china - ustr · states. china’s elimination of tariffs on the products covered by the information...

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FOREIGN TRADE BARRIERSFOREIGN TRADE BARRIERS46

CHINATRADE SUMMARY

The U.S. trade deficit with China was $103.1billion in 2002, an increase of $20.0 billion from$83.1 billion in 2001. U.S. goods exports in 2002were $22.1 billion, up 15 percent from theprevious year. Corresponding U.S. imports fromChina were $125.2 billion, up 22.4 percent. Chinais currently the 7th largest export market for U.S.goods.

U.S. exports of private commercial services (i.e.,excluding military and government) to China were$5.3 billion in 2001 (latest data available), andU.S. imports were $3.0 billion. Sales of servicesin China by majority U.S.-owned affiliates were$2.1 billion in 2000 (latest data available), whilesales of services in the United States by majorityChina-owned firms were $80 million.

The stock of U.S. foreign direct investment (FDI)in China in 2001 was $10.5 billion, up from $9.9billion in 2000. U.S. FDI in China is concentratedlargely in manufacturing, petroleum and financesectors.

OVERVIEW

With a population of 1.3 billion, China offers avast potential market for foreign goods andservices. Over the past 25 years, China has madeimportant progress in opening its market to foreigngoods and services as well as foreign investment. Economic and financial reforms have introducedmarket forces into China, and privileges accordedstate-owned firms are gradually being removed. However, the transition from a state-controlledeconomy to a market-driven one is far fromcomplete.

The Chinese Government has recognized forseveral years that economic restructuring andmarket opening are essential components ofsustainable and balanced economic growth,particularly on the industrial side. China's shiftaway from a planned economy model toward amarket economy has been difficult but has beenrewarded by sustained economic growth andimproving living standards. Reforms have beenparticularly difficult in sectors that traditionallyrelied upon substantial state subsidies. The state-owned sector faces significant pressure fromdomestic and foreign competition, particularly inservices and light manufacturing.

China acceded to the World Trade Organization(WTO) on December 11, 2001. China's accessionhas further opened its market to U.S. goods,services and investment. Overall, during the firstyear of its WTO membership, China madesignificant progress in implementing its WTOcommitments, although much is left to do. Progress was made both in making many of therequired systemic changes and in implementingspecific commitments. At the same time, seriousconcerns arose in some areas, whereimplementation had not yet occurred or wasinadequate.

As expected, the principal focus of China’s firstyear of WTO membership was on its frameworkof laws and regulations governing trade in goodsand services, particularly at the central level, asChina sought to bring them into compliance withits WTO obligations. China revised a largenumber of laws and regulations with potentiallymajor implications for U.S. producers andinvestors. For example, China’s revision of itspatent, trademark and copyright laws to betteraccord with WTO rules could have positiveconsequences for foreign and Chinese businessesalike. Likewise, in order to implementcommitments made in its accession agreement,China opened venture funds to foreign investors,revised rules regulating foreign investment intelecommunications, insurance, banking and othersectors, combined the domestic and quarantinetesting agencies with a goal of eliminating doubletesting and discriminatory treatment of imports,and lowered tariff rates on a wide range ofproducts. China also issued new measures in theareas of international courier services, legalservices, audio-visual services, maritime services,import and export administration, import andexport licensing, customs valuation and standards,among others.

Beginning early in 2002, China also devotedconsiderable resources to the restructuring of thevarious government ministries and agencies with arole in overseeing trade in goods and services. Some of these changes were mandated by China’saccession agreement, while others wereundertaken by China to facilitate its compliancewith W TO rules.

Another significant focus for China during the pastyear involved education and training of nationaland local level officials. In many regions,however, understanding of WTO rules remainslimited to a few specially trained officials.

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FOREIGN TRADE BARRIERS 47

While the efforts of China’s leadership toimplement China’s WTO commitments should berecognized, there were also a number of causes forserious concern during China’s first year of WTOmembership. One area of cross-cutting concerninvolved transparency. Some ministries andagencies took steps to improve opportunities forpublic comment on draft laws and regulations, andto provide appropriate WTO enquiry points, butChina’s overall effort was plagued by uncertaintyand a lack of uniformity. Apart from this systemicconcern, three other areas generated significantproblems – agriculture, intellectual property rightsand services. The area of agriculture proved to beespecially contentious between the United Statesand China. While concerns over market access forU.S. agriculture products are not unique to China,particularly serious problems were encountered onmany fronts, including China's regulation ofagricultural goods made with biotechnology, theadministration of China's tariff-rate quota systemfor bulk agricultural commodities, the applicationof sanitary and phytosanitary measures andinspection requirements. In the area of intellectualproperty rights (IPR), China has made significantimprovements to its framework of laws andregulations, but the lack of effective IPRenforcement remains a major challenge. Meanwhile, concerns arose in many servicessectors, largely due to transparency problems andChina's use of prudential requirements thatexceeded international norms.

With the increased competition being brought onby China’s W TO accession, pressures on China toreform large state-owned enterprises haveintensified, despite the inevitable short- andmedium-term adjustment pains. Many Chineseeconomists believe that China’s private sector,meanwhile, will see more immediate benefits fromWTO accession, as government influence isreduced by China’s adherence to WTOrequirements. In the long run, adherence to WTOrules and international norms should encouragestructural reform and promote the rule of lawthroughout China. Nevertheless, China’smembership in the W TO will not remove allcommercial problems.

Overall, while China has a more open andcompetitive economy than 25 years ago, andChina’s WTO accession has already led to theremoval of many trade barriers, there aresubstantial barriers that have yet to be dismantled. In many sectors, import barriers, opaque and

inconsistently applied legal provisions, andlimitations on market access often combined tomake it difficult for foreign firms to operate inChina in 2002. The central government continuesto protect noncompetitive or emerging sectors ofthe economy from foreign competition. Provincialand lower-level governments have stronglyresisted reforms that would eliminate shelteredmarkets for local enterprises or reduce jobs andrevenues in their jurisdictions. This phenomenonhas inhibited the central government's ability toimplement trade reforms.

China’s Economy in 2002

China officially estimated real GDP growth ateight percent for 2002. This represents a modestacceleration from the rate of 7.3 percent recorded ayear earlier but, consistent with the pattern since1997, remains well below the double-digit growthrates reported during the boom years of the earlyand mid-1990s. Fixed-asset investment, growingat the fastest pace since 1994 largely as the resultof government policy, fueled the rise in GDP. Inaddition, net exports made their first positivecontribution to GDP growth since 1998. Whilethe contribution of manufacturing and constructionto the economy rose in 2002, growth of the servicesector component of GDP declined, addingstatistical evidence to concerns among China'sleaders about slow job creation. Chinese officialsacknowledged that urban unemployment wasprobably in the range of seven percent, a figureclose to double the official number of "registered"unemployed.

Other indicators also pointed to ongoing problemswithin the Chinese economy. Most notably, Chinacontinued to experience modest deflation. Maintaining the deflationary trend that began in1998, retail prices fell about one percent, while theconsumer price index, which had shown marginalpositive growth in 2000 and 2001 as a result ofincreases in service prices, also slipped by slightlyless than one percentage point. In addition, retailsales growth slowed from the levels seen in recentyears, particularly in rural areas. Government-directed increases in civil service wages andwelfare benefits spurred average urban incomegrowth per capita of over 15 percent year-on-year. This increase, however, did not extend to thecountry's rural areas, home to two-thirds ofChina's 1.3 billion people, where annual incomeper capita rose by only about five percent. Urbanand rural incomes per capita at year end wereequivalent to approximately $1,000 and $300,respectively.

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IMPORT POLICIES

China has traditionally restricted imports throughhigh tariffs and taxes, non-tariff measures,restrictions on trading rights, and other barriers. Central government officials are increasinglyaware, however, that such protective measurescontribute to economic inefficiencies andencourage smuggling. These officials' enthusiasmfor reform and trade liberalization helps explainthe central government's general commitment toWTO implementation. As part of its first year inthe WTO, China slashed tariff rates on manyproducts, substantially reduced the number ofgoods subject to import quotas, began to phase-outother non-tariff barriers, and clarified its licensingprocedures. However, bureaucratic inertia and adesire to protect sensitive industries – such asagriculture – led to the failure at a working level tomeet some WTO commitments designed to reduceimport barriers.

TARIFFS AND OTHER IMPORT CHARGES

Tariff Reductions

Under the terms of its WTO accession, China wasto reduce tariff rates upon accession. BecauseChina acceded so late in the year (December 11,2001), it delayed making its scheduled WTO tariffcuts until January 1, 2002, when it implementedtwo rounds of reductions. The overall averagetariff rate fell from over 15 percent to 12 percent.

WTO accession will have a dramatic effect ontariffs for many products of interest to the UnitedStates. China’s elimination of tariffs on theproducts covered by the Information TechnologyAgreement (ITA) – semiconductors andsemiconductor manufacturing equipment,computers and computer parts, software,telecommunications equipment and computer-based analytical instruments – began uponaccession and is to be completed by January 1,2005. Tariffs for some passenger cars were over100 percent prior to accession, and will be reducedto 25 percent by 2005. China will also reduce itstariffs on auto parts to 9.5 percent.

Tariffs for U.S. priority agricultural products willfall from an average of 31 percent to 14 percent byJanuary 1, 2004. China will reduce its tariffs onfrozen beef cuts to 12 percent, frozen potatoproducts and grapes to 13 percent, beef and porkoffal, cheese and citrus to 12 percent, frozenpoultry parts, apples, pears, almonds and

pistachios to 10 percent, paper to 5.4 percent, andwood to 4.2 percent.

China’s post-WTO tariff rates are “bound,”meaning that China cannot raise them above thebound rates without “compensating” WTO tradingpartners, i.e., re-balancing tariff concessions or, inaccordance with WTO rules, being subject towithdrawal of substantially equivalent concessionsby other WTO members. “Bound” rates will giveimporters a more predictable environment. Chinamay also apply tariff rates significantly lower thanthe WTO-required rate in the case of goods thatthe government has identified as necessary to thedevelopment of a key industry. For example,China's Customs Administration has occasionallyannounced preferential tariff rates for items thatbenefit key economic sectors, in particularautomobiles, steel and chemical products.

China plans to maintain high duties on someproducts that compete with sensitive domesticindustries. For example, the tariff on largemotorcycles will only fall from 60 percent to 45percent. Likewise, most video, digital video, andaudio recorders and players still face duties ofaround 30 percent. Raisins face duties of 35percent.

Tariff treatment of certain products in 2002 –including the use of specific rather than advalorem tariff rates for chicken parts and theimposition of a M inistry of Information Industry(MII) end-use certificate requirement for 15semiconductor and telecommunications equipmentproducts as a precondition for eligibility forreduced duties under the Information TechnologyAgreement (ITA) – did not appear to fully matchChina’s WTO commitments. The United Statesand other WTO members raised these issues withChina and will work to ensure that China fullyimplements its tariff commitments. In early 2003,China’s Customs Administration issued a bulletinremoving the need for MII approval for the ITAproducts, but apparently still requiring specialCustoms Administration end-use verificationsbefore applying lower ITA-guaranteed tariff rates.

Tariff Classification

Tariff classification remained a problem in 2002. Customs officers have wide discretion inclassifying a particular import. Chemicalimporters report that they had to “negotiate” tariffclassification with customs officers at each port. While foreign businesses might at times have

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benefitted from their ability to negotiate tariffclassification into tariff categories with lowerimport duty rates, lack of uniformity made itdifficult to anticipate border charges.

Customs Valuation

Importers have often reported inappropriatevaluation methods by customs officials, resultingin higher-than-necessary customs charges. Inearly 2002, China released new valuationregulations in order to bring its valuation practicesinto conformity with the WTO Customs ValuationAgreement. However, importers report that manyCustoms officials continue to use minimum andreference price lists rather than the actualtransaction price for valuation purposes. While attimes this can result in lower import charges –especially for certain luxury imports – it tends toincrease fees for many products, ranging fromapples to big-ticket machinery and electronicimports. In addition, many Customs officials arestill inappropriately applying royalty and softwarefees to the dutiable value even if these fees are nota condition of the particular sale in question.

Rules of Origin

China is still using regulations on determining theorigin of imports written in the 1980s. AlthoughChina Customs has been slow in drafting newregulations, importers have not reported problemsstemming from inappropriate application of Rulesof Origin.

Border Trade

Firms along China's borders can receive anexemption from, or reduction of, tariff andlicensing requirements based on a regulationissued in 1996. This exemption was intended toallow small-scale traders to operate in bordercommunities. The regulation expired in 2000, butin the absence of a new policy governing bordertrade, customs officials are still applying the 1996regulation. Larger operators appear to be takingadvantage of this system to import bulk shipmentsacross China's land borders into its interior atpreferential rates. China has been reluctant to stopsuch shipments in its economically depressednorthern and western areas. Among affected U.S.businesses are boric acid exporters, who reportpaying higher duties (and value-added taxes) thantheir Russian competitors. U.S. timber exportersalso face similar discrimination.

Taxation

In April 2001, the National People's CongressStanding Committee passed long-awaited changesto the tax collection law, designed to standardizeand increase the transparency of China’s taxprocedures. The State Council issued detailedregulations for the implementation of this law inSeptember 2002. As part of a broader campaign to"rectify market order" and eliminate inter-provincial barriers to domestic commerce, theChinese central government also implementedmeasures to prevent local governments fromapplying discriminatory tax treatment that favoredlocally owned firms.

Foreign investors, including those who have usedinvestment as an entry point to the Chinesedomestic market, have benefitted from investmentincentives, such as tax holidays and grace periods,which allow them to reduce substantially their taxburden. Domestic enterprises have long resentedrebates and other tax benefits enjoyed by foreign-invested firms, and these benefits are beinggradually phased out.

Application of China’s single most importantrevenue source – the value-added tax (VAT),which ranges between 13 percent and 17 percent,depending on the product – is uneven. Importersfrom a wide range of sectors report that, becausetaxes on imported goods are reliably collected atthe border, they are sometimes subject todiscriminatory application of a VAT that theirdomestic competitors often fail to pay. Asdiscussed below in the section on importsubstitution policies, China has substantiallyreduced the applied VAT for semiconductorsmanufactured in China, while the full VAT mustbe paid on imported semiconductors. China hasalso announced the selective exemption of certainfertilizer products from the VAT, to thedisadvantage of imports from the United States. Other tax exemption programs, designed toeliminate the tax burden on farmers, put U.S. farmimports at a competitive disadvantage. China alsoretains an active VAT rebate program for exports. Although State Administration of Taxationofficials plan eventually to eliminate rebates as away to increase tax revenues, the authorities havecontinued this practice to date in order to spurdomestic economic growth. China's 1993 consumption tax system has alsoraised concerns among exporters. Because Chinauses a substantially different tax base to computeconsumption taxes for domestic and imported

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products, the tax burden imposed on importedconsumer goods ranging from alcoholic beveragesto cosmetics to automobiles is higher than forcompeting domestic products.

Antidumping, Countervailing Duty andSafeguard Measures

Chinese officials and the state-run media haveencouraged Chinese industries to petition forantidumping or safeguard measures to protect theirmarkets after WTO-mandated tariff cuts. Tofacilitate these investigations, the Chinesegovernment following accession created two newdepartments, in the Ministry of Foreign Trade andEconomic Cooperation (MOFTEC) and the StateEconomic and Trade Commission (SETC),respectively, to pursue unfair trade cases. Indeed,as trade barriers come down, China's beleagueredstate-owned enterprises increasingly have turnedto antidumping measures to address rising imports. As a result, the volume of trade remedy casesinitiated by the Chinese authorities followingWTO accession has increased significantly. Nineantidumping investigations were initiated in 2002,a number comparable to the total of similarinvestigations in the four years leading up toaccession, although none of the investigations hasyet progressed beyond a preliminarydetermination. Meanwhile, China’s firstsafeguards case resulted in significant additionalduties on several classes of steel products (withduties affecting mainly imports from Japan,Taiwan and South Korea). On a more positivenote, for the first time since the creation of China'sfair trade regime in 1997, a U.S. company avoideda final antidumping finding when SETC –recognizing, among other things, the fact thatrising costs would hurt Chinese farmers –terminated an investigation into imports of L-Lysine (animal feed additive).

The Chinese government agencies responsible foradministering antidumping, countervailing dutyand safeguards remedies have issued numerousregulations governing the conduct ofinvestigations, resulting in nineteen new traderemedy-related regulations in 2002. For the mostpart, these new regulations are good-faith effortsto implement China’s WTO commitments andimprove on what may have existed before, butthey remain vaguely worded. They thereforepermit procedures that are less than transparentand fail to address significant issues, thus leavingmany decisions to the broad discretion of theinvestigating authorities. The Chinese People's

Supreme Court also issued documents allowingindependent judicial review of determinations,although as yet no cases have reached the courts.

NON-TARIFF BARRIERS

China’s Protocol of Accession to the WTOobligated China to address many of the non-tariffbarriers it had historically used to restrict trade. For example, China is obligated to phase out itsimport quota system, apply international norms toits testing and standards administration, removelocal content requirements, and make its licensingand registration regimes transparent. At thenational level, China made progress in 2002 inreforming its testing system, revising regulationsrequiring local content, and improving overallregulatory transparency, including in the licensingarea. Despite this progress, however, as China'strade liberalization efforts moved forward, somenon-tariff barriers remained in place and evenincreased.

One year after China’s WTO accession manyindustries complain they face increasing non-tariffbarriers to trade. These include regulations thatset high thresholds for entry into service sectorssuch as finance and insurance, “quarantinecertificates” for agricultural imports, regulationson biotechnology products, and use of technicalstandards and sanitary and phytosanitary measuresto control import volumes. In fact, severalnational officials have stated openly in the state-run media that China should manipulate technicalstandards to limit imports. At the sub-nationallevel, importers have expressed concern that localofficials do not understand China’s WTOcommitments and are not prepared to relinquishcontrol over the local economy.

These problems are compounded by the fact thatcoordination between the State Administration forQuality Supervision and Inspection andQuarantine (AQSIQ) and its new affiliated bodies,the China National Certification and AccreditationAdministration (CNCA) and the StandardizationAdministration of China (SAC), is lacking, as iscoordination between these bodies and ChinaCustoms and other local implementers ofstandards and import regulations.

Import Quotas

Quotas on most products were eliminated orscheduled to be phased out under the terms ofChina’s WTO accession. China’s accession

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agreement required China to eliminate existingquotas for the top U.S. priority products uponaccession and phase out remaining quotas,generally by two years but no later than five yearsafter accession. In 2002, quotas remained in placefor eight categories of goods, including watches,certain vehicles, motorcycles, machine tools, oiland rubber. China did not have a system toallocate quotas in place upon accession asrequired, and in 2002 bureaucratic delays inallocating quotas disrupted imports of manyproducts, particularly in the auto sector. Becauseof these problems, in December 2002, MOFTECannounced it would extend the validity of 2002import quotas for machinery and electronicimports (including automobiles). Holders of a2002 MOFTEC-issued “Machinery and ElectronicImport Quota Certificate,” if they applied byDecember 31, 2002, could receive a 2002 “ImportLicense” valid until March 31, 2003. Continuingthe phase-out of its quota system, Chinaannounced that beginning January 1, 2003, certainvehicles, vehicle parts, motorcycles, motorcycleparts, cameras, watches, and cranes and chassiswould no longer be subject to import quotas. In the past, China often did not announce quotaamounts or the process for allocating quotas. Thegovernment set quotas through negotiationsbetween central and local government officials atthe end of each year. Under the terms of its WTOaccession agreement, China must make quotasavailable at agreed levels that increase 15 percenteach year. China is required to allocate quotas toimporters based on detailed rules outlined inChina’s accession agreement.

In the past, monopoly importers have also beenable to establish de facto quotas that maximizetheir monopoly rents. For example, the soleofficial government theatrical film importerinformally limited the number of foreign motionpictures for theatrical release it allowed each year. In 2001, this number was ten. With China’s WTOaccession, however, China committed to allow 20foreign films to be distributed in China on arevenue-sharing basis annually. China admitted18 foreign films in 2002.

Tariff-Rate Quotas

In 1996, China claimed to have introduced a tariff-rate quota (TRQ) system for imports of wheat,corn, rice, soy oil, cotton, barley, and vegetableoils. The quota amounts were not publiclyannounced, application and allocation procedures

were not transparent, and importation occurredthrough state trading enterprises. China laterintroduced a TRQ system for fertilizer imports. Under these TRQ systems, China places quantityrestrictions on the amount of these commoditiesthat can enter at a low “in-quota” tariff rate; anyimports over that quantity are charged aprohibitively high duty.

As part of its WTO accession commitments, Chinaestablished large and increasing TRQs for importsof wheat, corn, rice, cotton, wool, sugar, vegetableoils, and fertilizer, with most in-quota dutiesranging from 1 percent to 9 percent. Each year, aportion of each TRQ is to be reserved forimportation through non-state trading entities.China’s accession agreement sets forth specificrules for administration of the TRQs, includingincreased transparency and reallocation of unusedquota to end-users that have an interest inimporting.

However, China’s implementation of its TRQsystems has been problematic. Regulations for theadministration of the TRQ systems were issuedlate, did not provide the required transparency andimposed burdensome licensing procedures. TRQallocations were also plagued by delays. Chineseofficials have repeatedly argued that the agenciesresponsible for TRQ administration wereunprepared for such a difficult task, resulting inone-time delays in allocations.

SETC began to allocate fertilizer TRQs in April,nearly four months late. It delayed even longer innaming the non-state trading enterprises that couldhandle importation. SETC did announce therequired re-allocation of 2002 TRQs in a timelymanner, although no re-allocation materialized.SETC also issued the announcement of 2003 TRQlevels and procedures on time.

The State Development and Planning Commission(SDPC) did not allocate its agricultural TRQs tonon-state trading entities until April, also fourmonths late, and to state traders until early July. SDPC also repeatedly refused to answer requestsfrom government and private entities for specificdetails on amounts and recipients of TRQallocations. It became clear, however, that SDPChad issued some TRQ allocations belowcommercially viable levels. Most worrisome,China confirmed that SDPC had reserved a portionof the TRQs for processing and re-export only. In2002, the United States repeatedly engaged China,at all levels of government, in an attempt to

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resolve these issues. The United States alsorequested formal consultations with China underthe provisions of the headnotes contained in theGoods Schedule annexed to China’s Protocol ofAccession. These issues remain unresolved.

In late 2002, SDPC completed the required re-allocation of 2002 TRQs in a timely manner, andSDPC issued the announcement of 2003 TRQlevels and procedures on time. As in 2002, SDPCwill require a significant portion of the TRQs beused only for processing and re-export of imports. This restriction is most important for cotton, wherewell over one-half of the TRQ is restricted to re-exports. According to SDPC, allocations forTRQs reserved for the processing trade will bemade on a first-come first-served basis beginningJanuary 2, 2003. By late January 2003, however,non-state trading companies had received littlenews of allocations.

Import Licenses

Beginning in the early 1990s, China eliminatedmost of its import licensing requirements. Uponacceding to the WTO, China further reduced thenumber of product categories requiring importlicenses to 15. However, most products subject toquotas or TRQs – including petroleum, cotton,passenger vehicles, trucks, and rubber − stillrequire licenses in addition to quota or TRQallocation. China’s WTO accession agreementexplicitly states that China must automaticallyprovide any necessary import license for goodssubject to quotas or TRQs as part of the allocationprocedure. Despite this commitment, Chinarequires importers to apply separately for TRQallocations and import licenses, increasing theburden on importers and potentially causing tradedistortions.

China also committed upon accession to limit theinformation that a trader must provide in order toreceive a license, to ensure that licenses are notunnecessarily burdensome, and to increasetransparency and predictability in the licensingprocess. MOFTEC issued new regulations andimplementing rules to smooth licensingprocedures shortly after China’s accession. However, license applicants reported that theyhave had to provide sensitive business detailsunnecessary for simple import monitoring. Theyalso reported that MOFTEC was using a "one-license-per-shipment" system rather thanproviding licenses to firms for multiple shipments,which was acting as an impediment to trade.

MOFTEC began to allow more than one shipmentper license in late 2002 following U.S.interventions.

China’s inspection and quarantine agency,AQSIQ, has imposed inspection-relatedrequirements that had the effect of restrictingimports of some U.S. agricultural goods. AQSIQrequires importers to obtain quarantine inspectioncertificates before agricultural goods can enterChina’s market, and traders have reported thatAQSIQ has imposed quantitative restrictions andtime limits in connection with them, as in the caseof, for example, imported poultry and pork. Soybean traders have reported sporadic problems,but the most adversely affected U.S. product waschicken meat, whose exports to China were downmore than 20 percent by volume in 2002 comparedto the previous year, even though for most of theyear domestic Chinese prices for popular importedcuts were more than 20 percent above landed costsplus tariff and VAT. Near the end of 2002, aftercomplaints from the United States, tradersreported that AQSIQ was more freely awardingpermits. However, traders then reported problemswith a special MOFTEC "automatic registration"for chicken meat, which, according to MOFTEC,is intended only to monitor trade and to combatsmuggling. According to traders, MOFTEC wasadministering this system in a way that seriouslyrestricted legitimate trade.

Export Licenses and Fees

China has progressively reduced the number ofproducts requiring export licenses. By 2002, lessthan 10 percent of Chinese exports requiredlicenses. Garment and textile exports − whichrequire quota visas to enter foreign markets suchas the United States − make up the bulk of theseexports. Other products still requiring licensesinclude some raw materials and metals, lethalchemicals, and food products. In addition, Chinastill occasionally imposes new licensingrequirements on strategically sensitivecommodities.

China also requires export licenses on productsthat are the subject of antidumping duties in aforeign market. However, the central governmenthas delegated responsibility for issuing theselicenses to new quasi-governmental industryassociations formed to take the place of the nowdisbanded ministries that governed productionduring the earlier central planning era. Foreigninvestors report that the industry associations are

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using the power to issue export licenses to forcecompanies to participate in association-supportedactivities. For example, the steel producers’industry association will not issue an exportlicense to any company that does not contribute toits antidumping defense funds. In another case, anindustry association charges a scaled export fee forchemicals such as fluorspar (which is also subjectto export quotas), allowing them to reduce therelative costs for domestic producers of CFCs.

TRADING RIGHTS AND OTHERRESTRICTIONS

Trading Rights

China restricts the types and numbers of entitieswith the right to trade. Only those firms withtrading rights may import goods into or exportgoods out of China. Restrictions on the type andnumber of firms with trading rights contribute tosystemic inefficiencies in the trading system andcreate substantial incentives to engage insmuggling and other corrupt practices.

Liberalization of the trading rights system hadbeen proceeding gradually since 1995. The pacepicked up in 1999 when MOFTEC announced newguidelines allowing a wide variety of Chinesefirms with annual export volumes valued in excessof $10 million to register for trading rights. InAugust 2001, China extended this regulation toinclude export rights for foreign-investedenterprises. Import rights of foreign-investedenterprises (FIEs) are still restricted to the importof equipment, materials and components directlyrelated to their manufacturing or processingoperations. Companies with operations in Chinacan also import small quantities of consumerproducts for test marketing. Firms without apresence in China still must use a local agent.

Under the terms of China's WTO accession, Chinamust phase in trading rights for all firms withinthree years. According to its accessiondocuments, on December 11, 2002, China wassupposed to grant minority foreign-owned jointventures trading rights. However, regulationsauthorizing these liberalizations have not yet beenissued. The relevant authorities have maintaineddrafts of all new regulations in strict confidence,making it difficult to predict how China willactually implement these rights.

Even after WTO accession, the import of somegoods − such as grains, cotton, vegetable oils,

petroleum, sugar, fertilizers, news publications,and related products − is reserved primarily forstate trading enterprises. In its accessionagreement, however, China committed to makinga portion of the trade (ranging from 10 to 90percent) in grains, cotton, sugar, vegetable oils,and fertilizers available to non-state traders. Insome cases, the percentage available to non-statetraders will increase each year.

Local Agent Requirem ents

China’s WTO accession should improve theability of foreign-invested firms to import anddistribute their products effectively. In general,foreign-invested firms had only been allowed toimport inputs (see "Trading Rights" section) anddistribute products that they manufactured inChina (see "Distribution" section). Foreign firmswere forced to engage local agents to import end-use products and distribute products not made bytheir factories on the mainland. China has agreedto phase out such import and distributionrestrictions for most products within three years ofaccession.

Import Substitution Policies

Throughout the 1990s, China gradually reducedformal import substitution policies. In anticipationof its accession to the WTO, China enacted legalchanges in 2000 and 2001 to eliminate localcontent requirements for foreign investments. Under these rules, investors are still “encouraged”to follow some of the formerly mandatedpractices. In its accession agreement, Chinacommitted that it would not condition import orinvestment approvals on whether there arecompeting domestic suppliers or impose otherperformance requirements.

Instances in which the Chinese Government hasreportedly encouraged import substitution include:

Fertilizer. In 2001, China offered VATexemptions and rebates for the types of fertilizersthat are primarily produced domestically, but notfor like or directly competitive imported fertilizersof interest to American producers. Industryrepresentatives believe China is trying toencourage consumption of domestically producedfertilizer.

Semiconductors. China's 10th Five-Year Plancalls for an increase in Chinese semiconductoroutput from $2 billion in 2000 to $24 billion in

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2010. In June 2000, China's State Councilannounced in Document Number 18 thatintegrated circuits manufactured within China willreceive an 11 percent rebate on the VAT,effectively applying only a 6 percent VAT to theseproducts. Imported circuits still faced the full 17percent VAT. In October 2002, the Ministry ofFinance (MOF) and State Administration ofTaxation (SAT) jointly issued Circular No. 70mandating a 14 percent VAT rebate on integratedcircuits designed and built within China,amounting to a 3 percent applied VAT. CircularNo. 140, also issued in 2002, extended a 6 percentapplied VAT to integrated circuits designed inChina but produced overseas if such circuitscannot be manufactured domestically.

Telecommunications Equipment. There have beencontinuing examples of MII and China Telecomadopting policies to discourage the use ofimported components or equipment. For example,MII has still not rescinded an internal circularissued in 1998 instructing telecommunicationscompanies to buy components and equipmentfrom domestic sources.

Automobile Investment Guidelines. China'sautomobile industrial policy offered significantadvantages for foreign-invested factories usinghigh-levels of local content. In 2001, SETCissued Bulletin No.13, which provided that thepreferential policy for automobile localizationrates would be cancelled upon China's WTOaccession. However, U.S. auto manufacturersreport that some local government officialscontinued in 2002 to cite the old auto policy'slocalization standards when requiring high localcontent. SETC and SDPC are working on newauto investment guidelines that officials say willclarify the elimination of local contentrequirements.

STANDARDS, TESTING, LABELING ANDCERTIFICATION

In preparation for its WTO entry, China devotedsignificant energy to reforming its standards,testing, labeling, and certification regimes. In itsaccession agreement, China specificallycommitted that it would ensure that its conformityassessment bodies operate with transparency,apply the same technical regulations, standardsand conformity assessment procedures to bothimported and domestic goods and use the samefees, processing periods and complaint proceduresfor both imported and domestic goods. In April

2001, China merged its domestic standards andconformity assessment agency and entry-exitinspection and quarantine agency into one neworganization − the Administration of QualitySupervision, Inspection, and Quarantine, orAQSIQ. Chinese officials explained that thismerger was designed to eliminate discriminatorytreatment of imports and requirements for multipletesting simply because a product was importedrather than domestically produced. In 2001, Chinaalso formed two quasi-independent agenciesadministratively under AQSIQ: CNCA, chargedwith the task of unifying the country’s conformityassessment regime, and SAC, responsible forsetting mandatory national standards and unifyingChina’s administration of product standards andaligning its standards and technical regulationswith international practices and China’scommitments under the WTO Agreement onTechnical Barriers to Trade.

While the formation of AQSIQ and a unifiedsystem of certification are positive steps,implementation of standardization andcertification regulations continues to be a problem. Although China agreed to apply the samestandards and fees to imported and domesticproducts upon its accession to the WTO, someimporters report differential treatment andenforcement of standards. For example, foreigncompanies’ products can only be tested at certainlaboratories designated to handle foreign products,although this has not appeared to negativelyimpact foreign companies. U.S. companies do citeproblems with a lack of transparency in thecertification process, lack of coordination amongstandards bodies as well as between standardsbodies and other agencies, burdensomerequirements, and long processing times forlicenses. Some companies have also expressedconcern that their intellectual property will bereleased to competitors when they submit samplesof high-tech products for mandatory qualitytesting. In some cases, laboratories responsible fortesting imported products are affiliated withdomestic competitors, making the possibility ofsuch releases more likely.

A growing concern among many foreigncompanies and associations is the lack oftransparency in the standards development processin China. A vast majority of standards-settingbodies are not fully open to foreign participation,in some cases refusing them membership and inother cases refusing to allow companies withmajority foreign ownership to vote. In addition, in

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a number of sectors, including, for example, autos,telecommunications equipment, electricalproducts, heating and air conditioning equipment,whiskey and fertilizer, concern has grown over thepast year as China has pursued the development ofunique requirements, despite the existence of well-established international standards. Thesestandards, which sometimes appear to have littlescientific basis, could create significant barriers toentry into China’s markets because the cost ofcomplying will be high for foreign companies.

While China made numerous notifications oftechnical regulations in 2002, as required by theWTO Agreement on Technical Barriers to Trade(TBT), some of them indicated dates of adoptionor entry into force that would appear not toprovide a meaningful opportunity for comment byinterested parties, with insufficient time forChinese authorities to give due consideration tothe comments received before final adoption of theproposals. Additionally, China notified technicalregulations promulgated by AQSIQ to the WTO,but not technical regulations promulgated by otherministries.

Quality and Safety Certification

In December 2001, CNCA promulgated a newcompulsory product certification system. Underthis system, there is one quality and safety mark,called the “China Compulsory Certification” or“CCC” mark, issued to both Chinese and foreignproducts. Under the old system, domesticproducts were only required to obtain the “GreatWall” mark, while imported products needed boththe “Great Wall” mark and the “CCIB” mark. TheCCC mark system became effective May 1, 2002,with a one-year grace period for re-certification ofold products before becoming fully effective May1, 2003. Beginning May 1, 2002, all new productsin identified categories were required to have theCCC mark. Products that have previouscertifications can continue to use thosecertifications until May 1, 2003, at which time allproducts in the required categories will be requiredto have a CCC mark. When fully implemented,the CCC mark will be required for over 100product categories.

Despite these changes, U.S. companies in somesectors complained in 2002 that certificationremains a difficult, time-consuming and costlyprocess. In many cases, the process involves on-site inspection of manufacturing facilities outsideof China, the cost of which is borne by producers.

U.S. companies have also expressed concern aboutcontinued requirements for redundant testing,particularly for cosmetics, pharmaceuticals,medical equipment, cellular telephones and othertelecommunications products and consumerelectronic products. For example,telecommunications equipment faces CNCAsafety and quality tests, but then MII conductsfunctionality tests. Industry reports that the testsoverlap.

Examples of these problems include:

Electronic Products . China in 1999 imposedmandatory safety inspections for imports ofelectronic products, including personal computers,monitors, printers, switches, television sets andstereo equipment. An additional test forelectromagnetic compatibility was added for thesesame products in 2000.

Spare/Replacement Parts. Companiesmanufacturing and companies that import and sellheavy equipment report they must obtain CCCmarks for spare parts they use or provide toclients. Obtaining these marks can take two weeksto six months, making inventory planningdifficult. For some companies, the cost involvedin obtaining the CCC marks also makes it difficultto compete in the Chinese market. Althoughimporters of spare parts are eligible for waivers ofthe CCC mark, these waivers are only available inBeijing, creating difficulties and delays forcompanies in other parts of the country.

Self-Certification

Under the new CCC mark system, China will notaccept self-certification of conformance to Chinesestandards from manufacturers. Products must betested in designated laboratories in China. Insome cases, Chinese officials must also inspectand certify manufacturing facilities beforeproducts can be certified for import into China. Such inspections are time-consuming and costlyfor producers.

Sanitary and Phytosanitary Issues

Historically, China's phytosanitary and veterinaryimport standards have sometimes been based ondubious scientific principles and have not alwaysbeen consistently applied. In an effort to advanceits bid to join the W TO, China addressed certainlongstanding barriers to U.S. agricultural imports. China agreed to lift bans on imports of U.S. grain,

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citrus, and meat and poultry with the signing ofthe U.S.-China Agricultural CooperationAgreement (ACA) in April 1999. The majorprovisions of the ACA are as follows:

Meat. China agreed to recognize the U.S.certification system for meat. China promised toaccept U.S. beef, pork, and poultry meat from allUSDA-certified plants.

Citrus. China lifted its ban on imports of citrusfrom the United States allowing imports of citrusfrom most counties in Arizona, California, Florida,and Texas.

Wheat. China lifted its ban on imports of wheatand other grains from the U.S. Pacific Northwestand promised to allow the import of U.S. wheatthat meets specified tolerances for TCK fungus.

China’s implementation of the ACA has producedmixed results, and this situation continued in 2002.Traders reported (as noted above in the ImportLicenses section) that China has used the issuanceof quarantine inspection permits to place unduequantitative restrictions on meat imports. Inaddition, China has imposed a “zero tolerance”standard for certain pathogens in importeduncooked meat. This standard has provedproblematic for exporters because even the bestsanitary practices cannot completely eliminatesome pathogens in raw products. It has resulted inthe de-listing of four U.S. processing plants, and ithas so far proven impossible to get these plants re-listed, as AQSIQ is requiring U.S. healthauthorities to identify and correct problems inthese plants when U.S. authorities believe noneexist. Meanwhile, Chinese quarantine officials didapprove Pacific Northwest wheat imports. However, traders reported that quarantine officialsrequired special treatment of some wheat importedfrom the Pacific Northwest, effectivelydiscouraging imports. With regard to citrus, Chinacontinues to hold up the approval of imports fromfour counties in Florida.

Phytosanitary barriers also continued to blockimports of several other U.S. products in 2002,including stone fruit, several varieties of apples,pears and fresh potatoes.

Since joining the WTO, China has issued morethan 100 new standards for foods, and has set upan “SPS Enquiry Point” at AQSIQ. Althoughsome of these standards have been notified to theWTO as required by the WTO Agreement on

Sanitary and Phytosanitary Measures, many ofthem have not, particularly those issued by theMinistry of Health.

China’s Biotechnology Regulations

In January 2002, the Ministry of Agriculture(MOA) issued new rules implementing a June2001 regulation on agricultural biotechnologysafety, testing and labeling. The product mostaffected was soybeans. However, theimplementing rules did not provide adequate timefor completion of required safety assessmentsbefore their effective date of March 20, 2002. Uncertainty caused by these new measures causedmarket disruption as traders rushed to ship asmany soybeans as possible before March 20, 2002.

Following high-level U.S. interventions, in March2002, MOA issued "interim measures" to allowimports to continue until December 20, 2002. Inspite of this, however, bureaucratic lags inimplementing the interim measures prevented newcargoes from arriving in China from March untilearly June 2002. Increasing uncertainty about theDecember 20, 2002 expiration of the interimmeasures again led traders to rush to bring cargoesin before the end of the year. Imports increasedsteadily since the 2002 U.S. harvest, withbookings for October and November 2002exceeding 2 million tons. Again following high-level U.S. interventions, in September 2002, MOApublished new interim measures that delayedimplementation of the January 2002 rules untilSeptember 20, 2003.

Substantial U.S. concerns with China’sbiotechnology regulation and implementing rulesremain, particularly with regard to risk assessment(including administration of field trials), labelingand inter-ministerial coordination ofbiotechnology policy. The United States providedwritten comments on these issues to MOA in early2002. MOA agreed to the creation of a specialbilateral working group to address these issues, butafter an initial meeting MOA has not responded torequests for further talks.

Labeling

The U.S. processed food industry has registered itsconcerns on a number of standards and labelingrequirements on its exports to China. The meatindustry in particular is concerned that new meatlabeling regulations promulgated in late 2002 have

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several requirements that go beyond those of anyother country. They assert that these requirementsare unnecessary and will be costly. In addition,the distilled spirits industry is concerned thatChina will require its products to comply with allexisting food labeling regulations. The industrybelieves that some of these requirements areinappropriate since the industry does not considerdistilled spirits to be a food.

Agricultural importers and importers of processedfoods are also concerned about new measuresrequiring labels for products containing transgenicmaterial, such as soybeans and corn. The June2001 biotechnology regulation issued by MOArequired labeling of bulk commodities, amongother things, although without implementationdetails. In July 2002, the M inistry of Health(MOH) followed with its own measures to requirefood safety assessment and labeling of processedfoods derived from biotechnology ingredients. InNovember 2002, MOA indicated that MOA, ratherthan MOH, had received authority from the StateCouncil to regulate food safety in thebiotechnology area. Future implementation ofthese various measures remains uncertain.

GOVERNMENT PROCUREMENT

In accordance with the terms of its WTO accessionagreement, China agreed to conduct itsgovernment procurement in a transparent mannerand to provide all foreign suppliers with equalopportunity to participate in procurements openedto foreign suppliers. China also committed tobecome an observer to the WTO Agreement onGovernment Procurement (GPA), which it did inMay 2002. In addition, China committed that itwould table an offer and initiate negotiations formembership in the GPA "as soon as possible." According to Chinese officials, however, Chinahas no immediate plans to begin discussions.

In July 2002, China promulgated its firstGovernment Procurement Law. In part, this was aresponse to the need to separate procurement by"state-owned enterprises," which China haspromised would be made on a commercial basis,from "government procurement." Although theimplementing regulations are not finalized, China'snew government procurement system allowsbidding to be limited to domestic suppliers. At thesame time, many Chinese officials are beginningto recognize the high cost of not allowing an openand competitive bidding process for governmentcontracts. The new law expounds on the

principles of fair competition, openness,transparency and recourse. It establishesrudimentary criteria for the qualification ofsuppliers and various categories of procurement,including open tenders, tenders by invitation,competitive negotiation and sole sourcing. It alsosets broad standards for publicity, notification, bidscheduling, sealed bidding and bid evaluation.

On January 9, 2001, M OF issued a measureentitled "Procedures Concerning Public Biddingfor Procurement Companies in ForeignGovernment Loan Projects." Under theprocedures set forth in the measure, governmentagency financial departments must release allpertinent information regarding qualified foreigngovernment loan projects to procurementcompanies, and the companies responsible forimplementing a project must tender bid invitationsto more than three procurement companies within10 working days. The procedures state that non-competitive or protectionist ploys are strictlyprohibited while selecting a procurement companyfor a loan project, and they indicate that MOF willregularly examine bids and restrict procurementcompanies with "monopolistic inclinations." Aswritten, however, the procedures offer insufficientprotection to potential foreign participants. Among other requirements, foreign companies,unlike domestic companies, have had to obtainpermission from MOF before bidding on a project. It is not yet clear whether the new GovernmentProcurement Law will lead to the elimination ofthis requirement.

The status of procurement by state-ownedenterprises is as yet unclear. SETC in 1999 issuedregulations requiring state-owned enterprises(SOEs) to purchase all capital equipment fromeither domestic manufacturers or foreign-investedenterprises in China except where the equipment isnot available domestically. In its WTO accessionagreement, China subsequently agreed thatpurchases or sales by state-owned and state-invested enterprises of goods and services forcommercial sale, production of goods or supply ofservices for commercial sale, or for non-governmental purposes would be subject tonational treatment, market access and MFNrequirements. It further agreed to ensure thatstate-owned and state-invested enterprises wouldmake purchases and sales based solely oncommercial considerations and, in addition, thatforeign enterprises would be allowed to competefor sales to and purchases from SOEs withoutdiscrimination. It also agreed that the government

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would not influence the commercial decisions ofthese enterprises, although in practice this has notconsistently been the case.

EXPORT SUBSIDIES

China officially abolished direct budgetary outlaysfor exports of industrial goods on January 1, 1991,and MOF officials claim that the government canno longer afford large-scale export subsidies. China agreed to stop all export subsidies onindustrial and agricultural goods upon itsaccession to the WTO in December 2001. Nonetheless, several U.S. industries claim thatmany of China's exports benefitted from exportsubsidies through 2002.

China’s possible export subsidies on industrialgoods are difficult to identify and quantify becausethey are most often the result of internaladministrative measures and not publicized or theymay be provided through mechanisms such ascredit allocations or low-interest loans. Otherforms of export subsidies may involve guaranteedprovision of energy, raw materials or laborsupplies. U.S. industry has expressed its concernthat sectors such as high technology electronics,biomedicine, new materials and integrated circuitsmay benefit from such policies.

U.S. agriculture exporters have expressed concernthat China continues to use export subsidies forcorn and perhaps cotton. In 2002, China’s cornexports reached 11.67 million metric tons,compared to 6 million tons in 2001. It appearsthat corn is being exported from China, includingcorn from Chinese government stocks, at prices 20to 30 percent below domestic Chinese prices. As aresult, U.S. corn exporters have lost market sharein Asia, while China is exporting record amountsof corn. China claims that it stopped usingsubsidies in March 2002, and instead supportsexports with various W TO-consistent measures,such as transportation subsidies and VAT rebates. Because export procedures are not transparent, it isdifficult to determine what effect these measureshave on export prices. Particularly given the verylow applied VAT on corn in China, the VATrebate appears to account for only a smallproportion of the difference between export pricesand domestic prices.

INTELLECTUAL PROPERTY RIGHTS (IPR)PROTECTION

China has made substantial progress in some

aspects of intellectual property rights (IPR)protection since it signed bilateral agreements withthe United States on IPR in 1992, 1995 and 1996. Beginning in 2001, China improved its legalframework considerably, amending its patent,trademark and copyright laws to comply with theWTO Agreement on Trade-Related Aspects ofIntellectual Property Rights (TRIPS Agreement)and adding implementing regulations. In addition,China has launched several crackdowns oncounterfeiting and piracy. There is also aheightened focus on IPR protection as animportant factor in domestic growth. Over thepast several months, books, television talk shows,media articles and government and academicreports have highlighted the importance of IPRprotection to China's economic development. Recent speeches by China's leaders and papers oneconomic strategy stressed the importance ofintellectual property. The U.S. government is alsourging that China take additional steps towardsimproving its IPR regime in advance of China’shosting the World Intellectual PropertyOrganization (WIPO) Intellectual PropertySummit in April 2003.

However, significant problems remain,particularly in the area of enforcement. China hasa system of administrative penalties, which isoverseen by several administrative agencies. While this system is widely used, the penaltiesimposed tend to be weak and non-deterrent. Although China has revised its laws to providecriminal penalties for certain IPR violations, actualcriminal prosecutions of IPR violations are rare. Piracy and counterfeiting are sophisticated andwidespread. Pirates find ways to get digital copiesof blockbuster films and computer programs intothe Chinese market almost immediately after theyare released in the United States, well before theirlegal introduction into China. (Most blockbusterforeign films are never legally introduced intoChina because China permits the screening of onlytwenty of them per year.) Knock-off consumerproducts, including textile and apparel products,are readily available almost everywhere in China,and consumers are often unaware that they arepurchasing IPR-infringing goods. Chinese customsauthorities lack the power to initiate ex officiocriminal cases under the criminal IPR laws.

Some U.S. companies claim losses fromcounterfeiting equal 15 to 20 percent of total salesin China, in addition to losses in export markets. One U.S. consumer products company estimatesthat it loses $200 million annually due to

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counterfeiting in China. Industry notes that thedestructive effect of widespread IPR violationsdiscourages additional direct foreign investmentand threatens the long-term viability of some U.S.business operations in China. The inferior qualityof fake and unauthorized products can also poseserious health and safety risks to Chineseconsumers and damage the image of the legitimateproducers and products.

PATENTS

China's new patent law went into effect on July 1,2001, and implementing regulations becameeffective shortly thereafter. They generallycomply with the TRIPS Agreement.

The amended law and new regulations strengthenpatent protection and simplify patent examinationand issuance procedures. For example, there isnow a prohibition on the advertising or marketingof infringing products. Additionally, judicialreview of patent revocations is now available. However, textile designs are excluded fromprotection under the industrial designs provisionsof China's patent law. U.S. companies may beable to protect their designs under China'sProvisions on the Implementation of theInternational Copyright Treaty as works of appliedart. There are also several improvements inadministrative and civil enforcement. Administrative authorities may now confiscateincome from patent-infringing products. On thecivil enforcement side, there is a new provisionallowing a patent holder in a civil proceeding torequest immediate suspension of potentiallyinfringing acts before requesting a final legaldetermination. In addition, larger damages can beawarded than in the past, when judges had no legalbasis for levying stiff awards against violators. Judges in civil proceedings can now issue awardsin the amount of the actual damages suffered bythe injured party. If damages are difficult tocalculate in a particular case, damages can still beawarded in an amount equal to a reasonablemultiple of the licensing fee involved.

Protection for U.S.-Patented Pharm aceuticals

U.S. pharmaceutical companies in China continueto experience difficulties in obtainingadministrative protection for products patented inthe United States before China’s original patentlaw went into effect in 1993. It can take months toapprove an application for administrativeprotection of a foreign pharmaceutical. Under

regulations enacted in 1994, domestic imitation orsimilar pharmaceuticals can legally be registeredwhile a foreign manufacturer's application foradministrative protection is pending. In somecases, administrative protection remains pendingindefinitely.

TRADEMARKS

China’s amended trademark law went into effecton December 1, 2001, and new implementingregulations took effect on September 15, 2002. The changes in the new law and regulations wereintended primarily to bring the trademark systeminto compliance with the minimum requirementsof the TRIPS Agreement, which they largely did. Some problems do remain, however.

The United States, with the support of other WTOmembers, including the European Communitiesand Japan, raised concerns about whether foreigntrademark owners are receiving national treatmentin two important areas. The first involves well-known marks, which benefit from enhanced civiland criminal enforcement, such as lowerevidentiary thresholds. China currently listsapproximately 196 well-known marks, none ofwhich is a foreign mark. The other area involvesthe registration of trademarks. Chinese enterprisescan file for registration on their own, but foreignenterprises must use an agent. Under recentrevisions to the trademark implementingregulations, foreign-invested companies in Chinano longer need to use a Chinese trademark agent. However, it is still unclear how regulators willinterpret these provisions.

The new trademark law and regulations madesubstantial improvements to the legal frameworkfor enforcement. These improvements can befound in each of the three areas of enforcement,i.e., actions by administrative authorities, civilsuits brought by rights holders, and criminalprosecutions. In the area of administrativeenforcement, authorities are authorized toconfiscate and destroy counterfeit products and theequipment used to manufacture them. They canalso impose fines up to three times the value of thecounterfeit products and, in cases where it isimpossible to determine this value, discretionaryfines of up to RMB 100,000 (US $12,500). Underthe old regulations, fines were limited to 50percent of the value of the counterfeit products. Inthe area of civil enforcement, the trademark holderhas access to preliminary injunctions and canobtain an award equal to the amount of actual

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damages. If the plaintiff’s damage or theinfringer’s profits cannot be determined, theplaintiff can obtain statutory damages of up toRMB 500,000 (US $60,420).

The improvements in criminal enforcement beganwith the State Council’s issuance of regulationsdesigned to achieve the timely transfer ofcounterfeiting cases from administrativeenforcement authorities to the police. Under theseregulations, the administrative authorities arerequired to transfer cases to the police for criminalinvestigation if the suspicion exists that a crimehas been committed. The previous law called forproof of a crime, not just suspicion of one, in orderto transfer the case. Private parties are alsoauthorized to file complaints with criminalprosecutors, although this procedure has rarelybeen utilized. In addition, the Supreme People’sCourt and the Supreme People’s Procuratoratehave issued judicial interpretations andprosecution guidelines aimed at clarifyingstandards for criminal liability and enforcement.

COPYRIGHTS

China’s new copyright law took effect October 27,2001, and implementing regulations becameeffective on September 15, 2002. Together, thenew law and regulations are designed to bringChina into compliance with minimum TRIPSrequirements.

The new law and regulations strengthenenforcement measures. Administrative authoritiesare authorized to order a person to cease infringingactivities and to confiscate and destroy pirateproducts and the equipment used to produce them. They can also impose fines equal to three timesthe value of the pirated products and, in caseswhere it is impossible to determine this value,discretionary fines of up to RMB 100,000 (US$12,500). In civil copyright infringementproceedings, the plaintiff copyright holder nowhas access to preliminary injunctions and canobtain an award equal to the amount of its actualdamages. If damages are difficult to calculate inparticular cases, statutory damages can be set ashigh as RMB 500,000 (US $60,420). Judges canalso order confiscation of illegal gains, piratedcopies and property used to conduct infringementactivities. The new law and regulations also placethe burden of proof on the alleged infringer toprove it has a legitimate license, and they allow forreference to China’s contract law as a basis forfulfillment of the parties’ licensing obligations.

The U.S. home furnishing fabrics segment of thedomestic textile industry continues to experienceserious problems regarding illegal copying of theirdesigns by Chinese manufacturers. Industryrepresentatives described IPR violations,particularly textile design piracy, as a chronicproblem that costs some U.S. textile companies$100 million or more annually in lost sales. Counterfeit trademarked products made in Chinaare reported to affect U.S. sales domestically, aswell as in China and third country markets. Lackof enforcement and an inefficient judicial processat the provincial level appear to be the majorsources of problems for U.S. companies in China. One major U.S. carpet manufacturer complainedof the delays and lack of action by provincialauthorities.

The new law for the first time addresses copyrightissues related to the Internet. However, noimplementing regulations have yet been enacted. The United States would like to see China accedeto the WIPO Copyright Treaty and the WIPOPerformance and Phonograms Treaty andharmonize its laws and regulations more fully withthe requirements of these Internet treaties.

A new regulation on the copyright protection ofcomputer software products delineates theprotected interests for computer softwaredevelopment, circulation and application. Inaddition, the Supreme People’s Court has issued aregulation addressing civil liability for end-userpiracy of software.

ENFORCEMENT

The new IPR laws and regulations signal a stronginterest in enforcement within the centralgovernment. However, this commitment has nottranslated into effective enforcement at the locallevel, nor has it translated into effective inter-agency coordination on complex IPR matters. IPRinfringement remains a serious problemthroughout China.

The central government initiated a new anti-counterfeiting and anti-piracy campaign in 2002. As in prior years, this campaign resulted in highnumbers of seizures. These centrally mandatedenforcement campaigns, however, do not appear tohave significantly deterred piracy orcounterfeiting. The campaigns’ impact in mostsectors has been minimal because of thepervasiveness of piracy and counterfeiting, thesporadic nature of the campaigns and the low

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penalties that result, as well as local officialsprofiting from continued illicit operations. Thecampaigns highlight the need to address localgovernment officials’ protection of pirates andcounterfeiters and to coordinate national policiesamong the courts, police and variousadministrative agencies.

Criminal enforcement also remains a problem. U.S. companies complain that, in most regions ofChina, the police are either not interested inpursuing counterfeiting and piracy or simply lackthe resources and training required to investigatethese types of cases effectively. At the same time,there are recent reports that central governmentministries and agencies and their local brancheshave begun to refer significantly more IPRviolations for criminal prosecution. AQSIQ, forexample, has reported approximately 500 of thesereferrals. In addition, ambiguity in China’scriminal code impedes criminal enforcement, as itis not always clear whether a particular activitywarrants criminal prosecution as opposed tosimply administrative remedies.

Effective enforcement is also impeded byunnecessary limitations on enforcement powers,inadvisable evidentiary standards, and lowpenalties, particularly in the area of administrativeenforcement. Administrative authorities lack theevidence-gathering powers of the police. Inaddition, when administrative authorities set fines,the amounts are artificially low because they arebased on the value of the infringing goods, ratherthan the far higher value of the genuine articles. Furthermore, evidence that a person waswarehousing infringing goods is not sufficient toprove intent to sell. As a result, administrativeauthorities do not include those goods in the valueof the infringing goods when determining fines. These low administrative fines are viewed byorganized pirate or counterfeiting enterprises ascosts of doing business, not deterrents to furthercriminal activity.

China is making efforts to upgrade its judicialsystem, but there is much to be done. China’sjudicial system is divided into civil, administrativeand criminal panels, which may hear differentcases involving intellectual property. The civilpanels are likely to hear infringement andlicensing cases. The administrative panels hearappeals from administrative agencies, includingthe patent and trademark offices as well as appealsof administrative fines for infringement. Thecriminal panels hear criminal cases, including

those involving illegal business operations orproduct quality that may involve IPR issues.

U.S. companies complain that there is still a lackof consistent and fair enforcement of China’s IPRlaws and regulations in the courts. Many judgeslack necessary legal or technical training, courtrules regarding expert witnesses are vague, use ofprivate investigators is strictly limited, and rules ofevidence are ambiguous and not consistentlyfollowed. In the patent area, where enforcementthrough civil litigation is of particular importance,a single case takes four to seven years to litigate,rendering the damages provisions adopted tocomply with China’s TRIPS Agreementobligations less meaningful.

ELECTRONIC COMMERCE

China has experienced dramatic growth in Internetusage and electronic commerce. According toindustry estimates, the number of people in Chinawith access to the Internet was approximately 59million by the end of 2002, compared with620,000 in October 1997. China now has thesecond largest Internet population in the world,behind the United States. A fall in personalcomputer prices and the arrival of devices tailoredfor the Chinese market will further expand Internetaccess.

China has more than 1,100 consumer-relatedelectronic commerce websites. The majority areshopping websites. Others include auctionwebsites; distance education websites; anddistance medical and health-related websites. Among the shopping sites, approximately two-thirds are pure online shops; the remainder are partof traditional retail businesses.

The Chinese government recognizes the potentialof electronic commerce to promote exports andincrease competitiveness and has made someprogress toward establishing a viable commercialenvironment. However, some of the Chineseministries with responsibility for electroniccommerce have excessively regulated the Internet,thereby stifling the free flow of information andconsumer privacy needed for electronic commerceto flourish. Content is still controlled andencryption regulated, as discussed more fullybelow (in the “Regulation of International DataFlows and Restrictions on Data Processing”section).

A number of technical problems also inhibit the

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growth of the industry. Rates charged bygovernment-approved Internet service providersmake Internet access unaffordable for mostChinese. Slow connection speeds are anotherbarrier, although this is changing as broadbandconnections become more readily available. Thelack of a safe and secure payment system requiresthat Internet transactions in China be conductedcash-on-delivery, via post office payments, or bedelayed by a ten- to fifteen-day verification period. Still nearly a third of Chinese Internet userssurveyed in June 2002 said they had made anonline purchase within the past year, and over 30percent of these said they paid online.

SERVICES BARRIERS

China’s services sectors have been among themost heavily regulated and protected sectors of thenational economy. Until China’s entry into theWTO, foreign service providers were largelyrestricted to operations under the terms ofselective “experimental” licenses. Both as amatter of policy and as a result of its WTOcommitments, China has decided to opensignificantly foreign investment in its servicessectors. The market for services, currentlyunderdeveloped due to historical attitudes andpolicies, has significant growth potential in boththe short and long term.

China’s WTO commitments should providemeaningful access for U.S. service providers. Inits accession documents, China committed to thesubstantial opening of a broad range of servicessectors through the elimination of many existinglimitations on market access, at all levels ofgovernment, particularly in sectors of importanceto the United States, such as banking, insurance,telecommunications and professional services. These commitments are far-reaching, particularlywhen compared to the services commitments ofmany other WTO members.

China also made certain “horizontal”commitments, which apply to all sectors listed inits services schedule. The two most important ofthese cross-cutting commitments involve acquiredrights and the licensing process. Under theacquired rights commitment, China agreed that theconditions of ownership, operation and scope ofactivities for a foreign company, as set out in therespective contractual or shareholder agreement orin a license establishing or authorizing theoperation or supply of services by an existingforeign service supplier, will not be made more

restrictive than they were on the date of China’saccession to the WTO. In other words, if a foreigncompany had pre-WTO accession rights that wentbeyond the commitments made by China in itsservices schedule, that company could continue tooperate with those rights. In the licensing area,prior to China’s WTO accession, foreigncompanies in many sectors did not have anunqualified right to apply for a license to operatein China. They could only apply for a license ifthey first received an invitation from the relevantChinese regulatory authorities, and even then thedecision-making process lacked transparency andwas subject to inordinate delay and discretion. Inits accession agreement, China committed tolicensing procedures that were streamlined,transparent and more predictable.

However, in many services sectors, while agreeingto lift restrictions over time and de-politicizelicensing procedures, China has implementedextremely high capitalization requirements, bothfor establishment and branching. These highcapitalization requirements appear to be higherthan necessary from a prudential perspective andact as a barrier to market access. A wide range offoreign firms also emphasized that China’sregulations remain vague and do not reflect fullyChina’s WTO commitments. China’s ministrieshave not adequately consulted with foreign firmsabout new or revised regulations and have notallowed sufficient time for a meaningful commentperiod.

Insurance Services

China’s insurance market is growing steadily, butnot as quickly as its potential. Some expertsbelieve potential revenues for U .S. insurers couldreach $15 billion per year after a full opening ofthe market. Since 1992, China has allowedforeign firms limited access to its insurancemarket. Prior to 2001, 16 foreign insurersreportedly received licenses to operate either inShanghai or in Guangdong Province. The pace ofopening increased rapidly in 2001 when the ChinaInsurance Regulatory Commission (CIRC)committed to accept an additional 16 licenseapplications from foreign firms.

In its WTO accession agreement, China committedto a gradual opening of both its life and non-lifeinsurance sectors. Foreign life insurers are limitedto a 50 percent equity stake in a joint venture,while non-life firms are limited to a 51 percentstake. After two years, non-life firms can be

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wholly foreign-owned. Geographic restrictionswill also be removed over the next three years.

CIRC issued several new insurance regulationsshortly after acceding to the WTO, including onesdirected at the regulation of foreign insurancecompanies. These regulations implemented manyof China’s commitments, but they also createdproblems in three critical areas, i.e., prudentialrequirements, transparency and branching.

China’s insurance company capital requirementsare extremely high and many foreign firmscomplain they act as a barrier to market access andin some cases to finding a suitable joint venturepartner. A national license which includes a mainoffice and three branch offices requires capitalinfusion of RM B 500 million (US $60 million),while a regional license which includes a mainoffice and two branch offices requires capitalinfusion of RM B 200 million (US $24 million). Once a firm has a national license an additionalRMB 50 million (US $6 million) capitalizationwill be required for additional branches. Withregard to transparency, the regulations continue topermit considerable bureaucratic discretion andoffer limited certainty to foreign insurers seekingto operate in China’s market. To date, this lack oftransparency has manifested itself particularly inthe licensing process. Foreign firms complain thatthe insurance licensing requirements are overlycomplex and cumbersome. The regulations arealso unclear as to whether multiple branch andsub-branch expansion applications may besubmitted simultaneously or can only be submittedat intervals. CIRC has also insisted that non-lifeinsurers that are already in the market as a branchand that wish to branch or sub-branch cannot do sounless they first establish as a subsidiary, a costly– and unnecessary – proposition.

In 2002, under the new regulations and prudentialrequirements, two U.S. insurers received licensesfrom CIRC. Currently, approximately 50insurance companies operate in China’s market;approximately 30 of them are foreign firms(operating joint ventures with Chinese partners)and 20 of them are Chinese firms. Foreign firmscurrently garner only 2 percent of insurancepremiums in China’s market.

Financial Services (Banking and Securities)

With the exception of its failure to produceregulations enabling foreign non-financialinstitutions to engage in auto financing (see

below), China did put in place the necessarylegislation and regulations to meet its WTOcommitments for financial services during its firstyear as a WTO member. Nevertheless, foreignbanks and securities firms continue to face arestrictive regulatory environment.

China continues to have strict limitations, inparticular, on foreign banks' participation in localcurrency operations. Restrictions on the rights offoreign banks to raise RMB in the interbankmarket, being planned by the People's Bank ofChina (PBOC), China's central bank, will inhibitthe ability of foreign banks to build RMB loanportfolios necessary for profitable operations inChina. In addition, China's capital requirementsfor foreign bank branches are high, increasinglocal capital costs for foreign banks.

On December 30, 2001, the Chinese governmentannounced revisions to the regulations on foreignfinancial institutions. The revised regulationspermit the establishment of foreign bank branchesanywhere in China so long as the applicant meetsthe listed criteria. These include gross assets of$20 billion for those foreign banks looking toestablish branches in China. Although foreigncurrency business with any customer, foreign ordomestic, is also freely permitted under the newregulations, the Bank of China, one of China’sfour major state-owned commercial banks,continues to enjoy a monopoly on forward foreignexchange contracts. Foreign bank branches mustalso place 30 percent of their operating capital ininterest bearing assets designated by PBOC. Foreign branch current assets (cash, local bankdemand deposits, and PBOC deposits) mustcontinue to be greater than 25 percent of customerdeposits. In addition, foreign banks’ ratio ofcustomer deposits in foreign currency to domesticforeign currency loans may not exceed 70 percent,an increase from the 40 percent level mandatedpreviously. China calculates prudential ratios andlimits based on the local capital of foreign bankbranches rather than on the global capital base ofthe bank.

As part of its WTO accession agreement, Chinaagreed to allow foreign banks to conduct localcurrency business with Chinese companies twoyears after WTO entry, and with Chineseindividuals three years later. Regulations releasedin December 2001 place the authority fordetermining the geographic and operational scopefor foreign financial institutions to participate inlocal currency business with the PBOC. A

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December 9, 2001, PBOC notice allowed foreign-funded financial institutions established in thecities of Shanghai and Shenzhen to engage in localcurrency business as of December 1. Foreignfinancial institutions located in the cities of Dalianand Tianjin were permitted to apply for permissionto engage in local currency operations on the sameday. On December 1, 2002, the PBOC increasedthe geographic scope to include the cities ofGuangzhou, Beijing, Qingdao, Wuhan and Zhuhai. The Chinese government has committed toopening four new cities every year to foreignbanks to engage in local currency operations. Allnon-prudential restrictions on foreign banks are tobe lifted within five years of China's accession tothe WTO.

Pursuant to the terms of China’s accessionagreement, foreign securities firms are to receivethe right to form joint ventures for fundmanagement upon China's accession to the WTO,while joint ventures for securities underwritingmust be permitted within three years afteraccession. The China Securities RegulatoryCommission issued regulations on theestablishment of joint venture fund managementcompanies and securities underwriting byChinese-foreign joint ventures shortly afterChina’s WTO accession. China's decision to limitforeign partners to a 33 percent stake of these jointventures, however, has limited their appeal toleading foreign firms.

Motor Vehicle Financing

China’s WTO accession agreement requires Chinato allow non-banks to provide motor vehiclefinancing upon accession and without any limitson market access. However, the regulationsallowing the entry of foreign non-bank autofinancial services companies remain in draft form.

PBOC, the institution most responsible in Chinafor regulating auto financing, has shown itself tobe receptive to commentary and input fromforeign governments including the United States. In addition, PBOC received comments and metwith overseas firms and auto groups on PBOC'sdraft regulations throughout 2002. Foreigngovernments and firms believed that the firstPBOC issued drafts (provided in mid-2002)maintained unreasonably high depositrequirements that were inconsistent with China'srequirements for other foreign financialoperations. By late 2002, PBOC showed itself tobe willing to make selected modifications to

China's auto financing regulations to make themmore consistent with those in other countries andwith China's own financial services regulations.

In mid-December 2002, MOFTEC announced thatthe motor vehicle financing regulations would befinalized by early 2003. The completion of theseregulations will permit overseas foreign financialservices firms to compete in the world's fastest-growing auto market.

Express Delivery

Beginning in December 2001, the State PostalBureau (together with MOFTEC and MII) issuednew, restrictive measures that could havejeopardized market access that foreign expressdelivery firms (which must operate as jointventures with Chinese partners) enjoyed prior toChina’s accession. These measures threatened tocurtail the scope of operations of foreign expressdelivery firms licensed prior to China’s accessionto the WTO, despite China’s horizontalcommitment on “acquired rights.” Specifically,Notice 629, issued in December 2001, requiredfirms wishing to deliver letters to apply forentrustment from China Post. Notice 64 issued inFebruary 2002, extended China Post’s monopolyon letters by creating weight and rate restrictionson letter deliveries by private firms. Followinghigh-level U.S. interventions, in September 2002,Notice 472 eliminated the weight and raterestrictions on letter deliveries and streamlined theentrustment application procedure. Two majorU.S. express delivery firms subsequently appliedfor and obtained entrustment certificates fromChina Post.

Distribution

China's WTO commitments provide for the phase-in of distribution rights for foreign enterprises overthe three-year period following China’s accession(subject to limited exceptions), starting withminority foreign-owned joint ventures byDecember 11, 2002, followed by majority foreign-owned joint ventures by December 11, 2003, andwholly foreign-owned enterprises by December11, 2004. In this context, distribution rightsextend to commission agents' services andwholesale trade services.

MOFTEC, SETC and other relevant governmentagencies are apparently working to revise theexisting regulatory framework to satisfy China'sWTO commitments. However, despite the fact

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that liberalization of distribution rights was to takeplace no later than December 11, 2002, no new oramended laws or regulations have beenpromulgated in this area.

The relevant authorities have maintained drafts ofall new regulations in strict confidence, making itdifficult to predict how China will actuallyimplement distribution rights. For example, whileit appears that existing minority foreign-ownedjoint ventures will be granted trading rights, it isnot clear whether they will be allowed simply toamend their business licenses to authorizedistribution activities, or whether theestablishment of new enterprises will be required. Moreover, there has been no indication whetherforeign companies will be required to licenseseparate units of their China operations to conductdistribution activities, or whether they will beallowed to integrate these activities under a singleentity.

Retailing

In 1999, the Chinese government broadened thescope for foreign investment in the retail sector. New regulations encouraged the entry of largeinternational retailers (such as hypermarkets andwarehouse-style stores) into China.

China’s WTO commitments will further expandthe ability of foreign retailers to enter the marketthrough a much wider range of modalities. Smaller retail operations, some large retailoperations, gas stations and even car dealershipswill be allowed to be wholly foreign-owned withinthree to five years of accession. In addition,franchising, sales away from a fixed location (bothwholesale and retail), and related subordinateactivities will be permitted without restrictionswithin three years of accession. Certain types oflarge retail operations, however, may still faceownership limitations.

Direct selling remains problematic in China. In1998, China banned all direct selling activitiesbecause some foreign and domestic firms useddirect selling techniques to operate pyramidschemes and other less-than-legitimate operations. However, China has indicated it will allow fullresumption of direct selling activities within threeyears of accession to the WTO, consistent with theterms of its accession agreement.

Transportation and Logistics

The transportation and logistics sector has in thepast faced severe regulatory restrictions, highcosts, dominance by government-invested agents,and limitations on permitted activities. Themultiple government bodies responsible for thissector include: the Ministry of Communications,the Ministry of Railways, MOFTEC, SETC,SDPC, and the Civil Aviation Administration ofChina. Overlapping jurisdictions, multiple sets ofapproval requirements, and opaque regulationshinder market access. Domestic firms have usedgovernment connections and investments tomonopolize the sector. Foreign shipping firmshave found it impossible to open subsidiaries ininland ports.

Nevertheless, China’s W TO commitments and itsown reform policies support a broad opening ofthe transportation and logistics sector to foreignservice providers. After periods of time rangingfrom three to six years after WTO accession,foreign firms will be able to invest freely inwarehousing, road freight transport, rail freighttransport and freight forwarding companies. InNovember 2002, China issued regulationsallowing majority foreign ownership of roadtransportation firms, as it was required to dowithin one year of its WTO accession. China wasalso obligated to issue regulations allowingmajority foreign-owned joint ventures to enter thefields of packaging services, storage andwarehousing, and freight forwarding one year afterits accession; it issued timely regulations allowing75 percent foreign-owned joint ventures in thesefields.

China’s international maritime transportationregulations became effective January 1, 2002. Among other things, implementing rules, issued inJune 2002, require non-vessel-operating commoncarriers to make a cash deposit of RMB 800,000(about US $100,000) in Chinese banks withoutclear rules on access to and use of this money.

In July 2002, MOFTEC issued a Notice onEstablishing Foreign-Invested LogisticsCompanies in Trial Regions. This notice allowsforeign-invested logistics companies (with up to50 percent foreign ownership and registeredcapital of US $5 million) to establish in severalselect cities. U.S. firms have expressed concernabout the high capital requirement and the 50percent cap on foreign ownership, which may

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conflict with China’s WTO commitments forcertain types of logistics services.

Regulation of International Data Flows andRestrictions on Data Processing

Chinese authorities routinely filter Internet trafficentering China, focusing primarily on content thatChinese officials deem objectionable on political,social and religious grounds. In 2002, China liftedfilters on most major western news sites, includingthose of the Washington Post and Time, althoughaccess has subsequently been blocked. Inaddition, China blocks sites related to Taiwan, theFalun Gong spiritual movement, Tibetan andUyghur support groups, and human rightsorganizations focusing specifically on China. Few, if any, websites related to strictly economicand business matters are blocked. Changes toInternet filtering can occur without warning orpublic explanation. For example, the popularInternet search engine Google was blockedcompletely in China for a few weeks starting inlate August 2002. When Google became availableagain in September, its "cached pages" featureremained blocked; that feature had previouslyallowed users in China to access "snapshots" ofsome webpages that were otherwise blocked inChina.

Internet content restrictions are governed by anumber of measures, not all of which are public. The most important of these measures was issuedin September 2000 and cover Internet contentproviders, electronic commerce sites andapplication service providers. In March 2002, theInternet Society of China, a nominally privategroup affiliated with MII, established a "PublicPledge on Self-Discipline for the China InternetIndustry." Signatories commit to "refrain fromproducing, posting or disseminating perniciousinformation that may jeopardize state security anddisrupt social stability, contravene laws andregulations and spread superstition and obscenity." At least one Chinese subsidiary of a U.S. Internetfirm has signed the pledge. China generallyprohibits foreign-developed encryption anddecryption technologies, although this prohibitiondoes not currently apply to software and hardwarefor which encryption is only an incidental feature.

Telecomm unications

In its WTO accession agreement, China madeimportant commitments in the area oftelecommunications services. It agreed to permit

foreign suppliers to provide a broad range ofservices through joint ventures with Chinesecompanies, including domestic and internationalwired services, mobile voice and data services,value-added services, such as electronic mail,voice mail and on-line information and databaseretrieval, and paging services. In addition, allgeographical restrictions are to be eliminatedwithin two to six years after China’s WTOaccession, depending on the particular servicessector.

Importantly, when it acceded to the WTO, Chinaalso accepted key principles from the WTOAgreement on Basic TelecommunicationsServices. As a result, China is obligated toseparate the regulatory and operating functions ofMII (which has been both the telecommunicationsregulatory agency in China and the operator ofChina Telecom) upon its accession. China alsobecame obligated to adopt pro-competitiveregulatory principles, such as cost-based pricingand the right of interconnection, which arenecessary for foreign-invested joint ventures tocompete with China Telecom.

Since making these commitments, China hasseparated post and telecommunications services. It has also developed a telecommunications lawand lowered connection costs.

In May 2002, the government split ChinaTelecom, the country's largest telecommunicationscompany, into northern and southern parts. Twoof China’s seven national basictelecommunications companies, China Netcomand Jitong, merged with China Telecom’ssubsidiaries in 10 northern provinces to formChina Network Communications; subsidiaries inthe other 21 provinces and municipalities insouthern and northwestern China retained theChina Telecom name. Other national companies -China Unicom, China Mobile, China Satellite, andRailcom - will continue to operate separately.

China’s new Regulations on Foreign-InvestedTelecommunications Enterprises went into effectJanuary 1, 2002. They define registered-capitalrequirements, equity caps, requirements forChinese and foreign partners, and licensingprocedures. The regulations stipulate that foreign-invested telecommunications enterprises canundertake either basic or value-addedtelecommunications services. Foreign ownershipmay not exceed 49 percent in the case of basictelecommunications services (excluding wireless

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paging) and 50 percent in the case of value-addedservices (including wireless paging, which isotherwise categorized as a basic service). Theentire process of forming a Sino-foreign jointventure for basic services pursuant to the newregulations is expected to be lengthy, lasting onaverage 9 to 12 months.

Draft revisions of China’s othertelecommunications regulations are still underconsideration, and when approved, will representChina’s first comprehensive set of regulations inthis sector. China's existing telecommunicationsregulations were issued by the State Council inSeptember 2000 and allow for interconnection,cost-based pricing, universal service, and stipulatelicensing authority and procedures. However,these regulations are generally vague and lackingin specific and necessary details. For instance,they do not stipulate any transparent methodologyfor determining cost-based interconnection rates.

China has not yet established an independentregulator in the telecommunications sector. Thecurrent regulator, MII, is not structurally orfinancially separate from all telecommunicationsoperators and providers. China has also usedregulatory authority to disadvantage foreign firmsduring 2002. For example, MII arbitrarily raisedsettlement rates for international calls terminatingin China, which had the effect of artificiallyboosting the revenues of Chinesetelecommunications operators at the expense offoreign firms. At times, MII also changedapplicable rules without notice and withouttransparency.

Little progress has been made in opening themarket for value-added services, such as Internetservice and content providers. MII announcedmoves toward convergence in voice, video anddata services in 2000, but China considerscommunications and information contentsensitive, so foreign companies face significantbarriers in the Internet services sector. Thedefinition of websites as a "value-added telecomservice" hinders foreign companies from owningChina-based websites, even if only for the solepurpose of promotion of their own business. Therequirement that Internet Service Providers (ISPs)must provide user login information andtransaction records to authorities upon request,without clear guidelines as to the circumstancesand situations that warrant such actions, raisesconcerns about consumer privacy and preventionof data misuse.

Foreign equity investment limitations for ISPs andInternet Content Providers (ICPs) mirror thetimetable for value-added services in the WTOagreement (30 percent upon accession, 49 percentwithin one year after accession and 50 percentwithin two years after accession). However, ICPsmust still win the approval of MII before they canreceive foreign capital, cooperate with foreignbusinesses, or attempt domestic or overseas stocklistings.

Audiovisual Services (Including Film Imports)

China’s new Regulations on the Administration ofAudio-Visual Products and Regulations on theManagement of Film went into effect on February1, 2002. They are designed to bring more orderand transparency to the film and audio-visualindustries, with an eye to moving toward greatercommercial efficiency in accordance withdomestic reform efforts and WTO commitments. Despite these positive moves, the desire to protectthe monopoly rents earned by the state-ownedmovie and print media importers and distributors,and China’s concerns about politically sensitivematerials, result in continued restrictions inaudiovisual services.

Distribution of sound recordings, videos, movies,books and magazines remains highly restricted. Inaddition, the websites of foreign newsorganizations are often blocked for extendedperiods of time, and news services remain warythat the government will impose new restrictionson their activities. Inconsistent and subjectiveapplication of censorship regulations furtherimpede market growth for foreign and domesticproviders alike.

China began importing foreign films on a revenue-sharing basis in 1994. Under its WTOcommitments, China allows at least 20 foreignfilms annually into China on a revenue-sharingbasis. China also will open theaters anddistribution to foreign investment. Imported filmsmust be 35mm and include Chinese subtitles. They must be reviewed and approved beforerelease, and are subject to blackout viewingperiods during national holidays. Although Chinahas pledged to license another distributor,currently there is only one authorized distributorof foreign films, the state-owned China FilmDistribution Company. As discussed above in theImport Quotas section, China admitted 18 foreignfilms in 2002. U.S. industry sources report thatChina treats its WTO commitment as a ceiling,

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rather than a floor, which artificially increasesdemand for pirated products. Rightholders whocomply with Chinese law must forego marketinglegitimate products, leaving the demand formovies to be satisfied almost entirely by pirates.

Tourism and Travel Services

Immediately following China's WTO accession,China issued new travel agency administrationregulations to allow large foreign travel andtourism service providers to operate full-servicejoint venture travel agencies to promote foreigninbound tourism in the four major foreign touristdestinations in China - Beijing, Shanghai,Guangzhou and Xian. Wholly foreign-ownedfirms catering to foreign inbound tourists will bepermitted six years after accession. For now, theagencies must have an annual worldwide turnoverin access of $40 million, and local registeredcapital of almost $500,000. At least one majorU.S. travel services company received approval tostart operations in 2002 aimed at the corporate airtravel market.

Foreign firms continue to be restricted frommarketing to Chinese outbound tourists. Inaddition, holders of Chinese official passports,over 85,000 of whom applied for U.S. visas inFY2002, are required to use China’s state-ownedairlines or their code-share partners. Most of theseindividuals - state-owned enterprise employees -would not be considered government employees inmost countries. This represents a significant lossof business for U.S. airlines.

Education and Training

China faces a shortage of qualified teachers andclearly needs educators in inland regions. However, the Ministry of Education (MOE)continues to restrict participation by foreigneducators and trainers. China permits only non-profit educational activities and only activities thatdo not compete with the MOE-supervised nineyears of compulsory education, thereby inhibitingmuch-needed foreign investment in the educationsector. In April 2000, MOE banned foreigncompanies and organizations from offeringeducational services via satellite networks. Foreign universities may set up non-profitoperations, but must have a Chinese universityhost and partner to ensure that programs barsubversive content and localize importedinformation. China's training market isunregulated, which discourages potential investors

from entering the market.

PROFESSIONAL SERVICES

Legal Services

Prior to its WTO accession, China had maintainedvarious restrictions in the area of legal services. Itprohibited representative offices of foreign lawfirms practicing Chinese law or engaging in profit-making activities with regard to non-Chinese law. It also imposed restrictions on foreign law firms’formal affiliation with Chinese law firms, limitedforeign law firms to one representative office andmaintained geographic restrictions. Chinese lawfirms, on the other hand, have been able to openoffices freely throughout China since 1996.

As part of its WTO accession, China agreed to liftquantitative and geographical restrictions on theestablishment of representative offices by foreignlaw firms within one year after accession. Inaddition, foreign representative offices will be ableto advise clients on foreign legal matters and toprovide information on the impact of the Chineselegal environment, among other things. They willalso be able to maintain long-term “entrustment”relationships with Chinese law firms and be ableto instruct lawyers in the Chinese law firm asagreed between the two law firms.

Under new regulations and implementing rulesissued by the Ministry of Justice (MOJ) in 2002, itappears that foreign law firms are required todemonstrate there is an actual need for theestablishment of a representative office and thedevelopment of the firm’s legal services in China. In addition, a foreign law firm may not establishan additional representative office until its mostrecently established representative office has beenin practice for three consecutive years. Foreignattorneys may not take China's bar examination,and they may not hire registered members of theChinese bar as attorneys.

The new measures also appear to restrict the typesof services that foreign law firms may provide inChina. Foreign law firms are not allowed toperform any legal services involving Chinese law. They may only engage in legal services related tothe laws of their home country and to internationallaw. Foreign law firms are not permitted to act asan agent in arbitration proceedings or to expressopinions or comments on the applications ofChinese law or about facts involving Chinese law. Foreign representative offices are prohibited from

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completing registration, amendment, application,filing and other procedures with Chinesegovernment agencies. Even after the MOJmeasures took effect, some foreign lawyers servedas agents in arbitration proceedings and handledother legal procedures when dealing with certaincentral and local level officials, which indicatesthat enforcement of the measures is inconsistent.

Nevertheless, as more foreign businesses enterChinese markets, the demand for U.S. law firmswill likely grow as well.

Engineering, Architectural and ContractingServices

U.S. engineers, architects and contractors haveenjoyed a relatively cooperative and openrelationship with the Chinese government. Theseprofessionals operate in the Chinese marketthrough joint venture arrangements and are lessaffected by regulatory problems than other servicesectors. Nevertheless, they also face restrictions. Lack of clear guidelines makes it difficult forforeign architecture and engineering firms toobtain licenses to perform architecture andengineering services except on a project-by-project basis. Foreign firms also face severepartnering and bidding restrictions. Foreign firmscannot hire Chinese nationals to practicearchitecture and engineering services as licensedprofessionals. Currently, Chinese architecture andengineering firms must approve and stamp alldrawings prior to construction. There have beeninstances where U.S. architectural firms have hadto pay Chinese domestic taxes on designs preparedin the United States for Chinese projects. Chinaalso sets extremely low design fees, rather thanletting the market set prices. In addition, Chinadoes not have adequate lien laws to protect therights of engineers, architects, contractors andmaterial suppliers from non-payment.

Accounting and Managem ent ConsultancyServices

The Chinese Institute of Certified PublicAccountants (CICPA), a government body underMOF, has made significant progress inmodernizing accounting in China. Last year,MOF released four newly revised auditingstatements covering inter-bank confirmation,capital verification, accounting estimates and theaudit of commercial bank financial statements. Furthermore, MOF has been active instandardizing accounting procedures across a wide

range of topics including investments, inventories,cash flow statements, and fixed assets. TheChinese Securities Regulatory Commissionrequired listed companies to appoint a certifiedinternational CPA firm to conduct audits onprospectuses and annual reports in accordancewith international standards. While specificnumbers are not available, most observers agreethat the demand for internationally qualifiedaccountants will grow rapidly in coming years.

Despite these positive changes, pervasiveproblems remain. Differing accountingregulations limit the comparability of data, and theaccounting practices followed by many domesticfirms do not meet international conventions.

Prior to China’s accession to the WTO, foreignaccounting firms could not choose their ownChinese joint venture partners without outsideinterference or enter into contractual agreementsthat could fully integrate these joint ventures. Inits WTO accession agreement, China committed toallow foreign accounting firms to partner with anyChinese entity of their choice. China also wasrequired to abandon the restriction on foreignaccounting firms’ representative offices engagingin profit-making activities. Foreign accountingfirms can also engage in taxation and managementconsulting services, without having to satisfy themore restrictive requirements on form ofestablishment applicable to new entities seeking toprovide those services separately.

Advertising

The State Administration of Industry andCommerce (SAIC) enforces China's 1995Advertising Law. Among other things, the lawbans messages "hindering the public or violating .. . social customs." The law is subject tointerpretation by the SAIC, which must approveall advertising campaigns. One additionaldifficulty for foreign advertising firms, as well asforeign manufacturers, is that China has strictregulations prohibiting comparative advertising aswell as any advertising with claims about therelative superiority of one brand over another. Marketing strategies that are successful in someother countries are therefore illegal in China.

Foreign firms have been restricted torepresentative offices or minority ownership ofjoint-venture operations. As part of its WTOaccession commitments, however, China agreed toallow majority foreign ownership of joint venture

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advertising companies within two years andwholly foreign-owned subsidiaries after fouryears.

Movement of Professionals

Generally, there are no special entry restrictionsplaced on professional Americans who wish towork in China, such as doctors or engineers. However, they must receive approval from theForeign Experts Bureau. Prior to arrival, aprospective American job applicant may be askedto provide notarized copies of his or herprofessional credentials and a summary of pastwork experience. The credentials will be used bythe employer to file for a "foreign expertsresidency permit" for the American employee. Once the "foreign expert" permit is authorized, theprospective employee can request a work visa (a"Z" visa) from a Chinese embassy or consulate. Ifthe prospective employee arrives in China on avisitors' visa (an "L" visa) prior to commencingemployment, the prospective employee is usuallyasked to depart China prior to starting work, andto apply for the appropriate work visa from aforeign entry point (usually Hong Kong). Localemployers are responsible for all employment orincome tax and other withholdings for these"foreign experts" while they are employed inChina.

INVESTMENT BARRIERS

Foreign investors show great interest in Chinadespite significant obstacles. China received$52.7 billion in FDI in 2002, apparently becomingthe world's top investment destination for the firsttime. Barriers to investment include opaque andinconsistently enforced laws and regulations and alack of a rules-based legal infrastructure. China’sleadership has reaffirmed its commitment to“further open” China to investment and tocontinue movement toward a rules-basedeconomy.

The Standing Committee of the Ninth NationalPeople’s Congress (NPC) approved amendmentsto three laws covering joint ventures and whollyforeign-owned enterprises in October 2000 andMarch 2001. The amendments eliminatedprovisions mandating export performancerequirements (e.g., rules that required theseenterprises to export a certain percentage ofproducts), revised “Buy China” policies thatregulated procurement of raw materials and fuels,and removed requirements that these enterprises

submit production/operation plans to Chineseauthorities. Several of the previously mandatedactions remain "encouraged," however. Moredetailed implementing regulations were issued inApril and July 2001.

Investment Guidelines

Foreign investment inflows continue to becontrolled and channeled toward areas that supportnational development objectives. China hasadjusted its investment guidelines a number oftimes over the last five years. The revisions haveconfused potential investors and added to theperception that the investment guidelines do notprovide a stable basis for business planning. Uncertainty as to which industries are beingpromoted as investment targets, and how longsuch designations will be valid, underminesconfidence in the investment climate. A newcatalogue took effect April 1, 2002, listing sectorsin which foreign investment would be encouraged,restricted or prohibited, replacing the December1997 list. Unlisted sectors are considered to bepermitted.

Among other things, the new catalogue aims toimplement sectoral openings that China committedto in its WTO accession agreement, includingbanking, insurance, petroleum extraction, anddistribution. According to an accompanyingregulation, projects in “encouraged” sectorsbenefit from duty-free import of capital equipmentand VAT rebates on inputs. The same regulationstates that approval authority for “restricted”investments rests with the relevant centralgovernment ministry and may not be delegated tothe local level. For a number of restrictedindustries, a Chinese controlling or majority stakeis required. Industries in which foreign investmentis prohibited include national defense, firearmsmanufacturing, most media content sectors, andbiotechnology seed production.

The Chinese government emphasizes guiding newforeign investment towards “encouraged”industries and areas that support nationaldevelopment objectives. Regulations relating tothe encouraged sectors were designed to directFDI to areas in which China could benefit fromforeign assistance or technology, such as in theconstruction and operation of infrastructurefacilities. The government announced a series ofmeasures in August 1999 that began todecentralize investment approval decision-makingauthority and to create new incentives for

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investments in key sectors and geographic regions. These guidelines allowed authorities at theprovincial level of government to approve“encouraged” foreign-invested projects and raisedthe investment value beyond which centralgovernment approval is required.

Over the past five years, China has introduced newincentives for investments in high-technologyindustries, such as a regulation issued inNovember 1999 that provided foreign-investedenterprises a tax deduction for contributions tonon-affiliated research and development oreducational institutions. In December 2001, Chinaannounced comprehensive new incentives forinvestment in the less-developed central andwestern parts of the country.

Under the terms of its accession to the WTO,China is scheduled to progressively liberalizelimitations on foreign investment in value-addedtelecommunications, banking, insurance anddistribution, among other sectors.

Investment Restrictions

The Chinese government prohibits or restrictsforeign investment in projects not in line with "theneeds of China's national economic development." In many sectors, foreign firms must form a jointventure with a Chinese company and restrict theirequity ownership to a minority share in order toinvest in the Chinese market.

There are numerous examples of investmentrestrictions. China bans investment in the newsmedia, broadcast, and television sectors, citingnational security interests. The production of armsand the mining and processing of certain mineralsremain prohibited sectors. Many otherinvestments are restricted under the guise ofavoiding excess capacity.

U.S. investors have expressed particular concernsabout China's prohibition of investment ingenetically modified seed development andproduction. Ongoing work and planned projectsare at risk.

Investment Requirements

In addition to taking on the obligations of theWTO Agreement on Trade-Related InvestmentMeasures (TRIMS), China expressly agreed in itsprotocol of accession to eliminate exportperformance, local content and foreign exchange

balancing requirements from its laws andregulations and not to enforce any contractsimposing those requirements. China also agreedthat it would no longer condition investment orimport approvals on those requirements or onrequirements such as technology transfer andoffsets. Despite these commitments, industryremains concerned that the Chinese governmentmay impose unofficial requirements in exchangefor extra-legal, quid pro quo decisions bygovernment officials at both the central and sub-national level. In addition, some U.S. companiesreport that local government officials continue toenforce local-content requirements contained inindustrial policy documents.

Other Investment Issues

Venture Capital. There are currently no laws orregulations that define the legal and organizationalstructures for general purpose domestic privateequity funds, although an April 2001 regulationprohibited securities firms from entering theprivate equity business. Chinese laws andregulations concerning foreign private equity firmsset limits on corporate structure, share issuanceand transfers, and investment exit possibilities. For example, China has no regulations allowingissuance of preferred stock or options. Thedifficulty of listing on China’s stock exchanges,coupled with the bureaucratic approval required tolist overseas, limits interest in establishing China-based venture capital firms. As a result, mostforeign private equity investments in China haveactually occurred in offshore investment entities. A new regulation took effect M arch 1, 2003, toallow the establishment of foreign-investedventure capital firms, including whollyforeign-owned firms, to make investments“principally” in unlisted , high-technology firms inChina. Under the new regulation, which replaceda 2001 provisional regulation, foreign-investedventure capital funds are, in principal, authorizedto invest in foreign-invested firms in China.

Holding Companies. There has been somerelaxation of the restrictions on the business scopeand operations of holding companies. Somerestrictions on services provided by holdingcompanies and on their financial operations andtheir ability to balance foreign exchange internallywill remain even after full implementation ofChina’s WTO commitments. Profit and lossconsolidation within holding companies alsoremains prohibited.

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Access to Capital Markets. Foreign-investedenterprises in China remain largely unable toaccess domestic and international stock markets, tosell corporate bonds, to accept venture capitalinvestment, to sell equity, or to engage in normalmerger, acquisition and divestment activity. Foreign exchange transactions on the capitalaccount can be concluded only with case-by-caseofficial review. These approvals are subject tovery tight regulatory control. These barriers tocapital market access will not be removed byChina’s WTO protocol of accession. China hasbegun to experiment with liberalization, such asthe opening of domestic stock markets to listingsby foreign-invested firms.

ANTICOMPETITIVE PRACTICES

China continues to struggle with economicinefficiencies and investment disincentives createdby local protectionism, predatory pricing andpreservation of industry-wide monopolies. Anticompetitive practices in China take severalforms. In some cases, industrial conglomeratesoperating as monopolies or near monopolies (suchas China Telecom) have been authorized to fixprices, allocate contracts, and in other ways restrictcompetition among domestic and foreignsuppliers. Regional protectionism by provincial orlocal authorities often blocks efficient distributionof goods and services inside China. Suchpractices may restrict market access for certainimported products, raise production costs, andrestrict market opportunities for foreign-investedenterprises in China.

There are several existing laws and regulations inChina addressing competition matters. However,these measures are ineffective due to poor nationalcoordination and inconsistent local and provincialenforcement. China is drafting a new anti-monopoly law that could be adopted as early as2003. There are also reports that in 2003MOFTEC will issue long-awaited regulationsgoverning foreign mergers and acquisitions; thoseregulations would likely include competitionpolicy provisions.

OTHER BARRIERS

Transparency

Laws and regulations directly affectinginternational trade are increasingly becomingpublicly available in China. Since 1992, Chinahas published all trade laws and regulations in the

"MOFTEC Gazette," available on a subscriptionbasis. However, many "measures" that did not riseto the level of ministry-issued "regulations"continued to remain unavailable to the public. China’s ministries routinely implemented policiesbased on internal "guidance" or "opinions" thatwere not available to foreign firms. Experimentalor informal policies and draft regulations, inaddition, were regarded as internal matters andpublic access was tightly controlled.

China, in its WTO accession protocol, committedto publishing all laws, regulations and othermeasures that relate to trade matters, includingthose that affect imports, and generally to allowingits WTO trading partners an opportunity tocomment on them before implementation. Chinaalso agreed to provide a copy of new trade-relatedlaws, regulations and other measures to the WTOSecretariat in Geneva, translated into one or moreof the WTO’s official languages (English, Frenchand Spanish) no later than 90 days afterimplementation. China also agreed to createvarious contact points for its WTO tradingpartners and foreign businesses to inquire aboutthese measures.

In 2002, China did a reasonable job of publishingnational laws and regulations. Although severalregulations carried effective dates before the datesof publication, the lag was usually only a coupleof weeks. Various government-owned specialtynewspapers routinely carried the texts ofgovernment regulations, implementing rules,circulars and announcements. Many governmentministries also published digests or gazettescontaining the texts of these measures, both inwritten form and on their websites. In addition,there has been a proliferation of online news andinformation services that routinely offer up-to-datenews about and texts of new laws and regulations. Some services even provide legal-quality Englishtranslations by subscription.

China failed in 2002 to publish all "measures"related to trade, however. Chinese businessescontinue to report unofficial "guidance" providedby Chinese regulators, all unavailable to foreignentities. In some cases, Chinese officials providedunpublished documents to interested parties, butthis dissemination was ad hoc and based more onpersonal connections than formal procedures.

MOFTEC, in late 2001, established an “EnquiryCenter” to provide information on new trade andinvestment laws, regulations and other measures.

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In addition, MOFTEC officials have over the pastyear researched the United States’ “FederalRegister” and are planning to begin a journal topublish all national, provincial and local laws,regulations and other measures related to trade andinvestment.

The Chinese government began to consider asystem to solicit input from interested partiesbefore issuing trade and investment laws orregulations. In December 2001, the State Councilissued regulations explicitly allowing commentperiods and hearings. However, many of China’sministries and agencies continued to follow thepractice prior to China’s accession to the WTO. The ministry or agency drafting a new or revisedlaw or regulation will normally consult with andsubmit drafts to other ministries and agencies,Chinese experts and affected Chinese companies. At times, it will also consult with select foreigncompanies, although it will not necessarily sharedrafts with them. As a result, only a smallproportion of new or revised laws and regulationshave been issued after a period for publiccomment, and even in these cases the amount oftime provided for public comment has generallybeen too short. Government officials are stillresearching the wisdom of establishing a formalmechanism for soliciting input prior to finalizationof all governmental measures.

In the area of standards, CNCA, the agency incharge of drafting technical requirements,appeared to undergo a change in philosophy in2002. Where previously CNCA officials wereunwilling to share draft standards, in 2002 theyestablished a helpful "TBT Enquiry Point" that notonly provided drafts for comment, but alsoinformed interested parties of changes to the draftsduring the comment period. The new commentperiods proved unworkably short in many cases,although officials showed flexibility by"unofficially" extending deadlines.

Similarly, securities, foreign exchange andbanking regulators proved relatively open to theconcept of comment periods. In part this may be areflection of the international educational andwork background of these officials. However,they have also apparently recognized the need forinternational comment to avoid the pitfalls ofreleasing uninformed regulations in these sensitiveindustries.

Beyond these narrow areas, most of China'sgovernmental entities had a poor record of

providing the required opportunity for comment. Instead, ministries and agencies often circulatedunofficial copies of draft measures to a smallnumber of concerned domestic industryrepresentatives and scholars for comment. Face-to-face consultations between governmentministries or agencies and foreign industryrepresentatives on the text of new measures werealso possible in some cases, but not on a regularbasis.

Legal Framework

Laws and Regulations. Laws and regulations inChina tend to be more general and ambiguous thanin other countries. While this approach allows theChinese authorities to apply laws and regulationsflexibly, it also results in inconsistency andconfusion in application. Companies often havedifficulty determining whether their activitiescontravene a particular law or regulation.

In China, regulations are also promulgated by ahost of different ministries and governments at thecentral, provincial and local levels, and it is notunusual for the resulting regulations to be at oddswith each other. Even though finalized regulationsare now routinely published in China, they oftenleave room for discretionary application andinconsistencies arise, either through honestmisunderstanding or by design. Indeed,government bureaucracies have sometimes beenaccused of selectively applying regulations. Chinahas many strict rules that are usually ignored inpractice until a person or entity falls out of officialfavor. Governmental authorities can wield theirdiscretionary power to "crack down" on foreign ordisfavored investors or make special demands onsuch investors simply by threatening to wield suchpower.

This lack of a clear and consistent framework oflaws and regulations can be a barrier to theparticipation of foreign firms in the Chinesedomestic market. A comprehensive legalframework, coupled with adequate prior notice ofproposed changes to laws and regulations, and anopportunity to comment on those changes, wouldgreatly enhance business conditions, promotecommerce and reduce opportunities for corruption.

In its WTO accession agreement, China committedto establish tribunals for the review of alladministrative actions relating to theimplementation of trade-related laws, regulations,judicial decisions and administrative rulings.

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These tribunals must be impartial and independentof the government authorities entrusted with theadministrative enforcement in question, and theirreview procedures must include the right ofappeal. China also committed, at all levels ofgovernment, to apply, implement and administerall of its laws, regulations and other measuresrelating to trade in goods and services in a uniformand impartial manner throughout China, includingin special economic areas. In connection with thiscommitment, China further committed to establishan internal review mechanism to investigate andaddress cases of non-uniform application of lawsbased on information provided by companies orindividuals.

Commercial Dispute Resolution. Both foreign anddomestic companies often avoid enforcementactions through the Chinese courts, as skepticismabout the independence and professionalism ofChina's court system and the enforceability ofcourt judgments and awards remains high. Thereis a widespread perception that judges, particularlyoutside of China's big cities, are subject toinfluence by local political or business pressures. Most judges are not trained in the law and/or lackhigher education, although this problem decreasesat the higher levels of the judiciary.

At the same time, the Chinese government ismoving to establish consistent and reliablemechanisms for dispute resolution through theadoption of improved codes of ethics for judgesand lawyers and increased emphasis on theconsistent and predictable application of laws. The Judges' Law, issued by the StandingCommittee of the National People's Congress in1995, requires judges to have degrees in law or inother subjects where they have acquiredspecialized legal knowledge, and permits judgesappointed before the law’s implementation who donot meet such standards to undergo necessarytraining. In 1999, the Supreme People's Courtbegan requiring judges to be appointed based onmerit and educational background and experience,rather than through politics or favoritism. InAugust 2002, the Supreme People's Court issuedrules designating certain higher-level courts tohear cases involving administrative agencydecisions relating to international trade in goods orservices or intellectual property rights. Accordingto the Supreme People's Court, China's moreexperienced judges sit on the designated courts,and the geographic area under the jurisdiction ofeach of these designated courts has beenbroadened in an attempt to minimize local

protectionism. The rules provide that foreign (orChinese) enterprises and individuals may bringlawsuits in the designated courts raisingchallenges, under the Administrative LitigationLaw, to decisions made by China's administrativeagencies relating to international trade matters. The rules also state that when there is more thanone reasonable interpretation of a law orregulation, the courts should choose aninterpretation that is consistent with the provisionsof international agreements to which China hascommitted, such as the WTO rules. The rules tookeffect in October 2002.

Despite initial enthusiasm, foreign observers havegrown increasingly skeptical of the ChinaInternational Economic and Trade ArbitrationCommission (CIETAC) as a forum for thearbitration of trade disputes. Some foreign firmshave obtained satisfactory rulings from CIETACbut other firms and legal professionals have raisedconcerns about restrictions on the selection ofarbitrators and inadequacies in procedural rulesnecessary to ensure thorough, orderly and fairmanagement of cases.

Finally, in cases where the judiciary or arbitrationpanels have issued judgments in favor of foreign-invested enterprises, enforcement of suchjudgments has often been difficult. Officialsresponsible for enforcement are often beholden tolocal interests and unwilling to enforce courtjudgments against locally powerful companies orindividuals.

Labor and Benefits

In recent years, China has enacted national laborlaws and regulations that cover most, though notall, key labor areas. However, lack of uniformityand transparency in applying these laws andregulations complicates investors’ personnelplanning. The Chinese government is slowlydeveloping nationwide pension, unemploymentinsurance and medical insurance systems that willrequire substantial employer contributions. Thesystem is still rudimentary and characterized byserious funding shortfalls, in part due towidespread non-compliance, particularly amongdomestic firms.

China is developing, but has not yet enacted,national social security legislation. At present,differences in benefit costs and taxation between,and even within, regions and localities, complicateinvestor planning. Inconsistent application of

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labor regulations between foreign-investedenterprises and Chinese enterprises pose furtherdifficulties for foreign investors.

The cost of labor - especially unskilled labor - islow in much of China. The existence of anenormous surplus rural labor force, many of whomfind work in urban areas, helps to keep unskilledwages low. However, substantial restrictions onlabor mobility can distort labor costs. Many less-educated Chinese are still bound by a householdregistration system that makes it difficult for themto work or live outside their home area. China isgradually easing restrictions under this system, inpart due to rampant non-compliance by Chinesecitizens, and in part due to the recognition that thecreation of a genuine labor market is essential tothe continued growth of the economy. Wherecompetition for workers is intense and the supplylimited, especially in the case of technical,managerial and professional staff, labor costs canbe high. This is particularly true in China’srapidly growing coastal areas.

Corruption

Chinese officials admit that corruption is one ofthe most serious problems the country faces. China pursued more than 36,447 anti-graft cases in2002, recovering almost $500 million. Lower-level officials bore the brunt of the ongoing anti-corruption campaign, but the head of one ofChina's four large state-owned commercial bankswas arrested and expelled from the CommunistParty. Chinese law enforcement officials alsodetained several prominent businesspeople forengaging in corrupt activities. China's entry intothe WTO, which has greatly reduced tariffs,should significantly reduce incentives forsmuggling and the attendant corruption. Mostother official graft in China involvesmisappropriation of funds, abuse of power andembezzlement.

China issued its first law on unfair competition inDecember 1993, and the Chinese governmentcontinues to call for improved self-discipline andanti-corruption initiatives at all levels ofgovernment. While the government has pledgedto begin awarding contracts solely on the basis ofcommercial criteria, however, it is unclear howquickly and to what extent the government will beable to follow through on this commitment. U.S.suppliers complain that the widespread existenceof unfair bidding practices in China puts them at acompetitive disadvantage. This dilemma is less

severe in sectors where the United States holdsclear technological preeminence or costadvantages. Corruption nevertheless underminesthe long-term competitiveness of both foreign anddomestic entities in the Chinese market.

Land Issues

China’s constitution specifies that all land isowned in common by all the people. In practice,agricultural collectives distribute agricultural landto the peasants, while city governments distributeland for residential and industrial use. The Stateand collectives can either "grant" or "allocate"land usage rights to enterprises in return forpayment of fees. Enterprises granted land userights are guaranteed compensation if the Stateasserts eminent domain over the land, while thosewith allocated rights are not. Granted land usagerights cost more, of course, than allocated rights. However, the law does not define standards forcompensation when eminent domain supercedesland use rights. This situation creates considerableuncertainty when foreign investors are ordered tovacate. The absence of public hearings overplanned public projects, moreover, can giveaffected parties, including foreign investors, littleadvance warning of possible notices.

A new 2002 rural land law gives peasants fixedcontracts for periods of 30 to 50 years, and permitspeasants to exchange or rent out their land usagerights while their usage contract remains in force. There is no present prospect for changing fromland usage rights to direct ownership of rural land.

The problem for foreign investors is the array ofregulations that govern their ability to acquire landuse rights. Local implementation of theseregulations may vary from central governmentstandards; prohibited practices may occur in onearea while they are enforced in another. Mostwholly-owned foreign enterprises seek granted userights to state-owned urban land as the mostreliable protection for their operations. Foreignjoint venture companies usually attempt to acquiregranted use rights through lease or contributionarrangements with local partners. The time limitfor use rights acquired by foreign investors forboth industrial and commercial enterprises is 50years.

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