Membership In The World Trade Organization

China joined the WTO on December 11, 2001, as part of an ongoing process of integration into the global economy that started with the open door policies in the late 1970s. Membership in the WTO signified another stage of China's economic restructuring. It is also a political statement that the economic reforms and open-door strategies will continue. Membership indicates a broadening of international trade reform from a policy that had been focused on SEZs to a more comprehensive approach under which China agreed to change its laws, institutions, and policies so that they conform to the norms of international trade.

Process Leading to Membership

China applied to become a member of the General Agreement on Tariff and Trade (GATT) on July 11, 1986. From 1986 to 1989, GATT conducted meetings to settle problems with regard to China's application. During this period, GATT's contracting parties, including Japan, the European Community (EC), Australia, New Zealand, and Canada supported China's accession. The process was going smoothly without China agreeing to any major changes in its trade policy to meet GATT requirements.

However, all the goodwill GATT members showed toward China was lost after the Tiananmen Square incident on June 4, 1989. China's suppression of the democratic movement derailed the accession process, and most contracting parties withdrew their support. The United States made greater demands for economic reform as a condition for China's membership. As a result, China began to align its policy with GATT requirements.

By 1991, China's relationship with the United States had soured over disputes on China's handling of intellectual property rights (IPR), China's most-favored-nation (MFN) status in the United States, human rights violations on the mainland, and Beijing's military technology transfers to third-world countries. These issues created difficulties for China as it sought renewal of its MFN status by the United States. As a result, China changed its tactics and started to negotiate with smaller countries. China won the support of Belgium, Brazil, and Argentina, and soon had won over other, more important, contracting parties, such as Germany, Australia, and Great Britain. Bolstered by this new momentum of support, China was able to gain the support of still other countries.

The period from 1989 to 1992 marked two important themes: building a coalition of support outside the United States and internal policy changes to conform to GATT principles. During this period, China offered several significant concessions, including: (1) amendment of Sino-foreign investment law in December 1989, (2) publication of trade policies in December 1991, and (3) the establishment of a research institute to study international trade rules and to help the country rejoin GATT.

As GATT evolved into the WTO, China had the opportunity to gain a founding member status. Yet, China's contentious relationship and trade imbalance with the United States continued to hamper its quest for membership. After more than a year and a half of inactivity on China's part, it resumed negotiations with GATT in February 1992. Negotiations continued until December 1994 because both United States and other member countries demanded concessions from China in many areas. The primary focus of negotiations during 1992 to 1993 was on tariff reduction. In 1994, the emphasis shifted to other areas, such as intellectual property rights and market access by service sectors. China's desire to become a founding member led to many concessions on its part including: (1) concessions on human rights issues, (2) concessions covering sensitive areas, such as the automobile industry, and (3) extension of copyright protection.

With many major concessions addressed, the EU, Japan, and Australia supported China's admission into the GATT by the first half of 1994. To win the support of the United States, China offered concessions on a list of products that no longer needed import licensing and named 50 import categories whose tariffs were to be reduced.

After its bid for founding member status failed, China suspended formal negotiations. Both the United States and China came to loggerheads as neither was ready to back down from its position. The United States was upset over China's lack of action on U.S. copyright infringement issues and the growing trade deficit with China. The beginning of 1995 was the breaking point, when talks on copyright issues fell through, a trade war broke out between the countries.

Other areas of dispute soon erupted, including China's aggression toward Taiwan and continued disputes over developing country status, which drew opposition from the U.S. commercial and agricultural sectors. With regard to developing country status, the United States considered China to be a developed country due to its vast economic size and fast economic growth. Yet, China viewed this designation negatively and believed it would result in economic instability. Formal bilateral negotiations were stalled. The EU attempted to restart negotiations on China's behalf; it recognized China's developing country status and pushed for a transition period that would gradually change China's status to a full member. This approach received a lukewarm reception from the United States.

In 1996, the WTO's larger contracting parties, such as the EU, Canada, and Japan, resumed formal negotiations with China and sought to accelerate China's accession. The EU "transition period" approach for China received widespread support among WTO members and China. The EU now focused its negotiations on addressing which areas would be phased in, how long would the phases last, and which areas were to be immediately opened. The EU sought better terms on market access, subsidies, and tariffs. Access to the automobile sector was the most significant issue because the EU demanded drastic cuts in Chinese automobile tariffs and greater transparency of China's long-term policies in the automobile industry. During 1996, the relations between the United States and China soured even further as a result of the intellectual property rights disputes. In March, the United States called for $3 million dollars in preliminary sanctions against Chinese exports due to China's failure to protect U.S. intellectual property rights. In June, China and the United States reached an agreement over intellectual property rights. Yet, other areas of American concerns needed to be addressed, such as agricultural issues and the trade deficit. This led the United States to push for increased access to China's markets.

In 1997, China made a series of offers to WTO members and carried out many negotiations with member countries. The new offers covered tariff reduction in which China reduced the average tariff rate from 23 percent to 17 percent by October 1997. Regulations on distribution and production for foreign companies in China also were addressed. China promised to open the wholesale and retail sectors to foreign investment and to grant rights to all enterprises in China to import or export after a short transition period.

During 1997, the U.S. Congress took a tough stance on a variety of issues with China and proposed several stringent sanctions, including: (1) a ban on prison-labor products, (2) a ban on travel to the United States by Chinese officials who engaged in religious persecution or who forced women to have abortions as a means of population control, (3) inclusion of American human rights monitors in Beijing, (4) a ban on American trade with companies controlled by the Chinese military, and (5) denial of below-market-rate international loans to China.

In 1998, negotiations centered on China's liberalization of the agricultural and services sectors. Adding to WTO members' arguments was the fact that China had increased its share of exports over its Asian neighbors as a result of the 1997 Asian financial crisis. Members maintained that China's increased fortunes allowed it to increase its share of Western countries' imports drastically. As a result, China offered to reduce tariffs to 10.8 percent by 2005 and to eliminate import restrictions on 385 types of commodities over the next 10 years. Additionally, China provided concessions concerning the telecommunications and services sectors, including banking and insurance markets.

In 1999, China focused its attention on negotiations with the United States. China offered tariff cuts on beef and wheat. The United States had several additional concerns, including accusations that the Chinese were stealing nuclear secrets from the United States, a rising trade deficit with China, and apprehensions raised by both U.S. steel and information technology industries.

To further complicate issues, a NATO bomb hit China's embassy in Belgrade during the conflict in Bosnia. To curb internal dissent over the incident, China suspended negotiations with the United States. As this issue faded, China resumed negotiations with the United States. By November 1999, the United States and China were in accord and reached a bilateral agreement. In the same month, another bilateral agreement was signed by China and Canada.

In January 2000, China and the EU held bilateral talks on several outstanding issues covering market access, tariffs, investment, and industrial goods. Other unresolved issues included market access for telecom and insurance companies. In February, China and India signed a bilateral agreement, which increased the trade volume between both countries. By May, China had agreed to concessions pushed by the EU, which resulted in the signing of a bilateral agreement. China made a commitment to lift restrictions on insurance business, which would include allowing foreign operators to sell the same products as their Chinese competitors. Restrictions on location of foreign insurers were relaxed—previously foreign insurers were permitted only in the cities of Shanghai and Guangzhou. Also, foreign partners in Chinese life insurance joint ventures would be permitted to exercise effective management control, for they could choose their Chinese partners and secure a legal guarantee of freedom from any regulatory interference in private contracts on a fifty-fifty equity basis. Additionally, in May 2000, China signed a bilateral agreement with Australia, after reaching an agreement to liberalize access to 1,000 product categories across agricultural and manufacturing exports and to key service sectors.

In September 2000, China and Switzerland reached a bilateral agreement. This left only Mexican-Chinese negotiations as the last remaining obstacle before the WTO accepted China as a member. In September 2001, China and Mexico wrapped up bilateral negotiations. China made concessions to extend its current countervailing duties on 1,300 Chinese products in textiles, garments, footwear, and toys for six years. It also permitted an antidumping measure, which allowed Mexico to maintain the import duties after a six-year period if it discovered dumping. The eighteenth meeting ofthe WTO China working group finalized legal documents on China's accession; China was formally approved as a member at WTO's November Doha meeting.5

Regulatory Changes

China made a variety of commitments to the WTO for membership. A summary of the eight subject areas follows:6

1. Trading rights and distribution services: China agreed to grant full trade and distribution rights to foreign enterprises by the end of 2004 (with some exceptions, such as for certain agricultural products, minerals, and fuels).

2. Import regulations: Import regulations largely concern general and product specific import tariffs. In addition to a number of specific tariff reductions, Beijing agreed to reduce the average tariff imposed on industrial goods and agricultural products from 24.6 percent and 31 percent to 8.9 percent and 15 percent, respectively (with most cuts made by 2004 and all cuts completed by 2010).

3. Export regulations: China agreed to accept GATT Article XI, which generally prohibits export restrictions other than duties, taxes or other charges related to the cost of administering an export regime. Exceptions are made for certain sensitive products, such as those whose export could compromise national security.

4. Internal policies affecting trade: China agreed to abide by the core GATT 1994 principles of MFN nondiscrimination (known in the United States as normal trade relations) and national treatment, which requires that foreign firms operating in China would be treated no less favorably than Chinese firms for trade purposes, especially as such treatment relates to taxation, regulatory transparency, and price controls.

5. Investment: China agreed to eliminate local content and foreign-exchange balancing requirements from its laws, regulations, and other measures. Importantly, China also agreed that importation or investment approvals would not be conditioned on requirements such as technology transfer and export offsets.

6. Agriculture: China agreed to limit subsidies for agricultural production to 8.5 percent of the value of farm output and eliminate export subsidies on agricultural exports.

7. Intellectual property rights: China agreed to implement the WTO's Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement immediately upon accession. The TRIPS agreement sets down minimum standards for most forms of intellectual property regulation—copyright and related rights, industrial designs, patents, trademarks, and trade secrets—within all member countries of the WTO.

8. Services: China agreed to open the banking system to full competition from foreign financial institutions by 2007. Beijing also agreed to permit various degrees of foreign ownership in joint ventures in insurance and telecommunications.

Status of China's World Trade Organization Commitments

China met four significant WTO commitments in 2005. These areas are advertising, banking, freight forwarding, and insurance. In advertising, it met the commitment by allowing wholly foreign-owned enterprises (WFOEs) in advertising services when the Regulation on Management of Foreign-Invested Advertising Companies took effect on December 10, 2005. With regard to banking, China met its commitment when the China Banking Regulatory Commission announced on December 5 that it would allow foreign banks to expand their local currency business into Ningbo, Zhejiang; and Shan-tou, Guangdong. China opened Shenyang, Liaoning; and Xi'an, Shaanxi, in December 2004. In fact, China went beyond its WTO commitments and opened five other cities—Changchun, Jilin; Harbin, Heilongjiang; Lanzhou, Gansu; Nanning, Guangxi; and Yinchuan, Ningxia—in December 2005. In the area of freight forwarding, China met its commitments by allowing WFOEs in freight-forwarding agency services and to apply national treatment to capitalization requirements for foreign-invested freight forwarders. Another fulfilled commitment is insurance. Foreign-invested insurers no longer need to cede to the China Reinsurance Corporation a portion of the lines of the primary risk for nonlife, personal accident, and health insurance. The China Insurance Regulatory Commission also lowered the minimum required total asset level for an insurance brokerage license from $300 million to $200 million. The lower asset requirement took effect on December 11, 2005.

In 2006, China's new commitments were:7

• Architectural, engineering, and urban planning services: China will allow WFOEs in architectural, engineering, and integrated engineering services. Urban planning WFOEs have been permitted since May 2003.

• Banking: China has to lift all geographic and customer restrictions on their local currency businesses on foreign-invested banks. Moreover, China is scheduled to eliminate any nonprudential measures that restrict the ownership, operation, and operational form of foreign-invested banks. The combined phase-in of these commitments should mark the full opening of China's banking sector to foreign companies. It will allow wholly foreign-owned banks to provide local currency services to any Chinese client in any city. Full implementation of these commitments is made particularly important by the likelihood of continuing restrictions on foreign investment in domestic banks, which is capped at 25 percent for all foreign investors and less than 20 percent for any one foreign investor.

• Distribution and retail: China is scheduled to allow WFOEs and other foreign-invested wholesalers and commission agents to distribute chemical fertilizers, processed oil, and crude oil. Implementation of this commitment will remove the last remaining product prohibitions for foreign-invested distributors, except for restrictions on salt and tobacco, which are to remain under state control.

• Retail: WFOEs and other foreign-invested retailers with 30 or fewer outlets should be allowed to sell chemical fertilizers. Foreign majority-owned chain retailers with more than 30 outlets should be allowed to sell motor vehicles. Implementation of these commitments will mark the completion of WTO-mandated openings in China's retail sector, though China will retain the right to prohibit foreign-majority owned chain retail outlets with more than 30 stores from selling tobacco products, certain chemicals, some agriculture items, and specific processed oil products.

• Insurance: The last of China's WTO commitment in insurance requires it to allow wholly foreign-owned insurers to engage in reinsurance; international marine, aviation, and transport insurance; and brokerage for reinsurance and large-scale commercial risks, international marine, aviation, and transport insurance.

• Telecom: China is scheduled to lift all geographic restrictions on mobile voice and data telecom services for Sino-foreign joint ventures. Foreign-invested mobile voice and data telecom providers were restricted to operating in 17 cities, including Beijing, Chongqing, Guangzhou, and Shanghai. After the geographic restrictions are lifted, China will have fully implemented its WTO commitments in these services. China's WTO schedule does not require it to lift the 49 percent cap on foreign ownership in a mobile service provider. In domestic and international services, China is scheduled to expand the number of cities and regions in which Sino-foreign joint ventures may operate and raise the cap on foreign ownership. Foreign-invested fixed-line telecom providers could operate only in Beijing, Guangzhou, and Shanghai. China's 2006 WTO commitments allow these service providers to expand into many of China's most important business centers: Chongqing; Chengdu, Sichuan; Dalian and Shenyang, Liaoning; Fuzhou and Xiamen, Fujian; Hangzhou and Ningbo, Zhejiang; Nanjing, Jiangsu; Qingdao, Shandong; Shenzhen, Guangdong; Taiyuan, Shanxi; Wuhan, Hubei; and Xi'an, Shananxi. In addition, the cap on foreign ownership should rise from 25 percent to 35 percent and should rise again to 49 percent by the end of 2007.

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