to emphasize the premise that the exercise of intellectual property
importance of trade associations refraining from rights can act as a hindrance to market competition,
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including through apparent presumptions that have come under increased scrutiny by China’s
certain IP-related conduct harms competition. The enforcement agencies. In addition, U.S. industry has
draft guidelines also raise concerns regarding the expressed serious concerns about insufficient
treatment of refusals to license, “excessive” pricing predictability, fairness and transparency in NDRC’s
and standard essential patents. U.S. government investigative processes, including NDRC pressure to
agencies have been following the development of “cooperate” in the face of unspecified allegations or
the draft guidelines closely and engaging China’s face steep fines. In some cases, U.S. industry also
anti-monopoly enforcement agencies, including complained about limitations on their ability to have
through the submission of written comments. legal representation before the anti-monopoly
enforcement agencies by their non-Chinese counsel.
Some U.S. companies have criticized certain U.S. industry also has highlighted that NDRC has
MOFCOM decisions for lack of adequate bases to pressured companies either to withdraw IPR
find that a merger has or may have the effect of enforcement actions against Chinese companies
eliminating or restricting competition, and some U.S. outside China, including ongoing litigation, or face an
companies have raised concerns with the remedies intrusive anti-monopoly investigation. U.S. industry
that MOFCOM has adopted in granting conditional also has complained that anti-monopoly
merger approvals. In September 2017, MOFCOM enforcement is sometimes used against U.S.
published draft Measures for the Review of companies to achieve industrial policy objectives,
Undertaking Concentrations. This draft measure has which U.S. industry attributes to the influence of
the potential to help clarify MOFCOM’s procedures government ministries that are not supposed to be
for reviewing concentrations of undertakings by involved in anti-monopoly enforcement.
providing guidance on when notifications are
required and the procedural steps available during At the July 2014 S&ED meeting, China committed to
the notification and review process. provide any party under an Anti-monopoly Law
investigation with information about the
While MOFCOM was the regulator, its merger enforcement agency’s concerns and an effective
enforcement tended to focus more on transactions opportunity for the party to present evidence in its
involving foreign enterprises. Every transaction that defense. In addition, at the December 2014 JCCT
MOFCOM blocked or imposed conditions on meeting, China committed that the Chinese
involved at least one foreign party. At the same authorities would treat domestic and foreign
time, MOFCOM imposed penalties for failure to file a companies equally in Anti-monopoly Law
required merger notification on more domestic enforcement proceedings. China further committed
transactions than transactions involving foreign that the Chinese authorities’ normal practice would
parties. Over time, the percentage of merger be to permit an investigated foreign company to
notifications in which all parties were Chinese rose have foreign counsel present, to advise it and to
from around 15 percent to around 30 percent while provide information on its behalf during the
MOFCOM remained responsible for reviewing proceedings. At the November 2015 JCCT meeting,
mergers, suggesting increased domestic compliance China committed that agencies without Anti-
with the filing requirements of the Anti-monopoly monopoly Law enforcement authority will not
Law. intervene in the enforcement decisions of MOFCOM,
SAIC and NDRC. China also clarified that its anti-
Starting in 2013, NDRC increased its Anti-monopoly monopoly enforcement agencies will not disclose
Law enforcement activity noticeably. While both confidential business information to other agencies
domestic companies and foreign companies have or third parties, except pursuant to a waiver from
been targets of these NDRC investigations, U.S. the submitting party or under circumstances defined
industry asserts that foreign companies appear to by law.
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2018 USTR Report to Congress on China’s WTO Compliance
In March 2018, as part of a major government significant impact on commercial activities, academic
reorganization, China announced the creation of the exchanges, cooperation on global health matters,
SAMR, a new agency that now houses the anti- rule of law exchanges and shared environmental
monopoly enforcement authorities from the NDRC, concerns, as well as serious implications for
MOFCOM and SAIC in one of its bureaus. The State investment in China by U.S. NGOs and, indirectly,
Council Anti-monopoly Commission also was moved U.S. for-profit companies. In 2016, the National
to SAMR. In September 2018, the State Council People’s Congress passed the final version of the
issued the Provisions on the Jurisdiction, Department Foreign NGO Management Law, which went into
and Staffing of the State Administration for Market effect in January 2017. The new law does not
Regulation, which outlines SAMR’s organization, materially differ from the earlier draft, and it
functions and division of responsibilities with other therefore continues to generate serious concerns.
ministries and agencies. This measure makes clear
that SAMR is responsible for unified anti-monopoly Foreign business organizations that must register as
enforcement, coordinating and implementing NGOs under this law have raised many concerns
competition policies, and implementing the fair about its implementation. For example, in order to
competition review system against the abuse of register, an NGO must first obtain the sponsorship of
administrative power. SAMR is also charged with a “professional supervisory unit” (or PSU) from a list
guiding enterprises to respond to anti-monopoly of approved PSUs maintained by the Ministry of
lawsuits in foreign countries. Pubic Security. These PSUs are central or sub-central
government agencies. To date, many U.S. NGOs
At present, China’s anti-monopoly enforcement have had trouble obtaining the necessary
continues to generate serious concerns. One key sponsorship, as PSUs often consider sponsorship a
ongoing concern relates to how the Anti-monopoly political risk and have not been provided with
Law is being applied to state-owned enterprises. sufficient resources to take on their supervisory
Overall, many U.S. companies cite selective responsibilities. In addition, PSUs often impose
enforcement of the Anti-monopoly Law against requirements on the NGOs that they supervise, and
foreign companies seeking to do business in China as some NGOs have found that they must significantly
a major concern, and they have highlighted the change their activities in order to obtain
limited enforcement of this law against state-owned sponsorship, which is particularly concerning
enterprises. A further serious and continuing because in many cases a PSU is involved in regulating
concern relates to China’s periodic use of anti- the sector or subject matter on which the NGO
monopoly enforcement against U.S. companies to focuses.
achieve industrial policy objectives. Additionally,
U.S. industry continues to express concern about COMMERCIAL DISPUTE RESOLUTION
insufficient predictability, fairness and transparency
in Anti-monopoly Law investigative processes. Both domestic and foreign companies often avoid
seeking resolution of commercial disputes through
FOREIGN NGO MANAGEMENT LAW the Chinese courts, due to deep skepticism about
the independence and professionalism of China’s
In 2015, China’s National People’s Congress court system and the enforceability of court
published a draft Foreign NGO Management Law judgments and awards. There is a widespread
that laid out a series of provisions regulating perception that judges, particularly outside big cities,
organizations operating within its borders. The are subject to influence by local political or business
United States and numerous other governments and interests. In addition, many judges are not trained in
stakeholders around the world expressed serious the law or lack higher education, although this
concerns about the draft law, as it would have a problem decreases at the higher levels of the
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judiciary. At the same time, the Chinese government China as well as the arrest and detention of worker
is moving to establish consistent and reliable rights leaders.
mechanisms for dispute resolution through the
adoption of improved codes of ethics for judges and China recently issued two measures intended to
lawyers and increased emphasis on the consistent improve enforcement of China’s labor laws, but they
and predictable application of laws. For example, do not go far enough in addressing foreign
Supreme People’s Court rules provide that when companies’ concerns. The Measures for Announcing
there is more than one reasonable interpretation of Major Violations of Labor Security, which entered
a law or regulation, the courts should choose an into force in January 2017, address employers’
interpretation that is consistent with the provisions compliance with China’s labor laws by threatening to
of international agreements to which China has publicly name employers that commit serious labor
committed, such as the WTO rules. violations. The Measures for the Rating of
Enterprises’ Labor Security Compliance Credit, which
There is increasing skepticism of the China also entered into force in January 2017, rate
International Economic and Trade Arbitration employers based on a set of criteria that includes
Commission (CIETAC) as a forum for the arbitration compliance with China’s labor laws and subject
of commercial disputes. Some foreign companies poorly rated employers to routine inspections.
have obtained satisfactory rulings from CIETAC, but These measures are vague, do not define key terms
others have raised concerns about restrictions on and leave enforcement to provincial and local
the selection of arbitrators and inadequacies in administrative authorities, which can result in
procedural rules necessary to ensure thorough, inconsistent implementation.
orderly and fair management of cases.
In 2017, China introduced two other measures
A further problem for commercial dispute resolution aimed at improving labor dispute arbitration
in China is that obtaining enforcement has often systems. The Rules on Labor and Personnel Dispute
been difficult in cases where the courts or Arbitration Organizations define the roles of
arbitration panels have issued judgments in favor of arbitration commissions and courts at the provincial
foreign-invested enterprises. Chinese government and local government levels, provide dedicated
officials responsible for enforcement are often funding and specify qualifications, training and
beholden to local interests and unwilling to enforce oversight requirements for staff. The Rules on
judgments against locally powerful companies or Handling Labor and Personnel Dispute Arbitration
individuals. Cases address the handling of collective labor
disputes involving 10 or more workers and collective
labor disputes arising from the implementation of
LABOR LAWS collective labor agreements, among other things.
China does not effectively enforce its labor laws and In addition, China’s restrictions on labor mobility,
regulations concerning issues such as minimum which contribute to shortages of skilled workers for
wages, hours of work, occupational safety and foreign companies operating in China, continue to
health, bans on child labor, forced prison labor, and distort labor costs. In part due to the recognition
participation in social insurance programs. Many that labor mobility is essential to the continued
foreign-invested enterprises have expressed growth of the economy, China is gradually easing
concerns about their domestic competitors’ lack of restrictions under the country’s hukou (i.e.,
compliance with labor and social welfare laws due to household registration) system, which has
lax enforcement. Lax enforcement has led to traditionally limited the movement of workers within
significant increases in labor disputes and unrest in the country.
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China continues to maintain other policies that Once an ACFTU union chapter is established at an
negatively impact foreign companies, including enterprise in China, the enterprise is required to pay
restrictions on hiring contract workers. At present, fees to the ACFTU, often through the local tax
registered subsidiaries of foreign corporations have bureau, equaling two percent of total payroll,
two options when hiring workers in China. They can regardless of the number of union members in the
either hire full-time employees directly, or they can enterprise. While China’s laws on union formation
hire employees indirectly on contract from apply equally to domestic enterprises and foreign-
temporary placement agencies. These temporary invested enterprises, the ACFTU campaign may be
workers are known as “dispatch workers.” However, discriminatory, both because it does not appear to
amendments to the Labor Contract Law that went be directed at private Chinese companies and
into effect in July 2013 add restrictions intended to because it appears to specifically target Fortune 500
discourage these companies from using dispatch companies, to the disproportionate impact of U.S.-
workers instead of hiring long-term employees. The invested companies. The United States continues to
Labor Contract Law amendments limit the use of monitor this situation and is attempting to assess its
dispatch workers to periods of less than six months effects on U.S.-invested companies and their
in auxiliary, or non-core, business operations or for workers.
the purpose of replacing a permanent employee
away on leave. Additionally, the Interim Provisions LAND LAWS
on Labor Dispatch, which entered into force in
March 2014, further regulate employment of China’s Constitution specifies that all land is owned
dispatch workers by limiting the amount of dispatch in common by all the people. In practice, provincial
workers a business can hire to no more than 10 and municipal governments distribute state-owned
percent of the business’ total number of employees. urban land for industrial and residential use under a
Businesses whose total number of employees variety of terms depending on the type of land, its
comprised over 10 percent of dispatch workers prior intended use and the status of the land-use rights
to the implementation of the Interim Provisions on “purchaser,” while agricultural collectives, under the
Labor Dispatch were given until March 2016 to come control of local Communist Party chairmen,
into compliance. distribute collectively owned agricultural land to
rural residents in the form of 30-year renewable
In addition, and of great concern to the United contracts. Governments and agricultural collectives
States, China does not adhere to certain can transfer or lease land-use rights to enterprises in
internationally recognized labor standards, including return for the payment of fees, or other forms of
the freedom of association and the right to bargain compensation, such as profit sharing.
collectively. Chinese law provides for the right to
associate and form a union, but does not allow A major problem for foreign investors is the array of
workers to form or join an independent union of regulations that govern their ability to acquire land-
their own choosing. Unions must affiliate with the use rights, which are limited to 50 years for
official All-China Federation of Trade Unions industrial purposes in the case of foreign investors.
(ACFTU), which is under the direction of the Local implementation of these regulations may vary
Communist Party of China. The workers at from central government standards, and prohibited
enterprises in China are required to accept the practices may be tolerated in one locality while the
ACFTU as their representative; they cannot instead regulations are enforced in another. Most wholly
select another union or decide not to have any union foreign-owned enterprises seek land-use rights to
representation. state-owned urban land as the most reliable
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