[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]



 
               WTO: WILL CHINA KEEP ITS PROMISES? CAN IT?
=======================================================================

                                HEARING

                               before the

              CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              JUNE 6, 2002
                               __________

 Printed for the use of the Congressional-Executive Commission on China


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              CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

                    LEGISLATIVE BRANCH COMMISSIONERS

Senate

                                     House

MAX BAUCUS, Montana, Chairman        DOUG BEREUTER, Nebraska, Co-
CARL LEVIN, Michigan                 Chairman
DIANNE FEINSTEIN, California         JIM LEACH, Iowa
BYRON DORGAN, North Dakota           DAVID DREIER, California
EVAN BAYH, Indiana                   FRANK WOLF, Virginia
CHUCK HAGEL, Nebraska                JOE PITTS, Pennsylvania
BOB SMITH, New Hampshire             SANDER LEVIN, Michigan
SAM BROWNBACK, Kansas                MARCY KAPTUR, Ohio
TIM HUTCHINSON, Arkansas             SHERROD BROWN, Ohio
                                     JIM DAVIS, Florida

                     EXECUTIVE BRANCH COMMISSIONERS

                 PAULA DOBRIANSKY, Department of State
                 GRANT ALDONAS, Department of Commerce
                D. CAMERON FINDLAY, Department of Labor
                   LORNE CRANER, Department of State
                    JAMES KELLY, Department of State

                        Ira Wolf, Staff Director
                   John Foarde, Deputy Staff Director

                                  (ii)













                            C O N T E N T S

                              ----------                              
                                                                   Page

                               STATEMENTS

Opening statement of Hon. Max Baucus, a U.S. Senator from 
  Montana, Chairman, Congressional-Executive Commission on China.     1
Levin, Hon. Sander, a U.S. Representative in Congress from 
  Michigan.......................................................     3
Kaptur, Hon. Marcy, a U.S. Representative in Congress from Ohio..     4
Huntsman, Jr., Ambassador Jon M., Deputy U.S. Trade 
  Representative, Washington, DC.................................     5
Aldonas, Grant D., Under Secretary of Commerce for International 
  Trade, Washington, DC..........................................     6
Westin, Susan S., Managing Director, General Accounting Office, 
  Washington, DC.................................................     9
Murck, Christian, Chairman, American Chamber of Commerce, 
  Beijing, China.................................................    30
Clarke, Donald, professor of law, University of Washington, 
  Seattle, WA....................................................    32
Fiedler, Jeffrey L., consultant, Food and Allied Service Trades 
  Department, AFL-CIO, Washington, DC............................    34

                                APPENDIX
                          Prepared Statements

Huntsman, Jr., Jon M.............................................    46
Aldonas, Grant D.................................................    48
Westin, Susan S..................................................    54
Murck, Christian.................................................    61
Clarke, Donald C.................................................    66
Fiedler, Jeffrey L...............................................    78
Baucus, Hon. Max.................................................    80
Pitts, Hon. Joseph R.............................................    82
Kaptur, Hon. Marcy...............................................    82

                         Questions and Answers

Responses of Jon M. Huntsman, Jr. to questions from:

  Representative Wolf............................................    83
  Representative Levin...........................................    83
  Representative Kaptur..........................................    84

Responses of Grant D. Aldonas to questions from:

  Senator Baucus.................................................    84
  Representative Wolf............................................    86
  Representatives Kaptur and Wolf................................    86
  Representative Kaptur..........................................    87
  Representative Brown...........................................    88

Responses of Susan S. Westin to questions from:

  Representative Wolf............................................    88
  Representative Kaptur..........................................    89









               WTO: WILL CHINA KEEP ITS PROMISES? CAN IT?

                              ----------                              


                         THURSDAY, JUNE 6, 2002

                            Congressional-Executive
                                       Commission on China,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 2:38 p.m., 
in room SD-215, Dirksen Senate Office Building, Senator Max 
Baucus (Chairman of the Commission) presiding.
    Also present: Representative Bereuter (Co-Chairman of the 
Commission), Senator Hagel, Representatives Wolf, Pitts, Levin, 
Kaptur, Brown, and Davis; Grant Aldonas, U.S. Department of 
Commerce; and D. Cameron Findlay, U.S. Department of Labor.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
 MONTANA, CHAIRMAN, CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

    The Chairman. The Commission will come to order.
    At the Commission's earlier hearings, we focused on the 
relationship between human rights and the rule of law in China. 
We stressed that human rights can only be protected when there 
is a rules-based legal system that includes transparency and 
accountability.
    Today, we will focus on developments in China in the area 
of commercial law. We will also look at the implications of 
this on broader legal reform in Chinese society.
    Last December, we ushered in a new era with China's formal 
entry into the WTO [World Trade Organization]. The negotiations 
took over a decade. We spent a year in the Congress on passage 
of PNTR [permanent normal trade relations]. Now we are 
beginning to monitor Chinese implementation of the commitments 
they undertook.
    What do we want to accomplish? First, we want to ensure 
that China complies with the terms of accession and with the 
global standards of action embedded in the WTO.
    This is important. It is important to American 
manufacturers, to American service companies, to our farmers, 
to our ranchers, to our workers. China is our fourth-largest 
trading partner and is the country where we have our largest 
trade deficit. China's accession to the WTO should provide 
greater opportunities for all Americans doing business there.
    Second, we want to promote continued progress in the 
development of the commercial rule of law in China. This will 
likely accelerate changes in the way China is governed, 
including in non-commercial areas.
    For example, as a WTO member, China must establish and 
maintain judicial and administrative mechanisms to review 
trade-related sanctions by government agencies. These must 
operate independently of the agencies that carried out the 
actions in question. If implemented, this should contribute to 
the development of a more open, market-oriented society.
    The government will be bound by the written rules. I 
believe that China's membership in the WTO can be an important 
force in driving the development of the rule of law more 
broadly.
    We are now at an early stage in WTO adherence and 
commercial law development in China. Senior Chinese leaders are 
fully committed. We are already seeing changes in thousands of 
national and local laws and regulations.
    The Chinese Government has welcomed assistance from foreign 
governments and NGOs [non-governmental organization] to conduct 
extensive training sessions on WTO requirements, on 
administrative law, and on judicial reform. Chinese Government 
officials at all levels have been eager to learn about the 
steps needed to ensure that they are complying with 
commitments.
    Yet, there have been mixed signals about China's 
commitments. There have been reports that new barriers have 
been erected to replace barriers that were abolished, sanitary 
and phytosanitary standards that are still being used where 
there is no scientific basis, and regulations that were 
supposed to be in effect at accession that have not been 
promulgated.
    We need to monitor these developments closely, and we need 
to speak out vigorously and promptly when China has fallen 
short. After all, what we are concerned about deals with the 
terms of China's accession--the terms under which we granted 
China PNTR status.
    There are also questions about the capacity of the Chinese 
Government to implement the vast changes needed, and the 
national government's ability to impose its will on the 
provinces. We need to examine the problem closely and see if 
there are ways that our government can assist more in capacity 
building.
    We have embarked on a long process, and that is why the 
Finance Committee asked the General Accounting Office [GAO] to 
do a long-term investigation into China's WTO compliance. We 
will hear more about that in a few minutes.
    But let me just say that this GAO study can only proceed 
with full cooperation from the Executive Branch, and I expect 
all agencies to cooperate and be forthcoming with information, 
documents, and other assistance.
    As we scrutinize China's WTO compliance closely, we must 
also remind ourselves that this is but one step, albeit a major 
one, in the process of economic reform that began over two 
decades ago.
    We must evaluate the WTO process by looking both at a 
snapshot of the current reality and at the full video that 
incorporates trends over a 20-year period.
    While the topic of today's discussion is China, I want to 
say a word about the other major non-market economy, Russia. We 
have just been told that the Commerce Department plans to begin 
treating Russia as a market economy under United States trade 
law.
    I recognize the considerable reforms that Russia has 
undertaken in recent years and agree that it may no longer be a 
non-market economy, but it seems to me that the web of State 
monopolies and state-controlled commerce in Russia still falls 
short of meeting the requirements for being a market economy.
    I recognize the decision does not affect the Jackson-Vanik 
application to Russia. Still, I am concerned that today's 
decision will further undermine the Administration's 
credibility as the enforcer of U.S. trade law.
    That said, we have two distinguished panels to help us 
examine China's access to the WTO, the commercial impact on 
American firms, and implications for legal reform and the rule 
of law in China.
    We will start with Deputy U.S. Trade Representative Jon 
Huntsman, Under Secretary of Commerce Grant Aldonas, and GAO 
Managing Director Susan Westin.
    We have an interesting situation today. Grant Aldonas will 
testify on the first panel, but because he's a member of the 
Commission, he will join us up here and grill the second panel.
    Yogi Berra said, ``When you come to a fork in the road, 
take it.'' Grant is the only person I know who can take both 
parts of the fork and do it well.
    But, before we proceed with our panelists, I would like to 
open this up to the rest of the members of the Commission for 
any comments they might have.
    Does anyone wish to speak?
    Representative Levin. Just briefly.
    The Chairman. All right. Congressman Levin.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]

   STATEMENT OF HON. SANDER LEVIN, A U.S. REPRESENTATIVE IN 
                     CONGRESS FROM MICHIGAN

    Representative Levin. Just very briefly. First of all, I 
would like, though it is not the topic of our meeting here, our 
session, to join you in your comments on the decision of the 
Commerce Department. We will talk about that some other time, 
but it is an important issue, Russia and non-market economy 
economics.
    Also, I just wanted to underline what Senator Baucus has 
said about the importance of this hearing. These are busy days 
here and they are condensed into very few days each week, so it 
is hard for members to be here. It is hard for members of the 
Administration to be here.
    But this is a subject of exceptional, and I think unusual, 
importance. As we all read the media, there are more reports 
about these issues in China than most other subjects. What is 
transpiring in China is going to have such a major impact not 
only within that country or within Asia, but in the world.
    The establishment of the Commission was a reflection of the 
exceptional importance of China's evolution and our 
relationship with China. So as we proceed, I think all of us 
feel a special obligation to make this Commission work, to tap 
into the energies of all of the members of the Commission, both 
those within the Congress and those within the Executive 
Branch.
    An exceptional challenge has led to an exceptional 
instrumentality, a joint Congressional-Executive Commission. It 
worked once before when it related to Russia, to the Soviet 
Union. While the circumstances are different, the importance is 
of equal, if not potentially greater, significance.
    So I hope all of you as witnesses, even though all of us 
could not be here today, will take into account that there is a 
deep and abiding interest within this institution, and I think 
within the Executive Branch, to make sure that we take what was 
on a piece of paper some months ago--it seems so long ago--and 
make it a reality.
    Thank you very much, Mr. Chairman.
    The Chairman. Thank you very much, Congressman.
    Congresswoman Kaptur.

   STATEMENT OF HON. MARCY KAPTUR, A U.S. REPRESENTATIVE IN 
                       CONGRESS FROM OHIO

    Representative Kaptur. Thank you, Mr. Chairman. Mr. 
Chairman and members of the Commission, I welcome our 
witnesses, as does everyone else here today.
    I just wanted to State for the record that the hearing 
today on WTO regulation implementation is an interesting choice 
for a hearing topic, since our Commission was charged with 
examining and monitoring human rights and the rule of law in 
China.
    But I am willing to listen. I would suppose and hope that 
China would diligently work to come into compliance with WTO 
obligations. But, even if it does, what connection does that 
have to a new world of rights and freedoms for the Chinese 
people? I would like to hear the witnesses discuss that 
linkage.
    Really, does the development of commercial relationships 
lead to an expansion of liberty or human rights, or labor and 
environmental rights globally? Commercial transactions may have 
a logic, but they do not really have an ethic. They certainly 
do not have an ethic in societies where there is no rule of 
law, nor transparency in the judiciary.
    In closing, I would just like to say on the record that the 
people of China deserve our sincerest efforts, as well as of 
their own leaders, to uphold internationally recognized human 
rights, not as a condition of any trade agreement, but as a 
moral right and as a condition under the tenets of free peoples 
around this world that have respect for the dignity of every 
individual.
    So I am very pleased to be here and look forward to the 
testimony of the witnesses.
    [The prepared statement of Representative Kaptur appears in 
the appendix.]
    The Chairman. Thank you very much, Congresswoman.
    Any other panelists from the Commission wish to make 
remarks?
    [No response.]
    If not, we will begin with you, Mr. Huntsman. Thank you 
very much for taking the time to come here today. I know how 
hard you have been working. You are a great public servant.  
Thanks again. We would love to hear what you have to say on 
progress we are making in this area.

STATEMENT OF AMBASSADOR JON M. HUNTSMAN, JR., DEPUTY U.S. TRADE 
                 REPRESENTATIVE, WASHINGTON, DC

    Mr. Huntsman. Thank you very much, Mr. Chairman, and to the 
other members of the Commission. Thank you for inviting me and 
the other panelists to appear before you today to discuss the 
Administration's perspectives on the United States' trade 
relationship with the People's Republic of China, and in 
particular, the topic of China's WTO implementation.
    It gives me great comfort sharing the stage with two 
respected colleagues whom I deem it an honor to be associated 
with. They add enormous professionalism to the task at hand.
    China's accession to the WTO was a decisive victory for 
reform in China. This point should never be discounted. China's 
reformers clearly understood the values and benefits of 
openness in the economic sphere and that is why they pursued 
WTO membership.
    They know that WTO membership will help them transform 
China's economy, and many hope and believe China's society 
generally, in positive ways. This Administration, like the 
previous Administration, worked closely with China's reformers 
throughout the many years of WTO accession negotiations.
    The result was a comprehensive set of commitments with 
which this Commission is familiar. With the negotiations now 
over, we have continued to work with China's reformers on the 
next phase of this process as China embarks on the enormous 
task of implementing the numerous WTO commitments it has made.
    Clearly, implementation is, and will continue to be, a 
major challenge for China and its reformers. They must find 
ways to ensure that recalcitrant ministries, state-owned 
enterprises [SOEs], and provincial and municipal authorities 
all act in conformity with China's WTO commitments.
    But China's leadership appears prepared to take on this 
challenge. It is committed to make China competitive in the 
international economic arena in the 21st century. It knows that 
it needs to develop a market economy compatible with the WTO's 
rules for this to happen. It also knows that there will be a 
price to be paid as this transition takes place.
    The ability of China to meet this challenge and implement 
its WTO commitments in full will depend on the outcome of 
several sets of dynamics.
    No. 1, China's internal government coordination.
    As we have anticipated and as we have seen at times during 
the first 6 months of China's WTO membership, there will not 
always be agreement among the central government's ministries 
on WTO compliance matters. Some of the ministries are reform-
minded and generally understand the benefits of full compliance 
with WTO rules. The Ministry of Foreign Trade and Economic 
Cooperation [MOFTEC], which had the lead in the WTO 
negotiations, is one example. But other ministries, 
particularly those with proprietary functions or a domestic 
focus may be less interested in, and even resistant to, full 
compliance. In certain circumstances, they will be more 
inclined to seek ways to protect their, and their constituents' 
existing rights and privileges, so they will present a 
particular challenge to the implementation process.
    No. 2, center versus periphery, or Beijing versus the rest 
of the Middle Kingdom.
    We have also anticipated a similar set of dynamics 
involving the central government and the localities. While some 
provincial and municipal authorities appeared to see immediate 
benefits in complying with WTO rules, others do not see these 
benefits or simply do not yet understand WTO rules. 
Historically, Beijing's influence has not extended uniformly 
over local authorities, and at this point the breadth and 
extent of this influence vis-a-vis China's WTO commitments 
remains unclear.
    Realistically, we can expect some non-compliance as these 
internal struggles take place. But, it is also quite possible, 
if not probable, that independent of these internal struggles, 
China will simply be unwilling to live up to a particular WTO 
commitment. As you know, we still have compliance problems with 
longstanding WTO trade partners and there is no reason that 
China will be different.
    Now, the short-term scorecard.
    Looking back on the first 6 months of China's WTO 
membership, we have seen China take a good faith approach to 
its WTO membership and make significant efforts to implement 
its commitments. China has made substantial tariff reductions 
on industrial and agricultural goods of importance to United 
States businesses and farmers. It has begun to take concrete 
steps to remove non-tariff trade barriers in virtually every 
product sector. It has begun to implement far-reaching services 
commitments that have substantially increased market access for 
U.S. services suppliers. It has also repealed hundreds of 
trade-related laws, regulations, and other measures, and 
modified or adopted numerous other ones in an effort to become 
WTO-compliant in areas such as import and export 
administration, standards, and intellectual property rights, 
among many others.
    With the aid of the United States and other WTO members and 
the private sector, China has also embarked on an extensive 
campaign to educate central and local government officials 
about both the requirements and the benefits of WTO membership. 
This is an important initiative that should help to foster 
fuller compliance with China's WTO commitments.
    Mr. Chairman and members of the Commission, thank you for 
providing me with the opportunity to testify. I look forward to 
answering your questions.
    [The prepared statement of Mr. Huntsman appears in the 
appendix.]
    The Chairman. Thank you, Mr. Huntsman.
    Now, Secretary Aldonas.

STATEMENT OF GRANT D. ALDONAS, UNDER SECRETARY OF COMMERCE FOR 
              INTERNATIONAL TRADE, WASHINGTON, DC

    Mr. Aldonas. Thank you, Mr. Chairman and members of the 
Commission. Thank you for the opportunity to appear before you.
    With your permission, I would like to summarize my opening 
statement and submit my written testimony for the record.
    The Chairman. Without objection.
    Mr. Aldonas. First of all, I welcome the Commission's 
interest. I agree with Congressman Levin about the importance 
of this. Having had the opportunity to work as a staff member 
of the Finance Committee with the leadership of the Senators 
present, and certainly the other Members of the House present, 
it was a remarkable opportunity to reset the foundation, in 
many respects, of our relationship with China.
    I view Congress' involvement as integral to that process. 
One of the reasons for taking a Congressional staff delegation 
with me on my recent trip to China was to illustrate for the 
Chinese that there was no distance between the Congress and the 
Administration with respect to the fundamentals of China's 
adherence to its WTO obligations, and the kind of follow-
through that the Chinese could expect to see, both from the 
Congress and from the Administration in terms of ensuring the 
implementation of their commitments.
    I am particularly pleased to be here with Jon Huntsman and 
with Susan Westin, who I view as partners in this enterprise of 
ensuring compliance. Jon, of course, brings great strengths 
with his background in business. We need that kind of 
experience, given the level of detail we need to dig into with 
the Chinese in terms of their implementation.
    Susan, I had the great opportunity to work with when I was 
on the Finance Committee and has been at this for a long time 
in terms of examining China's compliance. I have tried, 
wherever I have gone, to encourage business and non-
governmental organizations to cooperate with Susan's efforts, 
because I really do believe that, from the point of view of 
keeping Congress involved, GAO's role is critical.
    I think that Susan's report is likely to set the effective 
benchmark against which we are going to end up judging China's 
compliance going forward and I welcome that involvement.
    I also welcomed the opportunity to have Susan and the GAO 
take a look at how we go about what we are doing, because we 
need benchmarks against which we can judge ourselves.
    When Secretary Evans and I both traveled to China in April, 
we emphasized two points that I would like to return to today. 
The first, is that WTO compliance is the key issue in our 
bilateral trade relationship and that our commercial 
relationship provides the foundation for our broader bilateral 
ties.
    The second, is what I view as the inescapable link between 
WTO compliance and the development of the rule of law in China.
    In terms of our monitoring and compliance efforts, from the 
perspective of American exporters, of course, China's accession 
to the WTO represents the most significant market opening 
initiative since the NAFTA and Uruguay Round.
    The advantages, however, of China's accession will only 
accrue to our exporters with continued vigilance and a 
willingness to promote American exporters' exports aggressively 
in the Chinese market.
    That is why, when Secretary Evans met with President Jiang 
and other senior leaders in April, he drove home the message 
about the importance of timely and transparent implementation 
of each of China's commitments under the WTO.
    That was critically important for the Secretary to make 
that statement as a part of the first meeting during the Bush 
Administration of the Joint Commission on Commerce and Trade to 
ensure that that is the benchmark that we will return to every 
time the Commission meets going forward.
    The subtext, of course, is that it is the benchmark against 
which we are going to measure everything. It provides a 
foundation. In meeting with Minister Shi and Vice Minister Ma, 
of MOFTEC, our counterpart agency, I was impressed by the 
intent they brought to continuing to foster change in China and 
to implement the WTO obligations.
    On the other hand, I would like to do a little take on Zhou 
Enlai, who was asked back in the days of President Nixon's 
first trip about what he thought of the American Revolution. He 
said, ``It is too soon to tell.'' My view, in terms of WTO 
compliance, is it is too soon to tell.
    I think we have seen the commitment from the leadership in 
the central government. That is a very positive note. I think 
they have taken steps to undertake the basic implementation.
    What we are always looking for is the follow-through. By 
that, I mean not only with the central government, but at the 
provincial and local level as well. That is really what we are 
going to have to test as we move forward as a part of this 
process.
    One of the issues that the discussions in China raised was 
technical assistance. As you said, Mr. Chairman, compliance is 
just not the threat of retaliation for the failure to implement 
trade agreements, but it is also about how we provide the 
assistance that allows the Chinese to move forward?
    During our recent visit we heard lots of requests for 
technical assistance, including about the development of 
commercial law. What concerned me most, actually, was the fact 
that many of our trading partners are there already with 
programs on the ground about standards, and a variety of other 
things.
    Of course, that always makes me nervous in terms of our 
market access. If the standards are set a certain way or the 
regulatory process is developed along the lines of the Japanese 
or the European model, I am going to have concerns about the 
benefits actually accruing to our exporters, because we have 
emphasized to the Chinese we need to see transparency in their 
regulatory procedures to have some comfort that, in fact, they 
are complying with the WTO.
    Let me close by talking just a little bit, which I hope 
will respond to Congresswoman Kaptur's question about the link 
between WTO compliance and the development of the rule of law. 
This may be a lawyer's habit in saying this, but in my view, 
observance of the law in any society has to become a habit. It 
has to be a part of the fabric of social relationships.
    But that really is built through the institutions that we 
have. There are some who seem to think that business is 
something separate from the sphere of other human rights or 
human relations. I do not agree with that. In fact, commerce is 
one of the ways in which you build the trust in society and a 
foundation for the rule of law.
    There are express links, which I know were reflected in the 
memo that the Commission staff did for the Commission members, 
in the WTO agreement itself that require an independent 
judiciary and the review of governmental actions.
    One of the first things that we are going to have to look 
at as we move forward is whether, in effect, those institutions 
are being put in place under Chinese law. We are not there yet.
    We are going to have to test whether or not they are 
productive and whether they do provide the seeds of political 
pluralism which will allow for the protection of basic rights. 
That, I think, is the link, but we are a long way from testing 
that and feeling secure that that is there.
    Thank you very much.
    [The prepared statement of Mr. Aldonas appears in the 
appendix.]
    The Chairman. Thank you very much, Mr. Secretary.
    Next, Ms. Susan Westin, who is the Managing Director of the 
General Accounting Office.

   STATEMENT OF SUSAN S. WESTIN, MANAGING DIRECTOR, GENERAL 
               ACCOUNTING OFFICE, WASHINGTON, DC

    Ms. Westin. Thank you, Mr. Chairman. I also ask that my 
entire statement be put in the record, and I will just 
summarize my remarks.
    Before I start my remarks, I would like to say how much I 
welcome the support that you gave in your statement to the 
General Accounting Office's efforts, and also the support from 
my colleagues here on the panel from the Administration.
    I am pleased to have the opportunity today to discuss 
China's development of rule of law practices related to the 
commitments China made to the WTO when it joined in December 
2001.
    My observations address three areas: (1) How elements in 
China's WTO accession agreement seek to improve the rule of 
law; (2) what Chinese officials told us about their reform 
efforts; and (3) what the United States business community has 
told us about the importance of these efforts, as well as their 
views on rule of law implementation in China to date.
    My statement today is based on our ongoing work, and 
therefore my observations are preliminary in nature. As you 
know, both the Senate Finance and House Ways and Means 
Committees have asked GAO to conduct a 4-year body of work 
relating to China's implementation of its WTO commitments.
    Our work to date has included two trips to China, numerous 
meetings with United States and Chinese Government officials, 
and a mail survey of, and structured interviews with, United 
States companies doing business in China. We plan to report on 
the first phase of this work in various products by mid-
October.
    Turning to my three main observations. First, many elements 
in China's WTO accession agreement seek to improve the rule of 
law. When China joined the WTO it agreed to ensure that its 
legal measures are consistent with its WTO obligations.
    In our analysis of China's accession package, we found at 
least 60 commitments that specifically obligate China to enact, 
repeal, or modify trade-related laws or regulations.
    In addition, China has made a substantial number of other 
commitments to the WTO in the rule of law areas of 
transparency, judicial review, uniform enforcement, and non-
discrimination.
    For example, in the area of transparency, China has agreed 
to designate an official journal for publishing all trade-
related laws and regulations and to provide a reasonable period 
for public comment.
    Second, Chinese Government officials have emphasized their 
commitment to make reforms that will strengthen the rule of 
law. They described to us how their early efforts for reform go 
beyond China's WTO commitments and include broad reforms of 
laws and regulations at the national and provincial levels, as 
well as reforms of judicial and administrative procedures.
    Let me give a few examples of these reforms. Provincial 
authorities are in the process of reviewing their laws and 
regulations to see if they are consistent with national laws. 
Some provincial officials estimate this process will take 2 to 
3 years.
    The Supreme People's Court has issued new regulations to 
improve the adjudication of civil and commercial cases 
involving foreign parties. In reforming administrative 
procedures, Chinese officials told us they are attempting to 
reduce the number of layers necessary to approve commercial 
activities.
    Chinese officials acknowledge the many challenges they face 
in completing the necessary reforms in a timely manner. Despite 
an extensive training program about WTO-related reforms 
throughout the country, officials identified the need for 
outside assistance to provide more training because they lacked 
the expertise and capacity to meet their needs.
    Turning to my third point, what we have learned from the 
business community. According to the preliminary results of our 
survey, United States businesses in China identified rule of 
law commitments to be particularly important to them, 
especially the consistent application of laws, regulations, and 
practices in China, and enforcement of intellectual property 
rights. Most businesses anticipated that these rule of law 
commitments would be difficult for the Chinese to implement.
    In our interviews with United States businesses in China, 
we heard several specific concerns about vague laws and 
regulations and lack of transparency. We heard some positive 
stories as well. One businessman told us his company had 
recently won a judgment against a counterfeiter in a Chinese 
court that included an order for the counterfeiter to cease 
operations.
    U.S. businesses expect WTO reforms, including those related 
to rule of law, to be part of a long-term process. Nonetheless, 
they believe the Chinese leadership is dedicated to carrying 
out WTO commitments.
    Let me conclude with one last observation. It is very clear 
that China has shown considerable determination in enacting 
numerous laws, regulations, and other measures to ensure that 
its legal system and institutions, on paper, are WTO-
compatible.
    Nevertheless, the real test of China's movement toward a 
more rule of law-based commercial system is how China actually 
implements its laws and regulations in fulfilling its 
commitments. At this point, it is too early for us to make any 
definitive judgment about China's actual implementation of its 
commitments.
    Mr. Chairman, this completes my oral statement.
    I would be happy to respond to any questions.
    [The prepared statement of Ms. Westin appears in the 
appendix.]
    The Chairman. Well, thank you all very much.
    I take it from listening to you that there is some 
progress, not a lot because it is very early, but some, in 
adhering to the WTO commitments and, generally, the rule of 
law.
    My question is this. Have you worked with China's 
Government, or has China's Government, on its own, developed a 
sequencing of issues and commitments that they are working on? 
That is, a timeline on how these issues will be handled?
    I am especially concerned about the judicial system and 
whether there are certain aspects of the judicial system that 
the Chinese Government is working on before other aspects.
    Grant.
    Mr. Aldonas. Yes. First of all, Mr. Chairman, there is a 
sequence within the WTO agreement as to when they stage-in a 
number of their obligations. We literally are so early in the 
process, that some of the things that we think would work 
through the administrative process and into their judicial 
procedures have not bubbled up yet.
    We are at the point where the sorts of issues we are facing 
right now, are, for example, problems with a misvaluation or 
misclassification at the docks with a Customs officer in 
Shanghai. You find you can resolve that particular issue at a 
local level.
    It has not become a systemic problem. It has not led to 
somebody essentially appealing through their Customs procedures 
and into their courts yet. That is why, in some respects, I 
feel like we are putting our finger in the stream a little 
early in the process with respect to those issues.
    I think what the Chinese have done with their rules and 
their procedures on paper is consistent with their commitments. 
It is the implementation, which we will only be able to see 
over time. My sense is that, at the top-most senior levels of 
the Chinese Government, in our conversations, that commitment 
is there.
    But you know, as in our own government, what happens with 
implementation really depends on the judge, the administrative 
officer, and the Customs port director in places like Shanghai, 
and that is where we are trying to put most of our effort at 
this point.
    On the issue of implementation with respect to the 
judiciary, there is no specific timetable. In many respects, I 
do not want to say we are not being proactive enough, but we 
are waiting to see, as somebody tries to test the system, 
whether in fact it works.
    The Chairman. All right. Ms. Westin.
    Ms. Westin. Yes. As you know, our first effort has been to 
take a careful look at the entire accession package and to 
divide it down into really understanding, as much as we can, 
what the commitments are. That work is not yet completed, 
Senator. We expect to report on that in October.
    But I can tell you that, as Grant has said, that some of 
the commitments have a definite time attached to them. Some of 
the commitments are actually phased in over an 8-year period, 
and some commitments are a little vague about when they ever 
might be implemented completely.
    I think that we found a good faith effort, to start. There 
seems to be a much greater understanding of the WTO agreement 
at the national level than there is down through the provincial 
level in China, and that is one of the challenges they face, 
moving this information down and making sure that provincial 
laws comply as well.
    With regard to the judicial system, they are working now to 
set up higher level courts that will hear the commercial cases 
involving foreign parties. This is a change there.
    One of the problems in China that businesses have 
complained about, is the judges do not seem to know the rules 
too well, so they felt they are not competing on a fair playing 
ground if they take a case to court. So there is this effort to 
establish mid-level and higher-level courts to hear the 
judicial cases.
    The Chairman. All right. Thank you.
    Ambassador Huntsman, do you have an observation here?
    Mr. Huntsman. Just a couple, if I might. I think, on the 
timeline, there are some well-established time horizons out 
there that are pretty much dictated by the WTO features that 
they have signed on to.
    There is very good interagency coordination between the 
State Department, Commerce Department, USTR, and others in 
terms of really defining those issues that are most important. 
We get input and feedback from the private sector that will 
help assure us, as we move forward, that the issues that we are 
focused on are, in fact, those that are most salient.
    But I think we always need to remember the significant task 
at hand. Every time I consider what we are looking at here, I 
am always awed by it. We are only 6 months into this process, 
and I think we need to remember that.
    I think we also need to remember there is a significant 
cultural adjustment that is taking place in China. It has taken 
place slowly over the 15 years as they have prepared for WTO 
membership, and it continues today.
    I think that cultural adjustment also probably impinges 
somewhat on their view of transparency and rule of law, even 
though of the hundreds of commitments that they have signed on 
to, I think 10 percent or so of them deal directly with rule of 
law. We are looking at a tremendous cultural adjustment here 
that I do not think should be under-played at all.
    The Chairman. I appreciate it. My time has expired. I think 
it would be appropriate for our Commission, working with GAO 
and the Administration, to develop some kind of timeline or 
game plan with benchmarks so we know where we are and where we 
are not over a certain period of time. Perhaps we can flesh 
that out more precisely in the next few days. But at the very 
least, let us begin thinking about that.
    Our Commission works on the early bird rule. That is, the 
early bird gets the worm. Our first arrival is Mr. Cameron 
Findlay, to my right.
    Mr. Findlay, we are honored to have you here.
    Mr. Findlay. Thank you very much, Mr. Chairman. It is an 
honor to have my colleagues to torment for once, at least in 
public. [Laughter.]
    My view as well on the question that Congresswoman Kaptur 
raised, is that accession to the WTO and compliance with its 
terms are absolutely critical to human rights in China, 
especially over the long term.
    It seems to me that the historical record shows that market 
economies are better at protecting human rights than non-market 
economies.
    I just wondered if each of the panelists could comment on 
that and talk a little bit about what the record shows from 
other nations in terms of the nexus between opening up 
economies and protecting human rights.
    Ambassador Huntsman, do you want to give it a try?
    Mr. Huntsman. Let me just take a quick shot at that. I 
think we can probably look at the cases of Korea and Taiwan, as 
these economies have transformed over the years, and the 
improvements that have been made in basic human rights and the 
extent to which their economic policies have led to more open 
political systems.
    But I guess in the case of China--and I have been visiting 
there over the last 20 years and with an adopted daughter from 
China who I look at every morning and am reminded of some of 
their challenges--I have to say that when I step into 
manufacturing plants in China as I have over the years, I am 
reminded that Western standards are on display, that Chinese 
employees, those who are coming into the workforce, are 
introduced to standards they probably have not seen or heard 
about before, those that deal with an open market economy, 
those that deal with manufacturing quality products, those that 
deal with interacting with other people from different 
countries.
    I think that there are some very important lessons that are 
learned through all of this. I have seen over the years the 
ways in which people have been transformed within the 
workplaces as they have embraced some of these Western 
standards.
    So I would have to say that, over time, at least in my 
experience, I have seen the extent to which trade and 
investment in China have, in fact, transformed the behavior, 
and the recognition and acceptance of outside standards.
    Representative  Kaptur. Would the gentleman yield?
    Would the gentleman yield on that?
    Mr. Findlay. Sure.
    Representative  Kaptur. I would just appreciate, Mr. 
Ambassador, if you could provide to our record the list of 
firms that you have visited and what the wage level is of the 
people working therein, and whether they are Western investment 
in China or whether they are Chinese-owned companies, state-
owned or otherwise.
    Mr. Huntsman. I would be happy to.
    Representative  Kaptur. Thank you.
    [The information requested appears in the appendix.]
    Mr. Aldonas. I was actually going to pick something a 
little closer to home. My beat has always been Latin America 
and the Western Hemisphere more than Europe or China when I 
have been in government. I have to say, I remember when I did 
my first tour as a Foreign Service officer in Mexico.
    This was in the days of Jose Lopez Portillo, when the 
percentage of government ownership in the Mexican economy was 
actually higher in Mexico than it was in the former Soviet 
Union. What you saw at that time was, essentially, to operate 
or to be in business, you had to pay a fee to the ruling party 
and that fee was paid, as a practical matter.
    One of the things that has come as a benefit out of the 
North American Free Trade Agreement [NAFTA] is that a lot of 
small businesses in places like Monterey that had continually 
resisted paying simply for the right to do business, had a 
market. They could sell elsewhere.
    I firmly believe, based on my own experience in Mexico, 
that a lot of the changes in Mexico economically coming out of 
the NAFTA also sowed the seeds of what we have today in the way 
of President Fox, and a different outlook and a different 
relationship between Mexico and the United States, as a 
practical matter.
    I would not say that that was a direct cause. Nor would I 
say that NAFTA was a sufficient condition. But, I would say 
NAFTA was a necessary condition, and it has certainly pushed 
Mexico in the right direction.
    Ms. Westin. I would only like to add that I think that it 
is difficult for human rights to flourish in a society where 
there is not rule of law. You see on the first page of my 
statement, rule of law does not have a commonly accepted 
definition.
    But one of the definitions, is a society in which law is 
what guides people and government in the conduct of their 
activities, rather than by the direction of a single person.
    It would seem to me that in China's meeting its WTO 
commitments and the other reforms in the areas of judicial 
form, transparency, etc., that it has committed to, that it is 
going to lay the groundwork for encouraging human rights to 
flourish in China.
    Mr. Findlay. Thank you very much for your statements. I 
will yield the remainder of my time.
    The Chairman. Thank you very much, Mr. Findlay.
    Next, Congressman Jim Davis from Florida. Congressman.
    Representative Davis. Thank you, Mr. Chairman. I have two 
very different questions, and the first follows up on 
Representative Kaptur's question.
    I know there are a lot of existing benchmarks that are used 
now to measure the extent of political freedom, religious 
freedom in China. Now that we are measuring compliance with the 
WTO, should we be thinking about developing another benchmark 
to start judging this belief which we are all espousing today 
that there are going to be some discernible political and civil 
rights benefits to the citizens as we move more to the 
commercial rule of law?
    Mr. Aldonas. I think, certainly, we ought to be thinking 
seriously about the benchmarks of whether or not there is an 
independent judiciary and they have followed through on their 
obligations to implement the same. But there are specific 
provisions of the WTO agreement that require that in different 
sectors.
    I think the problem that Susan alluded to is one that we 
have to test, which is, if you have judges who for a very long 
time have tried to read what the Party wanted in terms of 
making their decisions and they are now being asked to, in 
fact, render a decision based on the law and the facts in front 
of them, there is an ability to test whether that system is 
working. That is one of the things that we ought to do with 
respect to WTO implementation.
    I would submit it also has implications for whether or not 
you are inculcating that same sort of habit in the judiciary 
more broadly, not just in terms of implementing the Customs 
rules or what it might be. I think that is a fair way to assess 
both WTO compliance and whether you are seeing the knock-on 
effect in the rest of the judiciary.
    Representative Davis. Is there a recognized system that 
someone is already using in other countries that somehow 
qualitatively judges the extent to which a country has moved to 
an independent judiciary and enforcing the rule of law?
    Mr. Aldonas. I do not know of one. One source we might look 
to, as I know from my own experience volunteering with them, is 
the American Bar Association's Central and East European Law 
Initiative. They did a lot of the sort of seminal work in 
helping draft constitutions, commercial codes, things like that 
in Eastern Europe and the former Soviet Union.
    They probably have the most experience of any group in 
terms of assessing that, and that might be one source of 
information we could turn to to test the proposition.
    Representative Davis. I have heard some horror stories 
anecdotally about businesses trying to go into China. Do you 
think the extent to which businesses in the United States will 
actively engage in China depends upon their judgment as to how 
much independence and integrity is taking place in developments 
of the judiciary and the rule of law there?
    Mr. Aldonas. Sure, in part. Although I have to say--and 
this is based more on my experience in private practice with 
clients investing and exporting to China--you can also test it 
by the degree to which they opt out of the Chinese legal 
system.
    More often as not, as I was counseling clients, my reaction 
was, you had better have an arbitration clause. What you do not 
want to rely on was the Chinese court system. That is a pretty 
easy way to test whether lawyers have confidence in the system. 
I think that would be a fair way to look at contracts and a 
fair way to look at investments.
    Ms. Westin. If I could answer that also. My team was there 
interviewing businesses, American businesses that do business 
in China, and talked to over 50 companies about 2 weeks ago.
    Some of the companies had been in China doing business for 
a fair number of years, more than a dozen years, others were 
fairly new. The thing that we heard expressed the most was 
concerns about these rule of law issues from companies that had 
been there for a long time.
    In our preliminary look at our total results, they seem to 
say we found a way to work within the system. Companies that 
had not been there so long seemed to be having more difficulty. 
I think that would apply to American companies now that are 
thinking of starting to do business there.
    I believe that they will look carefully at how they would 
be treated in the courts, and I think it is a promising sign 
that they are putting in these higher level courts to hear 
cases where the judges will be trained in the law that applies.
    Representative Davis. The success you are referring to are 
people using the judiciary system and not bypassing it through 
arbitration or some other basis?
    Ms. Westin. No. I did not mean to imply that. They have 
learned how to work within the Chinese system, is what they 
said, not necessarily that they would go through the judicial 
system.
    Representative Davis. So, in closing, one of the things we 
probably ought to be watching is the extent to which, as people 
write these contractual relationships, they are willing to 
submit themselves to the Chinese judiciary system, because to 
the extent they opt out, it really undermines this argument 
that is being made today that promoting the rule of law and the 
judiciary are somehow going to have a broader impact on 
political and civil rights.
    Mr. Aldonas. Congressman Davis, it is one test, and I think 
it is a valid one. Now, there are certain instances, I just 
want to be clear, where you cannot opt out of the system. When 
you are trying to enter your goods and Customs has made a 
classification about it, you have got to go through the Chinese 
court system. It is not like you can agree to arbitrate that. 
So we need to be looking at that as well. We need to make sure 
that that system is working.
    Just to make one point, which is that lots of times when we 
open markets we have a tendency to think that it is all for the 
big guys. Generally, the big guys can both export or invest, 
depending on how they want to gain access to a market. Where 
the rubber really hits the road, is for the small- and medium-
sized enterprises. When the tariffs drop, since they can only 
export, they benefit most. But they are also the folks who 
depend most on the transparency of the process, both regulatory 
and judiciary.
    If we are going to see this agreement work out for their 
benefit and expand the number of small- and medium-sized 
enterprises that play in the Chinese market, this is really 
where the rubber hits the road, because they cannot afford the 
cost of a difficult system, as a practical matter. Transparency 
really is key for that end of the spectrum in our own market.
    The Chairman. Thank you. Thank you very much, both you, Mr. 
Secretary, and Congressman Davis.
    Next, Senator Chuck Hagel.
    Senator Hagel. Mr. Chairman, thank you. I want to welcome 
the three of you and appreciate, like we all do, your time and 
your contributions to our efforts.
    Ambassador Huntsman, you and Secretary Aldonas mentioned in 
your testimony the importance that the Administration places on 
the coordination of interagency work.
    I would be interested in your taking that down two or three 
levels and explaining some specific examples of that 
interagency coordination and how it fits, how it works, how it 
is coordinated, who coordinates it. And, Ms. Westin, your 
reflections on this would be welcome as well.
    So, with that, again, thank you each for your time with us 
today. Ambassador Huntsman.
    Mr. Huntsman. Thank you for the question. I think it is a 
very good one. I think this is a process that we are still 
trying to perfect as we move forward.
    Essentially, out of the U.S. Trade Representative's Office 
we have a Trade Policy Staff Committee [TPSC] that chairs the 
review of China's WTO implementation. It is an interagency 
process that basically invites all of the relevant agencies, 
State Department, Treasury Department, Commerce, Customs, that 
would have some stake in the trade discussion.
    Since December of last year, they have met on a monthly 
basis. It is in those meetings that they review, in 
collaboration with those people on the ground working out of 
the Embassy in Beijing and the four or five consulates 
throughout the country, folks who are involved either as ECON 
officers or agricultural officers, or Customs attaches, in 
bringing information to this coordinating committee.
    It is this committee, as they meet on a monthly basis, that 
basically is able to determine what the priorities ought to be 
as we go forward, those issues that we ought to be most focused 
on in terms of where China might be derelict in terms of its 
compliance, and indeed what the Administration's response to 
those issues ought to be.
    Mr. Aldonas. Senator, it is a terrific question, because 
lots of times we find ourselves not being able to sort it out. 
I think China is one of those examples. The TPSC process that 
Jon referred to is one where there is a monthly meeting. It 
really does keep the agenda for everyone.
    From the Commerce Department's perspective, we think our 
value added is an intake mechanism for that process. We have 
our Foreign Commercial Service officers on the ground in China. 
It is the single largest representation of what I like to call 
commercial diplomats that we have in any single post around the 
world.
    We also have our China desk, where we have added another 
five members in this fiscal year, precisely to provide, again, 
that intake mechanism when there are complaints from American 
business, so we can table those and get them onto the agenda 
for the TPSC.
    Now, Secretary Evans, since he demands accountability, has 
also asked me to establish something that he calls a ``tiger 
team.'' Tiger teams, conventionally, are folks who come in from 
the outside and try to break into your computer system just to 
test whether your security system works.
    What Secretary Evans has wanted us to do, is really have an 
alternative look at our own processes. Just by way of sort of 
underscoring the level of cooperation, as soon as we were asked 
to do that, the first thing I did was call Jon and Charles 
Freeman, who is the Deputy Assistant USTR for China, and say 
you have got to be a part of our tiger team to test whether or 
not our conventional systems are working as a practical matter, 
and if they are not, tell us how to improve them as a part of 
the process. So, that is sort of the level that we have gotten 
to in terms of coordination.
    Senator Hagel. Ms. Westin.
    Ms. Westin. Yes. We are not part, of course, of this 
interagency process, but we have been tasked to look at it as 
part of the request from Senate Finance and House Ways and 
Means. We determined, with those two committees, that it would 
really be fair for GAO to start such a look after they had time 
to put together their plans, and started implementation.
    So that is really the fourth body of work that we intend to 
start, probably late 2002, early 2003, taking a specific look 
on how they are monitoring China's enforcement and how the 
interagency process is working.
    Until then, though, there is information and documents that 
we need from all the agencies involved with us to help us 
understand how China is implementing its commitments.
    Senator Hagel. Thank you.
    Representative Bereuter [presiding]. Thank you.
    Next on Senator Baucus' list is the gentleman from 
Michigan, Mr. Levin.
    Representative Levin. Thank you.
    One of the provisions inserted in the House into the China 
PNTR bill related exactly to this, and that is the review 
process. There was a provision inserted that we request, 
through the WTO and in the WTO, for an annual review. There was 
some skepticism that could be achieved. If it were not, there 
was only going to be an every-4-year review. It was achieved, 
and resources were appropriated to help you carry that out.
    I think it would be helpful, even before the annual report, 
if you could give in writing to this Commission an analysis of 
what you are doing, how the interagency mechanism works, where 
you are with the hiring of additional people to make sure that 
this annual review is truly meaningful, so that when GAO 
undertakes its first review, it does not give you an E, or even 
a D.
    [The information requested appears in the appendix.]
    But let me pick up, if I might, a question that has been 
opened. It was played off of, or taken off of, Grant, your 
comment on page 2, ``Accession to the WTO will further 
development of an impartial judiciary, neutral regulatory 
bodies, transparent legal processes, and regularity in the 
administration of law in China.''
    Then the important sentence. ``To the extent that entry 
into the WTO reinforces the development of the rule of law in 
China, it does suggest broader lessons for China's leadership 
as they attempt to build a new foundation for Chinese 
society.''
    One of the issues that tends to divide us in Congress and 
about which there are differing perspectives on this Commission 
relates just to this. I think we wanted to become a forum, not 
for automatically choosing up sides, but trying to be an 
effective instrumentality.
    You within USTR have a person who is working on worker 
rights, and this Commission, I think, has hired, or is about to 
hire, somebody to do that. So I want to ask you a question in 
that regard.
    I do not think there is any automatic process. You 
mentioned Mexico. Let us not go into a debate over that.
    Someone could say the introduction of further market 
principles in Chile certainly did not lead to more freedom, at 
least right away, until the people who introduced it were 
thrown out. I think that is a fair comment. I do not think Mr. 
Pinochet became an instrumentality of freedom.
    So let us talk about China, because this is our focus. As 
China privatizes--as it moves away from these state-owned 
enterprises, we have already seen a lot of volatility in terms 
of labor markets. We have seen an immense question arising as 
to what is going to happen to the workers who are displaced.
    We have seen it best in an immensely uneven pattern. 
Sometimes people being able to exercise rights that in other 
societies would be, hopefully, easily exercised, in other cases 
those rights are just snuffed out, to put it charitably.
    So let us talk for a few minutes. Give us your responses to 
what you think is your role, what is the role of this 
Commission, as China goes through this process that is going to 
involve a lot of disruption and a lot of issues about the 
rights of workers in a society where there have been, on paper, 
some rights, but in reality, essentially none in terms of 
exercising, speaking out, defending their rights.
    So, there is only a minute left. Who wants to chew on that? 
I think the Chairman may give you an extra 30 seconds.
    Mr. Aldonas. I will take a shot at it, Congressman. There 
are two questions. One, is have they, in fact, fairly 
implemented their WTO obligations, which, as you well know, do 
not reach your fundamental point about labor law and labor 
markets.
    The second question is, what is the knock-on effect of 
implementing the WTO in terms of loosening up the society? I 
think there has been a consensus of economists indicate 
recently that what you need is strong government in terms of 
setting the rules of a society, but also government restraint 
to allow for the full interplay of human freedom which drives 
the economic process forward.
    Representative Levin. But what is our role, Grant? What is 
our role?
    Mr. Aldonas. I am going to get there. I am sorry. I think 
our role in looking at that is to test both whether they have 
implemented their WTO obligations, as well as whether or not 
they have put in place the constraints on their own actions 
that really do allow for the interplay of market forces.
    Those really are two different things, but I would suggest 
the Commission has to focus as much on the latter as it does on 
the former. There is the traditional process, frankly, of the 
Ways and Means and Finance Committee that can provide the 
oversight on those specific issues.
    The real question, is whether or not you are starting to 
see the follow-on effects of economic change and whether the 
Chinese have begun to see an interest themselves in ensuring 
that there are constraints on the government to not interfere 
in people's lives.
    That is a longer-term process, not just the 3 to 8 years of 
WTO implementation. But that is where I think shining a light 
on that part of the process is the most useful role of the 
Commission.
    Representative Bereuter. Ambassador Huntsman, do you have a 
response?
    Representative Levin. If you would allow it, I would be 
interested.
    Mr. Huntsman. I think our role is to monitor and to 
encourage. We are very early in this process, as I mentioned 
earlier, 6 months into it only. We have got a long way to go. I 
think we need to keep our dialog open and alive.
    I am simply referring to trips like the one Grant made, 
like other Administration officials are making, like Members of 
Congress can make, where they can actually articulate some of 
our beliefs and the principles on which we stand tall. I think 
that, as we keep this dialog open, we are going to have to 
realize that so much of the labor problems, the challenges, 
deal with the state-owned enterprises, the over 100,000 of them 
around the country.
    Therein lies a huge challenge, because China is having, I 
think, a difficult time articulating the WTO and the provisions 
of the WTO to some of the outlying regions. There is some 
resistance for all kinds of understandable reasons. This is 
going to take some time as the leaders in Beijing continue to 
kind of spread the WTO message and try to get various outlying 
provinces in compliance. We are going to have to follow this 
closely and we are going to have to visit not only Beijing and 
Shanghai, but I think some of the outlying provinces and meet 
with provincial leaders, and make certain visits where we are 
able to articulate a message that is meaningful.
    It is going to be a long, iterative process, but it is one 
that I think will require us to be engaged on both sides of 
this table, and it is one I think we are going to have to 
approach with some patience.
    Ms. Westin. Can I add something?
    Representative Bereuter. Yes.
    Ms. Westin. As you know, GAO's role is looking specifically 
at the WTO-related commitments. But when we were in China, we 
did meet with government officials. I recall a conversation 
that I had with the deputy mayor of Shanghai, in which he 
expressed one of their concerns in implementing WTO commitments 
was throwing a lot of people out of work, frankly. There are a 
lot of companies in China, the state-owned enterprises, that 
they know are not going to be competitive as foreign companies 
come in.
    Because GAO had done a body of work on trade adjustment 
assistance, I offered to share with him some of those reports, 
and said, frankly, it is a problem that the United States has 
faced as well in terms of providing support for people who have 
lost their jobs because of trade impacts. So, we had a 
discussion on that.
    But I think it is one of their big concerns as they 
implement WTO commitments, what it is going to mean as to the 
impact on their labor force.
    I might suggest to the Commission that that is one of the 
things that you might want to keep a close eye on as China does 
implement its WTO commitments, is have they put in some kind of 
safety net for workers that are thrown out of work.
    Does it mean that rights are lost because they are so 
concerned about the unrest, or do human rights, perhaps, start 
to build?
    Representative Levin. Thank you.
    Representative Bereuter. The gentle lady from Ohio, Ms. 
Kaptur, is recognized.
    Representative  Kaptur. As you were talking, I was 
thinking, we have not done such a good job of that in our own 
country. What is happening in Ohio, is our jobs are being 
displaced to China and the workers in Ohio are left behind. It 
is very interesting, what is going on here.
    The first question I really have, is China is now the 
largest holder of United States dollar reserves. Why is that an 
advantage? Of what advantage does that serve the United States 
in this trading relationship?
    Mr. Aldonas. Well, the irony there is that China is 
actually an exporter of capital. A lot of those investment 
dollars flow back into the United States. That money had been 
recently going exclusively into the private sector. We earned a 
rate of return on that that allows us not only to fund the 
obligations, but to create a lot of wealth in the United 
States.
    Representative  Kaptur. Do you have specific examples of 
that?
    Mr. Aldonas. I will tell you what. I can come up with some, 
to lay them out for you in writing, if that would be helpful.
    Representative  Kaptur. Is this direct investment?
    Mr. Aldonas. There is some Chinese direct investment in the 
United States.
    Representative  Kaptur. Or is this portfolio investment?
    Mr. Aldonas. Well, but even portfolio investment, if you 
think about it, flows through to the bottom line in terms of 
the access of companies in the United States to capital markets 
to fund their investments.
    My only point in saying that is that I would probably agree 
with you at the end of the day, China should not be in the 
position of being a surplus country. It is a classic developing 
country. It ought to be in deficit, frankly. It ought to be 
importing capital, as a practical matter.
    The fact that they put themselves in a position with a 
mercantilist trade policy to try and ensure that they have 
preserved their currency reserves and focus on that to that 
extent is perverse in terms of their own development strategy, 
to be honest with you.
    You think about our history in the United States, we were a 
deficit country for a long time as we had tried to attract 
capital and tried to expand across the expanse of the western 
United States. That is essentially what China is trying to do, 
and they are hobbling themselves by maintaining a very, very 
large trade surplus.
    Representative  Kaptur. Well, this is of great concern to 
me. At the same time as I see jobs being cashed out in Ohio, 
China ends up being the largest holder of our dollar reserves.
    I would be very interested in any information you could 
provide for the record on what is being done with those 
dollars, both inside China or outside China.
    Alan Greenspan has said that, overall, the U.S. trade 
deficit, which now totals 5 percent of GDP, is unsustainable 
and is unwise for our country. China is one of the largest 
components of that growing trade deficit. It seems to me we 
ought to focus some attention on that.
    I wanted to get a sense from any of our witnesses today if 
you could give me a feel about the market transition within 
China. If one looks at the millions of businesses that must 
exist and what percentage of them and their contribution to 
their country's economic growth would be defined as state-owned 
enterprises today, what percent would be what I would call 
oligarchical control, those who would come from the state-owned 
enterprises or had political connections in the country and 
managed to end up being CEO of whatever?
    Third, freestanding, independent companies that operate in 
a market sense as we know it in the West. Give us a sense of 
the texture there of what is going on.
    Mr. Aldonas. I could not quote you the specific figures, 
particularly on the middle one, Congresswoman. I think what I 
could say, just as a starting point for further reflection and 
then we can try and come back with more specifics about that, 
trying to match those categories, is if you think about China's 
development where you really see the ability to lift people out 
of poverty over the last 10, 20 years, has really been on the 
coast where you have seen the foreign direct investment, where 
you have seen the private investment, and the opening up of 
those economies.
    That represents between 200 and 300 million people out of 
1.2 billion. What that means, is for the 900 million, 800 
million on the land, while they can do private farming, a lot 
of what goes on out there is still controlled by the state, as 
a practical matter.
    You still do have State controls over work permits, which 
limits labor mobility many times, so the migration to the city 
is oftentimes actually illegal under Chinese law. But, 
nonetheless, they are drawn by the investment in those sectors.
    So I think what you could say based on that is where you 
have seen the strongest growth, and in fact in places like 
Shanghai the strongest commitment to WTO, because they see the 
benefit of liberalization.
    It is precisely where you have got private enterprise, 
where you see the least movement in the direction I think we 
would all like to see, is where you do have that stronger State 
control, and that is in the countryside.
    Representative  Kaptur. Well, we have seen that in 
economies that are transitioning from what had been called 
Communist to something else. I mean, the traditional pattern 
has been oligarchical control, first of the market mechanism 
and then of the political system, almost hand-in-hand.
    My guess would be, in China, it is no different than in 
some of the other countries I am thinking about as I make this 
statement.
    So I am trying to get a sense from you. Could any of the 
witnesses provide kind of a textural feel as to the ownership 
of these enterprises, as I have asked?
    Ms. Westin. Congresswoman, I do not have that information 
at my fingertips. We will certainly try to get back to you.
    I did not quite understand your second category, though.
    Representative  Kaptur. All right. Well, I would say those 
who had been known in the former regime as having a great deal 
of political power and who then move into control of given 
companies.
    Ms. Westin. All right.
    [The information requested appears in the appendix.]
    Mr. Aldonas. Can I come back on that one, Congresswoman? It 
is an interesting question. There was a period of time as China 
started to open up, from 1979 forward, where there was this 
possibility of wearing two hats, literally being a government 
official as well as a part of it.
    That was part and parcel, frankly, of the run-up, in terms 
of the complaints about corruption, to the events in 1989. It 
led to changes that divorced the ability of the People's 
Liberation Army and a variety of other government officials to 
wear those two hats, and you have seen a pretty strong movement 
away from that.
    The other thing that I think people are finding, is that 
you need professional management to create enterprises that can 
compete in the world economy, so increasingly you are seeing 
not a turn to people who are former Party members and things of 
that nature, but if you want to put up a wafer fabrication 
plant on the outskirts of Shanghai right now, you are going to 
have to import the management from somewhere else because you 
need that kind of management and ownership to actually drive 
the process in a way that will allow you to compete on the 
world scene. The state-owned enterprises simply cannot do that 
with the kind of ownership or leadership that you are 
describing.
    Representative  Kaptur. I know my timer has expired, but I 
would like to know if any of you could provide for the record 
information as to whether the United States is the major 
recipient of Chinese exported goods, or are other regions of 
the world equally graced. Thank you.
    [The information requested appears in the appendix.]
    Representative Bereuter. Thank you, gentle lady.
    Next, I have on the Senator's list the gentleman from Ohio, 
Mr. Brown, followed by the gentleman from Virginia, Mr. Wolf.
    So, Mr. Brown, you are up next.
    Representative Brown. Thank you, Mr. Chairman. As the 
newest member of this Commission, replacing Representative 
Pelosi, I wanted to make, within my 5 minutes, a brief couple 
minutes' statement, and then have a question for the panel.
    During the 10 years or so of MFN [most-favored nation] and 
PNTR debates, proponents assured us over and over that 
increased trade with China would cause human rights to improve, 
labor rights to develop, democracy to flourish.
    But each year, as we all know, and this Commission needs to 
remind us of that, I think, because of it charge in its first 
paragraph, as trade has increased, China's human rights record 
has gotten worse. The State Department's recent Human Rights 
Report cites crackdowns by China on freedom of speech, on 
freedom of belief, on freedom of association.
    With continued economic success, as Sandy Levin intimated a 
moment ago, the PRC will have an even greater opportunity to 
maintain control over a workforce that can neither protest, nor 
assemble, nor bargain collectively.
    Of course, over the last decade, more Western corporations 
have been looking to invest in authoritarian regimes. 
Statistics show they have moved from developing democracies to 
developing authoritarian regimes, regimes where there is little 
regard for, or interest in, the rule of law.
    In China's case, many, if not most, decisions are made 
about the economy, about the rule of law are made by three 
groups. They are made by the Chinese Communist Party, made by 
the People's Liberation Army which controls a significant 
amount of the businesses, as we know, in China, and are made by 
Western investors.
    There seems to be little interest from any of these three 
major players in China's economy in changing the current 
situation. All three, Western investors, the People's 
Liberation Army, the Communist Party, profit to much from the 
status quo to want human rights and labor rights to markedly 
change.
    About 6 weeks ago, about a dozen Members of Congress and I 
spoke with Zhu Rongji, and one of the first things he told us, 
is he receives a report every day on his desk detailing the 
outbreaks of labor unrest all over China.
    My question is, as China makes changes in its commercial 
law that you advocate and many on this panel have advocated, 
and it seems likely to happen so as they can better comply with 
WTO rules, what sort of changes do each of you foresee in the 
area of worker rights and the area of the right to organize?
    Mr. Aldonas. I think the first and most important thing is 
to recognize that the Chinese themselves treat foreign-owned 
enterprises and their state-owned enterprises differently under 
their own labor law.
    To the extent you see the private sector grow, they are 
going to be subject to a set of rules that actually do allow 
for labor organization the way the state-owned enterprises are 
not.
    Most of the times where you see the labor unrest, it 
actually relates to state-owned enterprises which are, frankly, 
not economic. What they are finding is, as they try and change 
to become economic, they are dumping an awful lot of people, 
either out of the enterprise, or they are finding that they 
simply cannot exist any longer. That is driving a lot of the 
labor unrest.
    So, again, I never want to try and over-sell that point. It 
has got to be the steady accumulation over time, of seeing that 
you have shifted that line gradually so that all enterprises 
are covered by those sorts of freedom, so that individuals do 
have the opportunity to bargain collectively if they so choose.
    Representative Brown. Do you probably believe, in those 
private, non-state enterprises, that the right to bargain 
collectively is markedly enhanced compared to state-owned 
enterprises?
    Mr. Aldonas. Absolutely. Yes.
    Representative Brown. Are the wages different in those? Are 
the wages significantly different?
    Mr. Aldonas. Absolutely. We will give you the documentation 
on that. But I think it is the sort of common-sense notion that 
what you have, just for the reasons you state, in a state-owned 
enterprise, is the state very clearly with its thumb on the 
pulse of everything that goes on in that enterprise in a way 
that is not true with respect to private enterprise.
    Representative Brown. But do not Western investors choose 
China because it is authoritarian and its economic and 
political nature that wages are low, that environmental 
standards barely exist, that workers' standards, if they exist, 
are rarely enforced?
    Mr. Aldonas. That has not been my experience.
    Representative Brown. So why do corporations, Western 
investors, choose authoritarian developing countries over 
democratic developing countries?
    Mr. Aldonas. I do not think you should confuse cause and 
effect. As you have seen China open up over 20 years and allow 
private investment, there has been a flow of capital to the 
Chinese market.
    If you looked at the statistics of where foreign investment 
has gone, it has moved in the direction of China. But it is not 
necessarily because it was authoritarian, it was because you 
have a market of 1.2 billion people opening up.
    Most of the investment, in fact, has gone on on the coast 
where they have opened up. It has not gone to the interior, 
which the Chinese are now trying to encourage. But the point 
there is, it has gone into those sectors that are most free, 
not into the sectors that are most controlled by the state.
    So even under the assumption that the theory was you were 
trying to invest in an area that was governed by an 
authoritarian government, the experience has been, they have 
invested in those parts that the authoritarian government has 
expressly said we are going to allow you the maximum amount of 
freedom we are willing to tolerate in this system, and that is 
where they have invested, not where there is actually State 
control of the enterprise.
    Representative Brown. In the rare moments of candor that 
American CEOs lobbying the Congress during PNTR, they would, in 
fact, acknowledge that their interest was less than 1.2 billion 
consumers than it was in 1.2 billion potential workers.
    Mr. Aldonas. I have to say, that has not been my experience 
either in private practice with my clients, or the experience 
listening to American business people who are investing there 
now.
    Representative Bereuter. We need to move on. I think we are 
going to have a House vote, and I want to get to our two 
colleagues.
    The gentleman from Virginia, Mr. Wolf, is recognized.
    Representative Wolf. Thank you, Mr. Chairman.
    You were representing clients in China before you were 
here?
    Mr. Aldonas. I was representing clients before I went to 
the Senate Finance Committee.
    Representative Wolf. All right. Fine. I just wanted to get 
that on the record. If you can be relatively brief because of 
the time.
    I want to share Mr. Levin's comments. I was in Italy last 
year, taking my wife on a short trip for our 40th wedding 
anniversary. There was a large article about Nestle's and 
another company doing business with Nazi Germany right up to 
the end of the war, and it really did not bring about a change.
    What is the trade deficit today with China?
    Mr. Aldonas. I think they are $80 billion in surplus.
    Representative Wolf. And what was it 10 years ago?
    Mr. Huntsman. It was about $19 or $20 billion.
    Mr. Aldonas. I think it was roughly a quarter of what it is 
now.
    Representative Wolf. A quarter.
    Mr. Aldonas. Yes.
    Representative Wolf. Can you supply for the record what it 
was over the last 20 years, give us each year?
    Mr. Aldonas. Yes.
    [The information requested appears in the appendix.]
    Representative Wolf. Second, we had a briefing by our 
security people saying there is a major espionage program by 
the Chinese Government against our private sector.
    Are you aware of that? Have you had that briefing? Do you 
raise that when you are in China?
    Mr. Aldonas. I did not raise it when I was in China. I did 
not have that briefing. I am aware of that because my clients 
faced it when I was in private practice.
    Representative Wolf. Can you all three get the briefings 
and then just drop a note to the committee that you have had 
the briefing?
    [The information appears in the appendix.]
    Representative Wolf. Do any American companies speak out on 
behalf of human rights? Do you have any record? Can you supply 
for the record all the companies that have spoken out, if 
somebody is dragged out of a factory because he happens to 
worship at an evangelical church, that the company has spoken 
out for them? Do you have any record, off the top, that you 
would know of?
    And have any business men who are Catholics spoken out for 
Bishop Su who has been in prison for a number of years because 
he gave Holy Communion to a Member of the House? Do you know of 
any American businessmen that have spoken out on that case?
    Mr. Aldonas. No.
    Representative Wolf. All right. Do you think it would be a 
good idea if the American business community did speak out on 
those cases?
    Mr. Aldonas. I think it would be a good idea if American 
business----
    Representative Wolf. Do you know if the American Chamber of 
Commerce in Beijing has ever spoken----
    Mr. Aldonas. Congressman, do you want me to answer the 
question?
    Representative Wolf. You did. You said no. You said it 
would be a good idea.
    Mr. Aldonas. But do you want me to----
    Representative Wolf. My time is running out. Do you know if 
the American Chamber of Commerce at Beijing has ever spoken out 
on those cases?
    Mr. Aldonas. Congressman, you know what the American 
business community does do in China, is largely what it does in 
the United States, which is invest in its community.
    Representative Wolf. No. But there are----
    Mr. Aldonas. They commit dollars to real projects on the 
ground that help the Chinese in the same way they do in their 
own neighborhoods here in the United States.
    Representative Wolf. But I think you sell the American 
businessmen short. American businessmen in the United States 
speak out on many important social issues, and they do it 
around the world. We just saw the Secretary of Treasury, in 
Africa, speaking out on AIDS and speaking out on debt relief.
    I think, and I will not have any more questions, frankly, 
some of you in the Administration have not listened and read 
President Bush's speeches, because I hear him say and speak out 
very eloquently and very passionately on this.
    Then when it gets down to the second level and the third 
level--and I think the more we are speaking out and advocating 
on the persecuted, religious freedom, human rights, the better 
we will be and the more likely they will change.
    Also, I am glad American businessmen are invested in China. 
I am glad they are investing. But also, if they were to speak 
out, if American business in China were to speak out, they 
would carry much more weight than a Member of Congress or 
anybody else.
    I have seen relative silence when business trips go to 
China, almost total silence on behalf of American businesses 
operating in China. Not a lot of people in the Department of 
Commerce or the trade representatives speak out on behalf of 
human rights. I think it would be good if you got the 
statements that President Bush made, spoke about, and 
advocated.
    At the beginning of every meeting, even though we want to 
trade and do business--because we do want to trade. I agree 
with the gentleman, the more we are trading with people, the 
less likely there will be war.
    But if we put it at the beginning, we make sure it is a 
priority and we publicly stand with, and we also do what 
Secretary Baker would do, and Secretary Shultz would do, we 
would go meet with the dissidents, go, as the Secretary of 
Commerce did, to the churches and worship with the people. We 
would send a message a lot more than we are currently doing.
    Mr. Aldonas. Well, just for the record, when I was in 
Shanghai, I did go to church and it was----
    Representative Wolf. But was it an underground house church 
or a recognized church?
    Mr. Aldonas. Well, in fact, it was a recognized church. And 
trust me, there were still Chinese agents sitting outside the 
church watching me go in. And I went there----
    Representative Wolf. But did you try to go to an 
underground house church?
    Mr. Aldonas. But I did go to church. [Laughter.]
    And part of that was trying to make a statement to the 
folks who I knew were following me that I was going to church 
in China. I wanted to exercise my rights of freedom while I was 
there.
    Representative Wolf. Did you speak out for Bishop Su?
    Mr. Aldonas. I thought that was, at least at my level, a 
fairly eloquent statement about my willingness to try and 
exercise my right while I was there, along with other Chinese 
and with other foreign citizens who were in Shanghai on a 
Sunday.
    Representative Wolf. Do you think just going to church 
spoke out for Bishop Su? Do you think that that spoke out for 
the 200 people that are in Drapchi Prison from Tibet, the 
Buddhist monks, the Buddhist nuns, the evangelical house 
churches? Your going to church spoke out on that? You should 
raise that in every issue and every meeting that you have.
    I have no further questions.
    Mr. Aldonas. I think, if you are the Under Secretary of 
Commerce and you are there on a very public visit, and you go 
to church on Sunday, I think that does make a statement, 
Congressman.
    The Chairman [presiding]. All right.
    Representative Bereuter. We have 10 minutes left, Mr. 
Chairman, so I must regretfully pass and catch up with you 
later.
    The Chairman. All right. Congressman Pitts, do you want a 
few minutes anyway?
    Representative Pitts. Thank you, Mr. Chairman.
    The Chairman. Then we will continue.
    Representative Pitts. Thank you, Mr. Chairman. Thank you 
for your testimony.
    And just for general information, I raised the same issue 
that Congressman Wolf did in the last hearing, then had a visit 
from the Chamber of Commerce. A couple of businessmen told me 
that they had privately raised human rights issues with the 
government when they were there in China.
    I just wanted to ask one thing. Some of you raised the 
issue of independence of the courts. I think, Ms. Westin, you 
mentioned the lack of independence of the courts.
    What were the Chinese officials' responses when you raised 
this issue with them? Did it seem that they intended to allow 
or to strengthen the independence of the courts? How can our 
government encourage further independence of the courts there?
    Ms. Westin. Yes. I do not want to leave you with the 
impression that, when we met with Chinese officials, we were 
raising issues like that. We were talking about what they were 
doing to implement the WTO reforms.
    So meeting with various officials, including some members 
of the Supreme People's Court, they were telling us of the 
process they were going through with judicial reform.
    Part of it was establishing, as I have mentioned, these 
mid-level and higher-level courts to deal with the foreign 
companies that bring cases. Part of it is working to make sure 
that judges get proper training so that they are making 
decisions based on law. So these were the things that they were 
telling us that were in process.
    Representative Pitts. Would any of the rest of the panel 
like to address that issue of independence of the courts?
    Mr. Aldonas. Congressman, the same basic experience was 
that what they have done and what they have in process looks 
good on paper.
    The real question, is when people have the opportunity to 
test that and whether they can vindicate their rights through 
the system. I think only time will tell. We have not really 
started to see enough of that bubble up through the system to 
be able to get a good measure of it.
    Representative Pitts. Thank you.
    Mr. Chairman, I am going to submit the rest of my statement 
for the record and I am going to go vote.
    [The prepared statement of Congressman Pitts appears in the 
appendix.]
    The Chairman. Thank you, Congressman, very, very much. I 
appreciate your taking the time. I know it is often a great 
distance to travel over from the other body.
    I would like to ask all of you, very briefly, and ask you 
to be short in deference to the next panel--the major premise 
of this Commission's activities is that the rule of law will 
help move China toward protection of civil rights, honoring 
human rights, and more toward an independent judicial system, 
etc.
    But Congressman Wolf raises a good question, basically: Is 
it enough? It is a bit presumptuous to say this as Americans, 
but nevertheless, that is our goal as human beings morally, as 
Americans at a moral level and a human level, where we believe 
that human rights should be honored and protected worldwide, 
regardless of where.
    But the question is, at what point does pushing for 
honoring human rights in China become counterproductive? We are 
working to help China develop a stronger rule of law, not only 
in the commercial area, but in the civil and political area? 
Where is that line?
    That is, when does the advocacy of human rights, and only 
human rights, irrespective of anything else, help, and when 
does it start to hurt and detract from our efforts? Some of you 
have a lot of experience. Grant.
    Ms. Westin. And I can easily defer to the Administration 
because GAO does not serve as an advocate, really, on any 
position.
    The Chairman. All right. Grant.
    Mr. Aldonas. Honestly, Mr. Chairman, I think it is when you 
start to create a backlash against the very people you are 
trying to help. When I think about Ned Graham's work on behalf 
of religious freedom in China, Billy Graham's son, what he 
would say consistently is that there is a level of pressure in 
acting on behalf of your own values that is important as an 
example to the Chinese. It is not a direct confrontation to 
their question about who runs China so much as an expression of 
your own values.
    But at the point where you encourage the State to focus 
back on the very people you are trying to help, whether it is 
in the Christian community or whether it is more broadly than 
that, Falun Gong, whatever it might be, I think you have 
stepped too far, as a practical part of that.
    I do not so much see that as a part of WTO compliance and 
the development of the rule of law, as it is really trying to 
encourage the Chinese to understand they will succeed at what 
they want to do on behalf of their own citizenry, in their 
economic sphere where they seem focused, by trying to encourage 
the release of human freedom at all its levels. That is 
something I think you can say without having to trigger a 
backlash against the various people you are trying to help.
    The Chairman. Mr. Ambassador.
    Mr. Huntsman. I agree completely with what Grant said. I 
think what we also need to realize, is that more and more there 
are students here in the United States, tens of thousands of 
them, and they are not learning Marxism and Leninism, they are 
studying Jeffersonian principles. They go back and apply those 
in China. I think they realize that we here in the United 
States have certain attributes about us. We will be very 
competitive in the free market, while at the same time we will 
espouse certain principles.
    There will always be a balance that comes out of the United 
States, and I think increasingly China will understand that and 
they will learn how do deal with it without recoiling in horror 
whenever we want to talk about certain things.
    But I also think we need to see this in the fuller spectrum 
of time. That is, the year I was born, China launched the Great 
Leap Forward, a disastrous program that left 30 million dead of 
starvation. That was then followed up by the great proletarian 
cultural revolution, which was a great policy debacle for 
China. Then the Open Door policy followed shortly thereafter, 
once Deng Xiaoping was able to consolidate his rule in the late 
1970s, and you look at the progress that has taken place since 
then. So, I tend to look at things based upon how long I have 
been around and the progress that has been made.
    I tend to think we do not look enough at the transformation 
that has occurred when we go back to the late 1950s or early 
1960s vis-a-vis where we are today. I think sometimes we need 
to take stock of some of those changes as well.
    The Chairman. Thank you. Thank you very, very much. This 
has been most productive. We will get back to you on a timeline 
and benchmarks for adherence to the commitments of the WTO. 
Thank you.
    Our next panel consists of Chris Murck, chairman of the 
American Chamber of Commerce in Beijing and president of APCO 
Associates in China; Professor Donald Clarke of the University 
of Washington Law School; and Jeff Fiedler, who is former 
president of the Food and Allied Services Department of the 
AFL-CIO.
    First, Chris Murck, chairman of the American Chamber of 
Commerce in Beijing. Mr. Murck.

  STATEMENT OF CHRISTIAN MURCK, CHAIRMAN, AMERICAN CHAMBER OF 
                    COMMERCE, BEIJING, CHINA

    Mr. Murck. Thank you very much, Mr. Chairman. I am honored 
to appear before this distinguished body and am pleased to 
hear, by your questions to the prior panel, that the American 
Chamber of Commerce in China is known to you.
    I would ask that my written testimony be submitted for the 
record, and I will just make a few remarks.
    The Chairman. It will be included for all of the panelists.
    Mr. Murck. I have framed my testimony in terms of the rule 
of law as it affects the business environment in China rather 
than specifically with reference to the World Trade 
Organization accession commitments because I think the rule of 
law is a broader issue than merely WTO, and cannot really be 
discussed solely within that framework.
    By rule of law, the business community focuses primarily on 
transparency and consistency. By transparency, we mean the 
promulgation of laws and regulations that have been developed 
with participation by affected parties and the general public, 
and which are easily accessible, objective in their terms, and 
clearly understandable.
    By consistency, the business community refers to fair, 
reliable, and non-discriminatory application and enforcement 
not only of laws, but also of regulations and contracts.
    In 1979 when China began its reform progress, it is a fair 
statement that it did not have a legal system. In the years 
since then, remarkable progress has been made to draft a large 
body of law, to reestablish and improve the court system, to 
reestablish the legal profession. As such, there are now 300 
law schools in China, where in 1979, there were none.
    So, I think we can say today that China does have a legal 
system, but it is also clear that that legal system is neither 
transparent, nor consistent. We have viewed this as a major 
problem and we have been a strong voice of support for 
strengthening the rule of law in China on those grounds.
    About a year and a half ago, we produced a white paper for 
2001 which noted the progress that has been made over the 20-
some years since the current reform process began, but also 
said that in our view it had stalled, and with respect to rule 
of law, we were even in some sense moving backward.
    The WTO accession package in this area, as in others, has 
revived somewhat this process by making explicit a series of 
new commitments which are extremely important. I would just 
like to note two of them. They have been mentioned by the prior 
panel. I will just reiterate.
    One of them, is to enforce only published laws and 
regulations, thus eliminating the legal force of internal 
documents, which has been a major problem for the business 
community, and to make laws and regulations available before 
their effective date, in some cases, for comment by the general 
public.
    A second major commitment is ``to administer,'' and I am 
quoting here from the Protocol, ``in a uniform, impartial, and 
reasonable manner all its laws, regulations, and other measures 
of the central and local governments governing its trade and 
foreign investment regime.''
    These commitments are important statements of principle. 
They are, however, particularly the commitment with respect to 
uniform, impartial, and reasonable enforcement, extremely 
difficult to judge. It is not as objective as lowering a tariff 
rate or increasing a tariff rate quota.
    These criteria will be harder from our point of view and 
from the Chinese point of view in terms of assessing whether or 
not they have actually lived up to them.
    In my own view, this will be a long process. I would view 
it as a 10-year effort to establish a legal system which is 
transparent and consistent in the terms in which I have 
mentioned it above.
    I think that process requires diverse approaches, not only 
from the business community, but also from governments 
involved, from multilateral agencies, from foundations, from 
the human rights community, and from many others.
    The exact outcome of it cannot be clearly predicted. 
Although transparency and consistency are at the core of any 
legal system that we would characterize as respecting the rule 
of law, it by no means accounts for all of it.
    We hope that the United States Government, which has been a 
strong spokesman and critic of China with respect to rule of 
law, will in the coming years begin to fund in a material way 
capacity building efforts, which it has not done to date, 
particularly by comparison with the Europeans.
    We have not been players in providing technical assistance 
and training. That began to change only last year, with a $3 
million appropriation, most of which went to one program run by 
Temple University in coordination with Qinghua University in 
Beijing. We see signs of new commitment and new effort by the 
U.S. Government in this respect and we would strongly encourage 
that.
    I particularly recommend that you examine the Commercial 
Law Development Program in the Commerce Department, which is 
barred from activity in China because it is funded partially by 
AID funds, which are, as you know, restricted.
    Mr. Chairman, thank you very much, again, for the 
opportunity. I look forward to your questions.
    [The prepared statement of Mr. Murck appears in the 
appendix.]
    The Chairman. Thank you, Mr. Murck.
    Next, Professor Clarke.

  STATEMENT OF DONALD CLARKE, PROFESSOR OF LAW, UNIVERSITY OF 
                    WASHINGTON, SEATTLE, WA

    Mr. Clarke. Thank you, Mr. Chairman and members of the 
Commission. I am very pleased to have the chance to come before 
you today to offer you some thoughts on WTO implementation in 
China and the rule of law.
    Since you have my written testimony, I am just going to 
highlight a few areas of that right now.
    The first issue I want to highlight is the debated issue of 
whether China's WTO obligations, to the extent that they call 
for enforcement of private rights, are directly and immediately 
enforceable within the Chinese legal system. I raise this issue 
because Chinese law, remarkably enough, is unclear on this 
issue.
    Nevertheless, I believe the only realistic position to take 
is that they are not. That is, in China, as in the United 
States, WTO obligations become part of the Chinese domestic 
legal system, enforceable by domestic courts only, when Chinese 
Government bodies issue appropriate rules requiring courts and 
other government bodies to enforce or implement those 
obligations.
    That said, however, we should recognize that in some cases 
China has already issued the necessary regulations, and where 
it has not, it is a relatively simple matter to do so. Those 
regulations do not necessarily have to be promulgated by the 
National People's Congress after a full legislative process.
    In some fields, such as, for example, enforcement of 
judgments or procedural rights, it would be possible within the 
Chinese system for the Supreme People's Court to issue a 
directive instructing lower courts to implement those 
obligations. Of course, procedurally, that is a much simpler 
matter.
    The next issue is that of local government measures. There 
is a substantial and legitimate concern that local governments 
within China might take measures that are inconsistent with 
China's WTO obligations.
    I have mentioned in my testimony an example of that in 
recent legislation from Zhejiang Province, that at least on its 
face seems to grant privileges to Taiwanese investors that are 
inconsistent with MFN principles.
    Now, China, in this respect, is not like the United States 
and other Federal systems. As you know, Chinese local 
governments have no legal power to defy the central government.
    Because the central government has the legal capacity to 
require local governments to conform to WTO obligations, it 
therefore, under WTO rules, has the obligation to do so and it 
would be in violation if it did not.
    As you know, though, to say all this does not solve the 
basic problem, which is that local governments do, in fact, 
enjoy a considerable amount of de facto autonomy from Beijing 
for various institutional reasons that I will not go into here, 
so they may in fact come up with inappropriate regulations and 
measures, and the central government may be unable, as a 
practical matter, to get them abolished.
    I just want to make two comments about this. First, the 
failure of the central government to get such regulations 
abolished is not necessarily an example of its faithlessness in 
the WTO context. China is a big and not very well-governed 
country, and some things are very hard to do.
    The second comment, is that China's trading partners are of 
course not helpless in the face of such violations. The dispute 
settlement process is a regular part of WTO life, and violative 
measures can be identified and sanctioned.
    Finally, I want to say a few brief words about prospects 
for the rule of law in China. In the United States and in the 
West generally, we tend to identify rule of law with rule of 
courts. Thus, for example, the Working Party on China's 
accession insisted that administrative rulings in China should 
be made appealable to the courts.
    But this procedure rests on an assumption that courts and 
judges are better trained to analyze legal questions and more 
likely to be fair and unbiased than administrative agencies.
    Chinese courts, I believe, at present simply do not have 
the capacity to play the role that is expected of them in the 
standard model of the rule of law. Chinese courts are weak. 
They are dependent on local government for funding, and are 
staffed, by and large, by officials who do not know a lot about 
law. Perhaps 10 percent of Chinese judges have undergraduate 
degrees in law, and a large number have no college degree in 
anything.
    Thus, it would be, I think, more realistic to think of them 
not as courts, but as something we might call perhaps a legal 
adjudication office. Instead of calling their officials judges, 
which brings to mind a dignified, black-robed official with a 
high degree of legal training, we might better call them 
hearing officers or some other name that better reflects their 
essentially bureaucratic and administrative role.
    Unlike United States courts, Chinese courts have effective 
jurisdiction over only a limited class of legal rules, and a 
vast part of China's legal system is still under the effective 
and sole control of government administrative bodies.
    Now, what is the policy consequence of this? I think the 
policy consequence is that it would be profoundly unrealistic 
at this time--at this time--to keep looking to China's courts 
as the best potential source of rule of law values.
    Reading the Working Party report and other commentary, I 
get the impression that if the process is not ultimately 
appealable to courts it is considered, ipso facto, flawed, but 
that it is all right to relax and stop worrying once a court 
has been given the last word. I think both of these assumptions 
are wrong.
    I think there is no substitute for an informed 
understanding of the particular domestic tribunal that is 
proposed as the final arbiter of any question, and that nothing 
is gained by looking at whether it is labeled administrative or 
judicial.
    Since I have about a half a minute left, I want to address 
one question which came up in the last panel, which is whether 
the use of arbitration by foreign businesses reflects a lack of 
confidence in the legal system.
    I think it would be a mistake to look at that as a sign of 
lack of confidence, whether or not this lack of confidence 
exists. First of all, you cannot opt out of the Chinese legal 
system by using arbitration because you still need the Chinese 
legal system to enforce your arbitration award.
    Second, arbitration is a very, very common part of business 
agreements all over the place, all over the world, in all 
countries. If you look at your credit card agreement, your bank 
agreement, your brokerage agreement, you will probably find 
that you have agreed to arbitration yourself even in this 
country.
    So that is all I have to say on that, and I will be very 
happy to answer any questions.
    [The prepared statement of Professor Clarke appears in the 
appendix.]
    The Chairman. Well, thank you very much.
    Appreciate it.
    Next, Mr. Fiedler.

 STATEMENT OF JEFFREY L. FIEDLER, CONSULTANT, FOOD AND ALLIED 
       SERVICE TRADES DEPARTMENT, AFL-CIO, WASHINGTON, DC

    Mr. Fiedler. Thank you, Mr. Chairman.
    I, too, will enter my statement into the record and will 
make some additional comments based on the government's earlier 
testimony, and some questions and some statements that folks 
have made.
    First, though, let me say that I do not think, as a layman, 
that China has a legal system. I view it as a system of control 
that enables the Party to maintain its power. That is its 
purpose. Its purpose is not to adjudicate disputes among 
people, it is really to keep control of people.
    There was a statement made that transparency is important, 
that commercial law may lead to the rule of law or a greater 
sense of the rule of law. I was sort of hopeful that, after we 
lost the political debates on PNTR and MFN, that we would end 
the discussion that capitalism brings democracy, and now it is 
commercial law brings the rule of law.
    I do not think that that is what it is all about. I think 
that a great deal more goes into the building of civil society, 
and one of those elements of civil society is a vibrant, free, 
and independent labor movement which does not exist even in 
China's private enterprises, United States companies, and is 
not likely to exist in any United States company.
    As a matter of fact, the only thing apparently being 
imported into U.S. companies these days is the Party has said 
that every foreign-owned enterprise now must have a Communist 
Party branch in it. They were more tolerant of that not 
existing before, that having been precipitated, I believe, 
largely by Falun Gong activity.
    The biggest risk to the WTO is worker unrest. I find it 
interesting that two of the government witnesses--I do not 
consider Ms. Westin to be a government witness in the truest 
sense--only answered the question of worker unrest in the 
questioning, not in their testimony.
    I was part of the Council on Foreign Relations' Task Force 
on China and the WTO, where the largest single greatest concern 
among those, some eminent, some not so eminent like myself, 
members of that task force, was worker unrest. It is the 
dismantling of the State enterprises, it is the slowing of the 
pace of the dismantling of the state enterprises because of the 
prospect of worker unrest that is going to slow compliance. I 
believe that to be true.
    I also believe that the policy question that should be put 
before this Commission and the U.S. Government generally, is 
what are we going to do as a government?
    What is the Congress going to do, what is the 
Administration going to do, when China violently represses 
workers when, and if--and I tend to believe when--worker unrest 
begins on scale and spreads from city to city? What are we 
going to do? That is something I believe this Commission should 
address.
    By the way, just a couple of comments. I do not favor the 
U.S. Government funding any training of any so-called judges or 
training anybody in WTO compliance. China has enough hard 
currency. It is throwing it all over the United States.
    U.S. business that would benefit most directly from it has 
plenty of money, too, to conduct that training. Worker 
taxpayers should not pay for training of judges who repress 
workers in China today. It is just an unacceptable use of U.S. 
taxpayers money.
    I will stop early.
    The Chairman. Save it up for later.
    Mr. Fiedler. It does not take much to get me going.
    [The prepared statement of Mr. Fiedler appears in the 
appendix.]
    The Chairman. Thank you very much, Mr. Fiedler.
    Let me just take up on that last point about helping China 
develop a legal system.
    I wonder, Mr. Murck--Mr. Fiedler's point is whether 
American workers and companies, and American taxpayers, should 
pay to help a country that basically subjects most of its 
people to a living standard and political standard which we 
would find unacceptable, given the fact that China has got huge 
currency reserves.
    Mr. Murck. Let me discuss that in a slightly broader 
context. Obviously, from my testimony, you can tell that I 
disagree with Mr. Fiedler about the policy course that the U.S. 
Government should pursue.
    Just a point of information. China's foreign reserves are 
invested predominantly in United States Government bonds rather 
than anything else. If you look at the inflow of foreign direct 
investment into China since 1979, and Nicholas Lardy who is 
here at Brookings has done this, it is almost exactly matched 
by the outflow of Chinese direct investment abroad, plus an 
increase in foreign reserves, plus the errors and omissions 
line.
    That is very interesting because that does show, as Mr. 
Fiedler suggests, that China has never needed foreign direct 
investment purely for funding. They have a 40 percent savings 
rate and they have enormous liquidity in the banking system.
    The problem is, they need foreign direct investment, and 
have always needed it for the transfer of management 
technology, for the allocation of capital to economically 
viable enterprises, and for the transfer of technology.
    Part of that--and I know Mr. Fiedler will disagree with 
me--when American companies come into the market is a higher 
level of wages and a very different way of treating workers.
    I do believe he is correct in saying that compliance with 
WTO in itself, and even the establishment of a broader rule of 
law in the sense in which I have outlined it, will not 
necessarily lead to the establishment of a free trade union 
movement as we know it in the United States.
    But the rights of workers, as they experience them, have 
been significantly impacted by the fact that there are large 
foreign establishments, such as the Shanghai General Motors 
plant and others funded by American investment. That has been a 
major contribution and a major improvement.
    The Chairman. Could you touch a little bit on EU assistance 
in China? I think, parenthetically, you mentioned or suggested 
that perhaps the EU was more heavily involved than the United 
States.
    Mr. Murck. The European Union has been active in this field 
for almost a decade. Their funding is at the level of 
approximately $10 million a year. They are the largest single 
player in this area.
    The second largest is Germany, acting individually. The 
GTZ, the German Technical Assistance agency, has trained 
MOFTEC's lawyers in trade law and WTO compliance so that it 
should be no surprise to anybody that MOFTEC takes a rather 
European view of the recent United States action on steel 
tariffs.
    The next largest player would be Canada. The Ford 
Foundation has been active. After that, it drops way down in 
terms of dollars to a couple of small, but effective programs 
like Asia Foundation, which has a program of grants.
    There is a new program launched by the U.S.-China Business 
Council which is funded by grants and by assistance from many 
corporations which has been active. The U.S. Government, 
however, until last year, was a very strong spokesman, but 
actually did very, very little in this area.
    The Chairman. Mr. Fiedler, I deeply appreciate your 
comments. Certainly, no one questions your integrity, or that 
of anyone on the panel here. But my question is, given the 
current reality, that is, China is China, there is a WTO, and 
China is a member of the WTO, what should this Commission do to 
help advance things. You can choose whatever you think makes 
sense, either commercial law, rule of law, human rights, a 
combination, or whatever. What do we do?
    Mr. Fiedler. Well, I certainly accept reality. The WTO 
exists. China has gained entrance to it. It has said that it is 
going to comply with 600-some-odd different aspects of various 
and sundry agreements associated with the WTO.
    I am saying to you that in all likelihood they will not, 
and never intended to on the schedule everyone else thinks they 
are going to, because of what they call social stability.
    The changes that are required for them to comply are so 
dramatic and so disruptive of significant numbers of people in 
urban areas, that it is just not going to happen on time.
    The Chairman. So what do we do?
    Mr. Fiedler. Well, the Council on Foreign Relations was 
talking about alternative dispute mechanisms outside the realm 
of the WTO, its fear being that regular WTO dispute mechanisms 
are going to be overwhelmed, and therefore the world trading 
system undermined. You have to understand, I do not care so 
much that the system is undermined by the Chinese or not.
    The Chairman. But do you have any recommendations as to 
what the Commission should do to advance our goal and be 
relevant somehow in the world?
    Mr. Fiedler. What, on compliance? I think you are doing 
plenty of things on compliance. I do not have any other 
suggestions on how you monitor and get compliance. I do not 
think you get compliance until and unless the Chinese want to 
give it, period. There is nothing you can do. What are you 
going to do?
    The Chairman. Sometimes you can help influence a result.
    Mr. Fiedler. I think that the U.S. administration is trying 
to, and the business community is trying to. I particularly 
would like to see workers organize so that there is not the 
kind of unrest that is likely to disrupt the WTO.
    The Chairman. I doubt that we will solve it here today. 
Thank you.
    Mr. Fiedler. I did not expect to when I came.
    The Chairman. Thank you. All right.
    Next, Mr. Findlay.
    Mr. Findlay. I actually thought your testimony was 
fascinating, Mr. Fiedler, very frank and candid. But I sensed 
despair in your testimony, as the Chairman did. I took you to 
say that, given the reality that China exists and that it has 
acceded to the WTO, that nothing can change.
    Are there any steps that the U.S. Government can take, not 
the Commission, which was Senator Baucus' question? Also, 
United States businesses in China. Are there steps that we 
could take to enhance labor rights in China?
    Mr. Fiedler. The first thing that the Administration could 
do, is that the President of the United States, when he spoke 
in Miami on Cuba, called for the development of a fully free 
and independent labor movement in Cuba. I have never heard the 
President of the United States, whether it be this one or the 
previous one, do anything similar as regards China.
    It is not enough for me or for our government to send you 
and the Labor Department over there to teach people how to do 
things better in a labor context. We have to speak out for 
workers who lead their colleagues in a protest because they 
got, they thought, a raw deal.
    The deal gets bettered after the workers demonstrate and 
after they start to talk to workers in other oil fields. But 
the four entrepreneurs, if you will, who suddenly got the 
gumption, are in jail today because they organized their peers. 
What did the U.S. Government do? Did not hear a word. Did not 
hear much out of the Congress either, sir.
    So I am sorry if the top of my priority is not how China 
lets some product of the United States get into the country in 
a timely fashion, when I am much more interested in the fate of 
the workers who are producing the products inside China.
    Mr. Findlay. And I think that should be all of our concern. 
I am grasping for ideas beyond rhetoric that the U.S. 
Government can do through any of our programs in our 
department, or perhaps through work with the Department of 
State.
    Mr. Fiedler. Look, the Clinton Administration, in 1994, 
when it delinked trade from human rights, talked about a code 
of conduct for U.S. corporations, which it could not get 
anybody to do.
    We went over to the White House at that time and said, 
look, codes of conduct are worthless unless the code of conduct 
says workers have the right to organize. It is U.S. policy that 
we think everybody should have the right to organize. I said, 
but if you do that, United States companies would have to leave 
China.
    So you are asking me what, short of the establishment of 
freedom of association, is acceptable in incremental fashion to 
make workers' lives better? I am sorry, I do not accept 
anything short of freedom of association. And it is not 
rhetorical. It is not at all rhetorical. It is a deeply held 
belief.
    Mr. Findlay. I think the question is, how do we advance 
freedom of association?
    Mr. Fiedler. Talk about it. The U.S. Government does not 
talk about it.
    Mr. Findlay. Then what, beyond rhetoric, can the government 
do? Is there nothing that we can do?
    Mr. Fiedler. Then you are going to get into things which 
you have already rejected, which are linkages. We have enough 
domestic fights about including labor rights in international 
trade agreements. We seem to have lost that fight as well.
    So you are asking me again for all of the things that we 
have lost, and to come up with something short of that is 
acceptable to you when we laid out what we essentially believe 
is the minimum necessary.
    Mr. Findlay. I am not even asking for ideas that are 
acceptable to me, I am just asking for ideas. But it sounds 
like----
    Mr. Fiedler. I said to you that the United States 
Government should impress upon the Chinese that it is matter of 
United States policy that it ought to allow the establishment 
of free and democratic trade unions. I do not think there is 
much more you can do.
    Mr. Findlay. Let me ask a question that I think Professor 
Clarke raised in his testimony. I am just a little bit 
confused. I took you to say that we should not worry too much 
about the lack of a judiciary that looks like our judiciary 
because the rule of law can be put in place through other means 
such as administrative bodies. Is that what you were saying? If 
it is, could you explain more what you mean by that?
    Mr. Clarke. I am glad you asked the question so I can have 
a chance to enlarge. Actually, it was sort of the opposite. I 
was trying to say that because the courts and the judiciary are 
so weak, I think it would be a mistake to concentrate in a way 
that I see people doing a lot, in thinking that the courts are 
essentially like U.S. courts or courts in Western countries 
except that they lack a little something, they lack, maybe, 
some training or something like that, and that therefore, if 
they could be made better trained or more powerful, they could 
be substantial contributors to the building of the rule of law 
in China.
    The point I am trying to make, is that courts at the 
moment--and it may be sometime in the future they will develop 
into that kind of institution--but right now I see them as 
essentially a kind of clerical bureaucratic institution, maybe 
like administrative law judges within a particular government 
department in this government.
    Therefore, programs to train, for example, judges, can 
serve some purpose. I guess I disagree with Mr. Fiedler in 
thinking that these are universally bad ideas. I think one has 
to look at the particular programs and make an individualized 
assessment.
    But one should not, for example--the way I see the Working 
Party having done--think that somehow the problem of arbitrary 
administrative action will be solved if we merely provide for 
an appeal to courts. I do not think that will solve the 
problem. I think we have to look further.
    But because courts are not necessarily going to solve the 
problem, I think one, therefore, has to also look at the other 
possibility, which is maybe that there do exist other 
mechanisms somewhere other than courts that would be useful to 
investigate and to try to support.
    The Chairman. Thank you, Mr. Clarke, very much.
    One of the unique features of our Commission is that it 
sort of merges the separation of powers. We do not have an 
Article 3 judge here on our panel, but we do have members of 
the Legislative Branch, as well as the executive branch, Mr. 
Findlay certainly being one, and now Mr. Aldonas another.
    We are very happy to have you here, Mr. Secretary, as a 
member of our Commission. The floor is yours.
    Mr. Aldonas. Thank you, Mr. Chairman. Of course, obviously, 
the first question on my mind is, when was the last time you 
were in church in China? [Laughter.]
    In all seriousness, the one thing I heard sitting in that 
chair a minute ago was both the Commission and the witnesses 
struggle with a couple of concepts which I know
    I have been trying to give some thought to. This goes to 
every one of the panelists, really.
    How do you measure that progress in the respective areas, 
whether it is on the commercial side, whether it is more 
fundamentally throughout the Chinese legal system, or whether 
it is in the area of labor rights, in part, so within the 
Administration and on the Commission we can establish some 
effective benchmarks that would help guide us in determining 
not only whether we are making progress, but then where do we 
try and reinforce the effort, whether it is through rhetoric or 
whether it is through the programs that we develop?
    Maybe, Mr. Murck, I can start with you and sort of work my 
way through Professor Clarke, and end up with Mr. Fiedler.
    Mr. Murck. Well, the answer to the first part of your 
question is, 2 weeks ago. However, with respect to benchmarks, 
I think it is an extremely difficult thing to do, because much 
of what we are talking about is not a simple thing.
    It is a question of values and a question of behavior. The 
kind of changes we are looking for do imply a reduction in 
administrative discretion, and a reduction in special 
privilege, and a reduction in arbitrary power.
    It will be difficult to evaluate exactly what the progress 
is, particularly because we are looking at this across a very 
large country with very disparate patterns of enforcement in 
local courts.
    I think, with respect to the business environment at least, 
I would look closely at progress in property rights and 
contractual rights. Many of the WTO commitments do run to 
protecting these with respect to the foreign trade and 
investment regime, so the first step, I would say, is to verify 
that that has been accomplished in some way.
    It is my personal belief, and I have discussed some of this 
in greater detail in my written testimony, that it is not 
possible to compartmentalize the rule of law. If you establish, 
for example, contractual rights or property rights for foreign 
investors and foreign participants in the economy, they 
naturally spread to the local competitors and counter parties 
as well, and from there spread into other areas.
    But I do not think there is a clear, easy way to quantify 
this progress. That suggests that the Commission's role as a 
forum and as a place where views, data, and information from a 
wide variety of observers can be gathered and pondered is a 
very important one, not only today, but going forward.
    Mr. Aldonas. Professor Clarke.
    Mr. Clarke. Thank you. I am pretty much in agreement with 
Mr. Murck on that subject. I recently looked pretty closely at 
that because I was writing a paper on whether one can figure 
out whether all these rule of law assistance programs have 
actually done any good. How does one measure whether they have 
done any good? I think it is almost impossible to answer, 
certainly, in a quantitative sense.
    Various economists have tried to do studies where they 
figure out some index of rule of law or contract enforcement, 
then they measure it against gross domestic product, or 
something. But it is never very satisfactory. I think, 
ultimately, if one were to take certain raw numbers like 
percentage of the population in prison, this country would not 
look very good either.
    So I think there is really no substitute for highly 
informed qualitative studies that may need a special commission 
to say what is going on in this particular area, or that 
particular area. But I regret to say, I do not have a good 
answer to the question. I am not sure there is one.
    Mr. Aldonas. Mr. Fiedler.
    Mr. Fiedler. A partial answer could be a reduction in 
number of people being arrested for doing what the average 
human being would think would be something commonsensical, like 
getting back pay for me and 3,000 other people and not having 
to go to jail when I do.
    Mr. Aldonas. That is a fair answer. One of the things that 
the China Trade Relations Act propounded or authorized was the 
idea of programs to look at the rule of law. There had not been 
specific appropriations behind that.
    But if you took a look at that authorization and said, 
where would you dedicate resources if you had them, what would 
top the list of priorities? If I could just sort of go through 
the panel again and identify some priorities we might want to 
focus on.
    Mr. Murck. I would certainly focus on raising the level of 
training and education of the judiciary. I would focus on human 
rights and I would look at areas such as consumer rights and 
women's rights, and at criminal procedure.
    I would look at administrative drafting, because so many 
Chinese laws are very general and they are implemented by 
regulations which are subsequently drafted. So I would 
certainly look in that area. I think all of these things 
deserve attention and they all, in a certain sense, flow 
together.
    One of the great steps forward, which was taken very 
recently, is that the Chinese Government has now moved to a 
single qualifying examination for prosecutors, judges, and the 
bar. That implies that in the future we may see a single legal 
profession across all of these three sets of people, which we 
certainly do not have today.
    In the future, we may see better-qualified prosecutors and 
better-qualified judges. That will be a long-term process. We 
are going to have to wait, I think, until a generation of 
people retire and disappear from the judiciary. But there is 
thought in China about this issue, as well as thought 
elsewhere.
    Mr. Clarke. Were you speaking of WTO implementation in 
particular or human rights advancement in general?
    Mr. Aldonas. In fact, particularly given the ambit of the 
panel, I think WTO is a specific focus. But the Commission's 
focus is actually broader than that in terms of development of 
rule of law.
    Mr. Clarke. Yes. I think it is difficult to come up, on the 
top of my head, with the best way to spend several million 
dollars in 5 minutes.
    The Chairman. We do that here all the time.
    [Laughter.]
    Mr. Clarke. I think, as a general principle, programs that 
focus on bottom-up change can often be more effective than 
programs that just focus on top-down change.
    One example that I might give is, say, legal aid programs 
in China. Not only simply money to fund legal aid programs, but 
also money to fund training of people who are doing legal aid, 
for example, clinics in law schools and things like that. That 
is a kind of a bottom-up approach.
    I think there is a great thirst for that kind of assistance 
and knowledge in China. I think that assistance does not look 
too political and would be welcomed by people in China also.
    Mr. Fiedler. I share Don's view on legal aid, but I am 
fearful that as those folks get more effective, that is being 
demonstrated now in rural areas and in some cases with workers, 
that they are shut down by the government, that they are 
arrested, that they are intimidated.
    I think, to step outside the realm of labor stuff for a 
moment, it would be enormously helpful if every time a U.S. 
businessman were asked for a bribe or to do something illegal, 
that they reported it to the Party Disciplinary Committee.
    That is the only section of the Party that I might help 
these days. The issue of corruption is what is undoing most 
everything in that country. It is undoing a great deal of 
business, it is undoing people's ordinary lives.
    The simple training of judges, the looking at of this, 
that, and the other thing, all these technical aspects of legal 
systems are insufficient.
    Now, the problem is, that requires political will and it 
requires power, and apparently even someone as powerful as Zhu 
Rongji threw up his hands after a while on this problem.
    Mr. Aldonas. Mr. Chairman, if I could just sort of add to 
what Mr. Fiedler was saying. I think we may have identified one 
of the sorts of things we should do on the trade front, which 
is try and encourage China to become part of the WTO Government 
Procurement Code, precisely because it forces that level of 
transparency on the procurement process.
    Thank you very much. I appreciate it.
    The Chairman. Yes. That was very informative.
    I am a little concerned with the dialog--what the 
benchmarks should be and how to measure progress. The basic 
answer I got from two of you, is, gee, it is pretty hard, I 
don't know if it can be done, and so forth.
    It seems to me that we have got to try harder.
    It seems to me that with the rule of law, two main precepts 
are transparency and consistency, and that there are some 
measurements that we can develop. You also mentioned in 
response to Secretary Aldonas' questions some areas where more 
funds might be useful. That implies, at least, an area that 
perhaps can be measured a little bit.
    I am just wondering if I can press you both a little bit 
more to try to give us ideas of what we might be looking at in 
terms of quantifying progress.
    Mr. Murck. I think progress can be discernible. The problem 
is to quantify it. The way I would look at this, for example, 
in my written testimony I discussed at some length the question 
of protecting intellectual property rights, which is a major 
issue for the business community.
    I think, in general, the business community in China has 
agreed that extraordinary progress has been made in the last 3 
years on this front in terms of----
    The Chairman. And it took a lot of work, too.
    Mr. Murck. It took a great deal of work.
    The Chairman. And a lot of pressure by this committee and 
this Congress over the years, and by several Administrations.
    Mr. Murck. There has been sustained pressure by several 
Administrations. What has happened in the last several years, 
is that we are convinced that the senior levels of the Chinese 
Government are now fully understanding of the point that 
intellectual property rights violations damage their own 
economy and their own companies more than they damage foreign 
companies and are a major barrier to further economic progress 
and economic growth.
    That battle has clearly been won. The laws that are now in 
place after the recent revisions of the trademark and copyright 
laws, and patent laws, still have some defects but are 
basically reasonably acceptable.
    The problem we have, is driving this down into local levels 
and getting it enforced consistently by police and courts 
across a very large country.
    On that score as well, there has been some progress. For 
example, the leading anti-counterfeiting group in China is the 
Quality Brands Protection Committee, which this year held a 
ceremony in Beijing and made a selection from all of the court 
cases, hundreds of them that its members had brought over the 
course of the year, and actually selected 10 and brought the 
relevant prosecutors to Beijing and gave them a certificate and 
a nice weekend in Beijing, and some time on television to 
publicize the fact that it is now possible to go to the court 
system for recourse and to put violators in jail. So, on that 
score, we are doing reasonably well.
    There is a great deal more progress to be made on that 
front, and we have to fight it out at the local level, training 
people in groups of 20 and 30, looking at hot spots, and trying 
to make this system work more efficiently.
    We poll American companies every year and ask them what the 
losses are because of counterfeiting. The answer, today, is 15 
or 20 percent of revenue, which is what it was 3 to 5 years 
ago. When we see that number start to go down, then I think we 
will have one indication, at least in this area, that we have a 
more effective legal system.
    The Chairman. Right. Right. Right.
    What are your thoughts about the next generation? I met 
Vice President Hu Jintao when he was here about a month ago. He 
struck me as being very direct, forthright, professional.
    I am curious whether you think this next generation is any 
different or not and what will happen when Hu, presumably, 
becomes President of China.
    Mr. Murck. I think it is very hard to discern at this point 
anything about Mr. Hu personally. In terms of the generations, 
the incoming generation of leaders is about 15 years younger. 
They are much more technocratic. They are much more 
international in their thinking.
    There will be basic continuity of policy direction. Whether 
or not the policy direction will be accelerated, I think, 
remains to be seen. There are those who are hopeful that it 
will be and others who feel that it will not be. I cannot 
really predict how that will come out.
    My biggest worry in China is actually not that incoming 
generation of leaders, nor is it the young people. I think the 
young people are extraordinary and are very much aware of the 
opportunities that the future holds for them.
    My worry is the generation that was born in 1950 which 
experienced the famine at the age of 7 to 10, which got to the 
age of 15 and found the school system closed down, which then 
went into a state-owned factory and worked for 25 years or so, 
and in their early 50s they are now being laid off because 
those enterprises are collapsing.
    That generation is not going to benefit from the new growth 
that the Chinese reform process is generating. In my view, the 
only way to deal with that is to create new social safety net 
institutions to take care of them.
    That is why WTO and the rest of the shift to the private 
sector is, in my view, part of the answer rather than part of 
the problem because you are going to have to have a group of 
viable companies generating a profit that can be taxed in order 
to deal with the huge social problems that arise because of 
that generation which, frankly, has had a very bad deal their 
entire life.
    The Chairman. Thank you. We are going to have to adjourn. 
There is a vote going on, and the House Members have informed 
me they are unable to come back from their vote.
    This has been, by far, the most constructive session of 
this Commission, and I thank all six of you panelists for being 
a part of that effort and helping to make this such a useful 
hearing.
    We have a lot of work ahead of us. This was very thought-
provoking and very, very helpful. Thank you very much.
    The Commission is adjourned.
    [Whereupon, at 4:56 p.m. the hearing was concluded.]
                            A P P E N D I X

=======================================================================


                          Prepared Statements

                              ----------                              


               Prepared Statement of Jon M. Huntsman, Jr.

                              june 6, 2002
    Thank you for inviting me to appear before you today to discuss the 
Administration's perspectives on the United States' trade relationship 
with the People's Republic of China and, in particular, the topic of 
China's WTO implementation. It gives me great comfort sharing the stage 
with two respected colleagues whom I deem it an honor to be associated 
with.
                     china and its wto commitments
    China's accession to the WTO was a decisive victory for reform in 
China. China's reformers clearly understand the values and benefits of 
openness in the economic sphere, and that is why they pursued WTO 
membership. They know that WTO membership will help them transform 
China's economy--and many hope and believe China's society generally--
in positive ways.
    This Administration, like the previous Administration, worked 
closely with China's reformers throughout the many years of WTO 
accession negotiations. The result was a comprehensive set of 
commitments, with which this Commission is familiar.
    With the negotiations now over, we have continued to work with 
China's reformers in the next phase of this process, as China embarks 
on the enormous task of implementing the numerous WTO commitments it 
has made. Clearly, implementation is, and will continue to be, a major 
challenge for China and its reformers. They must find ways to ensure 
that recalcitrant ministries, State-owned enterprises and provincial 
and municipal authorities all act in conformity with China's WTO 
commitments.
    But, China's leadership appears prepared to take on this challenge. 
It is committed to make China competitive in the international economic 
arena in the 21st century. It knows that it needs to develop a market 
economy compatible with the WTO's rules for this to happen. It also 
knows that there will be a price to be paid as this transition takes 
place.
    The ability of China to meet this challenge and implement its WTO 
commitments in full will depend on the outcomes of several sets of 
dynamics.
Internal government coordination
    As we have anticipated, and as we have seen at times during the 
first 6 months of China's WTO membership, there will not always be 
agreement among the central government's ministries on WTO compliance 
matters. Some of the ministries are reform-minded and generally 
understand the benefits of full compliance with WTO rules. The Ministry 
of Foreign Trade and Economic Cooperation (MOFTEC), which had the lead 
in the WTO negotiations, is one example. But, other ministries, 
particularly those with proprietary functions or a domestic focus, may 
be less interested in, and even resistant to, full compliance. In 
certain circumstances, they will be more inclined to seek ways to 
protect their and their constituents' existing rights and privileges, 
and so they will present a particular challenge to the implementation 
process.
Center versus periphery
    We have also anticipated a similar set of dynamics involving the 
central government and the localities. While some provincial and 
municipal authorities appear to see immediate benefits in complying 
with WTO rules, others do not see these benefits or simply do not yet 
understand WTO rules. Historically, Beijing's influence has not 
extended uniformly over local authorities, and at this point the 
breadth and extent of this influence vis-a-vis China's WTO commitments 
remains unclear.
    Realistically, we can expect some non-compliance as these internal 
struggles take place. It is also quite possible, if not probable, that, 
independent of these internal struggles, China will simply be unwilling 
to live up to a particular WTO commitment. As you know, we still have 
compliance problems with longstanding WTO trading partners, and there 
is no reason to expect that China will be different.
Short-term score card
    Looking back on the first 6 months of China's WTO membership, we 
have seen China take a good faith approach to its WTO membership and 
make significant efforts to implement its commitments. China has made 
substantial tariff reductions on industrial and agricultural goods of 
importance to U.S. businesses and farmers. It has begun to take 
concrete steps to remove non-tariff trade barriers in virtually every 
product sector. It has begun to implement far-reaching services 
commitments that should substantially increase market access for U.S. 
services suppliers. It has also repealed hundreds of trade-related 
laws, regulations and other measures and modified or adopted numerous 
other ones in an effort to become WTO-compliant in areas such as import 
and export administration, standards and intellectual property rights, 
among many others.
    With the aid of the United States and other WTO members and the 
private sector, China has also embarked on an extensive campaign to 
educate central and local government officials about both the 
requirements and the benefits of WTO membership. This is an important 
initiative that should help to foster fuller compliance with China's 
WTO commitments.
    There have also been some bumps in the road, such as the delayed 
and flawed allocation of tariff-rate quotas, trade-distorting 
biotechnology regulations, inadequate adherence to commitments 
benefiting foreign insurers, and restrictive measures in the area of 
express delivery services. These are important issues, and we have been 
using all available and appropriate means to obtain China's full 
compliance. Working closely with the affected U.S. industries, we have 
been addressing these and other issues vigorously through bilateral 
means at all levels of the U.S. Government. We have also 
multilateralized these efforts, where possible, by working with like-
minded WTO members on an ad hoc basis, both in Geneva and Beijing, 
where particular issues are having an adverse impact beyond the United 
States. WTO dispute settlement procedures also remain available as a 
tool for resolving these issues.
    Finally, we should keep in mind that we are only 6 months into 
China's WTO accession. China's WTO implementation is a long-term 
process, with major transformations required of China's trade regime 
and many important Chinese commitments, such as trading rights and 
distribution services, to be phased in over the next few years. We 
should continue to be comprehensive in our review of China's 
implementation efforts, but we should also realize that implementation 
is a complicated and ongoing process.
                  u.s. inter-agency monitoring process
    Now, let me say a word about the U.S. inter-agency monitoring 
process.
    Given China's importance as a major trading power and the breadth 
and complexity of China's WTO commitments, the Administration has set 
up a comprehensive inter-agency monitoring effort to determine the 
extent to which China is complying with those commitments. USTR's China 
Office is coordinating this initiative, which is being formally 
overseen by a newly created Trade Policy Staff Committee (TPSC) 
subcommittee whose mandate is devoted exclusively to China and the 
extent to which it is complying with its WTO commitments.
    All TPSC agencies have been invited to participate in this newly 
created subcommittee. The subcommittee held its inaugural meeting on 
December 4, 2001, and, since then, has met on a monthly basis as it 
evaluates and prioritizes the monitoring activities being undertaken, 
reviews the steps that China has taken to implement its commitments and 
decides on appropriate responses.
    The activities being overseen by the subcommittee are taking place 
on several fronts, with continual private sector involvement. In China, 
State Department economic officers, Foreign Commercial Service 
officers, Foreign Agricultural Service officers and Customs attaches 
are very active, gathering and analyzing information, maintaining 
regular contacts with U.S. industries operating in China, maintaining a 
regular dialog with Chinese government officials at key ministries and 
agencies, and working with personnel from like-minded Embassies of 
other WTO members. In Washington, an inter-agency team of experts, 
coordinated by USTR and including principally the Departments of 
Commerce, State, Agriculture and Treasury and the U.S. Patent and 
Trademark Office, is working closely with personnel from the U.S. 
Embassy and Consulates General in China as well as with U.S.-based 
trade associations and companies. Finally, at the WTO in Geneva, USTR 
has been active in voicing concerns about, and working with other WTO 
members to address, problems with China's implementation efforts as 
they arise.
    USTR and other agencies will also be active participants in the 
WTO's annual Transitional Review Mechanism, which I will discuss next.
                the wto's transitional review mechanism
    Consistent with the terms of China's accession agreement, a unique 
multilateral review mechanism known as the ``Transitional Review 
Mechanism'' has been created. It calls for a detailed review of China's 
WTO compliance annually for the next 8 years, with a final review in 
year 10. It requires China to provide detailed information to WTO 
members for purposes of this review mechanism. It also gives WTO 
members the opportunity to raise questions about how China is complying 
with its commitments, and it calls on China to submit responses to 
these questions.
    Each year, the review will be conducted initially in 16 WTO 
committees and councils. Each of those bodies will review 
implementation matters within its mandate and then report on the 
results of its review. Ultimately, the WTO's highest body, the General 
Council, will consider these reports and then make recommendations to 
China about its implementation efforts.
    The new TPSC subcommittee addressing China's WTO compliance will be 
working closely with existing TPSC subcommittees that focus on the 
regular work of the WTO bodies to coordinate U.S. participation in the 
Transitional Review Mechanism, which this year will begin with meetings 
in September. Together, these TPSC subcommittees will solicit input and 
advice from industry and actively press U.S. concerns about China's 
implementation efforts.
    Currently, we are working with China and other WTO members to make 
the Transitional Review Mechanism as thorough and meaningful as 
possible. It is a new mechanism at the WTO, and we need to resolve 
various logistical matters and procedures to implement it properly, 
such as the dates of meetings and the time-deadlines for China to 
submit relevant information and to respond to other WTO members' 
questions. To that end, we have been holding formal and informal 
discussions in Geneva. These discussions have not gone as quickly as we 
would have liked, in part because the Chinese delegation is still 
trying to become familiar with WTO practices and procedures. 
Nevertheless, we hope to resolve these matters soon.
                               conclusion
    Mr. Chairman and members of the Commission, thank you for providing 
me with the opportunity to testify. I look forward to answering your 
questions.
                                 ______
                                 

                 Prepared Statement of Grant D. Aldonas

                              june 6, 2002
    Chairman Baucus, Co-Chairman Bereuter, members of the Commission, 
thank you for the opportunity to appear before the Congressional-
Executive Commission on the People's Republic of China. I welcome the 
Commission's interest in China's compliance with its World Trade 
Organization (WTO) obligations, particularly as it relates to the 
development of the rule of law in China.
    I am pleased to be joined on this panel by Deputy United States 
Trade Representative Jon Huntsman and GAO Managing Director Susan 
Westin. Jon, of course, brings many years of experience in trade with 
China. This is the sort of practical experience that is at a premium at 
this critical juncture in our relationship with China, where so much 
depends on ensuring that we see the benefits of our bargain. I had the 
great pleasure of working with Susan over the last several years, first 
during my tenure as Chief International Trade Counsel to the Senate 
Finance Committee at the time of Congress' passage of permanent normal 
trade relations (PNTR), and now at the Department of Commerce. Susan 
and the GAO have become true partners in the effort to ensure both 
China's compliance with the WTO and Congress' ability to provide 
effective oversight of that process.
    Secretary Evans and I both traveled to China in April to observe 
firsthand China's implementation of its commitments under the WTO. We 
emphasized two points. The first was that our commercial relationship 
provides the foundation for our broader bilateral ties. WTO compliance 
has become the single most important measure of our bilateral 
commercial relationship. In other words, early, transparent, and 
measurable progress on compliance is the primary goal in our bilateral 
trade relationship. The second point we raised may prove still more 
important in the years ahead--that is the inescapable link between WTO 
compliance and the development of the rule of law in China.
     china's wto compliance and the development of the rule of law
    Observance of the law in any society must become a habit--it must 
be woven into the fabric of social relationships. Commerce is one of 
the primary means by which members of a society build those bonds of 
common trust that allow a society to function and provide a guarantee 
of freedom and basic human rights.
    With language bequeathed to us by a long-dead economist, we tend to 
talk about the changes in China as a departure from socialism or the 
advent of capitalism. As has often been the case in the long, sad 
history of socialism, the language of Marx obscures more than it 
reveals. To talk of what has happened in China simply as the advent of 
capitalism on the one hand, or ``socialism with Chinese 
characteristics'' on the other, misses a more fundamental point. The 
point is that, from bitter experience with collectivization, the Great 
Leap Forward, and the Cultural Revolution, the Chinese have been forced 
to confront the fact that all good things in the economic sphere flow 
from one root cause--human freedom.
    Therein lies the most important part of the economic equation that 
the Chinese are currently trying to solve. To reach a higher standard 
of living, the Chinese government has been forced to embrace human 
freedom as the engine that drives both economic growth and innovation. 
The Chinese leadership has demonstrated a willingness to foster 
significant changes in Chinese society in pursuit of a higher standard 
of living. Those changes have been under way for over two decades, 
during which time China has lifted between 100 to 200 million people 
out of poverty.
    Significantly, living economists have come around to a very 
different view of the role of government in the economy than existed at 
the time of either Adam Smith or Karl Marx. Views have changed 
regarding the role government plays in contributing to economic growth. 
On the one hand, there should be little doubt, given the many examples 
we have worldwide, that strong government is essential to a functioning 
market economy. On the other hand, what has become equally clear is 
that there must also be strong constraints on the government's ability 
to intervene in the market and upset the free rein of market forces. 
Government's role is to create the environment in which individuals can 
pursue their own best interest, not to intervene on the assumption that 
the government knows better than individual citizens what is best for 
them.
    What role then does adherence to the WTO and the development of the 
rule of law play in solving that equation? In my view, the Chinese 
leadership's willingness to undertake reforms in their country's own 
economic interest extends to compliance with China's WTO obligations. 
The acid test will, of course, be whether their willingness to 
implement China's commitments translates into action.
    How that relates ultimately to the development of the rule of law 
generally is, in my view, simple and direct. While we should not 
oversell the ability of the WTO, in and of itself, to foster 
fundamental change in China, we should not, at the same time, overlook 
or devalue the positive contribution China's adherence to the WTO can 
make. In adhering faithfully to the WTO, the Chinese government will, 
in the process, set a profound example for its own citizens about the 
benefits that flow from honoring the law.
    I fully expect that the WTO principles of transparency, judicial or 
administrative review of executive action, and non-discriminatory 
treatment will have a direct impact on the development of the law in 
China. Accession to the WTO will further the development of an 
impartial judiciary, neutral regulatory bodies, transparent legal 
processes, and regularity in the administration of law in China. To the 
extent that entry into the WTO reinforces the development of the rule 
of law in China, it does suggest broader lessons for China's leadership 
as they attempt to build a new foundation for Chinese society.
    Let there be no doubt that the United States intends to play a 
constructive role in that process. It is in both our commercial 
interest and our interest in a peaceful, more stable world to see China 
succeed in honoring its WTO commitments and in building a stronger 
foundation for China's future based on the rule of law.
    We can help most at a very practical level. As I said earlier, 
observance of the law must become a habit. We can contribute to that 
process by ensuring that we raise our commercial problems as quickly as 
they surface and ensure that China strengthens its record on WTO 
compliance at every opportunity. In the process, we will make three 
important contributions. First and foremost, we will vindicate the 
bargain we reached with the Chinese at the negotiating table and ensure 
that our exporters have access to the market per the WTO agreement. 
Second, we will avoid turning every dispute into potential litigation 
at the WTO, with all that implies in the way of both politics and delay 
in real market access. Third, we will also help by demonstrating that 
the habit of observing the law is profoundly in China's interest, as 
much as ours.
    In practice, both the commercial importance and the broader 
significance of WTO compliance has led to a natural emphasis within the 
Administration on two different processes. One is the ongoing effort to 
monitor China's compliance efforts. The other is developing a program 
of technical assistance that contributes both to the goal of compliance 
and, consistent with that goal, the development of the rule of law. It 
is to those two topics that I would like to turn.
                     monitoring compliance efforts
    From the perspective of American exporters, China's accession to 
the WTO represents the most significant market-opening initiative since 
the North American Free Trade Agreement (NAFTA) and the Uruguay Round. 
But, the advantages of China's accession will only be guaranteed by a 
vigilance and a willingness to promote American exports aggressively in 
the Chinese market.
    I have testified before Congress that our efforts to assist China 
in implementing its commitments are guided by two principles: (1) 
China's implementation of its WTO obligations is the key issue in our 
bilateral trade relations; and (2) early detection and resolution of 
problems is necessary to avoid protracted trade disputes.
    We emphasized the importance of implementation in April when 
Secretary Evans led a business development mission to Beijing and 
Shanghai to help American companies take advantage of the opportunities 
that China's membership in the WTO will bring. He met with President 
Jiang and other senior leaders as well as his Chinese counterpart as 
part of the Joint Commission on Commerce and Trade, which he chairs for 
the U.S. side, to drive home the message about the importance of timely 
and transparent implementation of each of China's commitments under the 
WTO.
    Three weeks prior to Secretary Evans's trip, I was in China myself 
leading a delegation of senior professional staff from the House and 
Senate, many of whom worked on the Congressional passage of Permanent 
Normal Trade Relations (PNTR) and are experts on trade matters. They 
participated in all of my meetings in Beijing and Shanghai. By doing 
so, they underscored for the Chinese the important role that Congress 
will continue to play throughout the WTO implementation process. The 
subtext--and an important point to have made--was that there is no 
daylight between the Administration and the Congress when it comes to 
China's implementation of its WTO obligations.
    At the Ministry of Foreign Trade and Economic Cooperation 
(MOFTEC)--our counterpart agency--we met with Minister Shi and Vice 
Minister Ma. MOFTEC appears to have the best of intentions for tackling 
a very tough job. We need to do what we can to help them--especially in 
terms of our work with other central government agencies as well as 
with provincial authorities. We met with officials from the State 
Development and Planning Commission, the Ministry of Information 
Industry, the National People's Congress and local officials in 
Shanghai. I also discussed WTO issues with local officials in Guangzhou 
and Shenzhen. There is a clear recognition of the enormity of the task 
the Chinese leaders want to accomplish. I was impressed by the level of 
knowledge and familiarity that our interlocutors had with the WTO 
agreements and China's accession commitments.
    We also talked with American businesses at functions organized by 
the American Chambers of Commerce and the U.S.-China Business Council 
and visited U.S. company facilities and one Chinese state-owned 
enterprise. We met with representatives of the Shanghai Film Studio, 
where we were told that piracy of optical disks was hurting their sales 
in China. It was fascinating to discover that we have a new ally in our 
work to enhance enforcement of intellectual property rights (IPR) 
protection in China and elsewhere. We saw the Shanghai Model Port 
Project--an APEC initiative that demonstrates how Customs officials can 
use technology to facilitate trade and protect IPR. I thank U.S. 
Ambassador to APEC Larry Greenwood for suggesting that we visit this 
facility. We went to the WTO Affairs Consultation Center, where Chinese 
officials are being trained in different aspects of the requirements of 
WTO membership. Members of my delegation and I were invited to come 
back and help them teach classes, and I look forward to doing so in the 
future. Capacity-building is extremely important, and I'll discuss this 
momentarily when I focus on technical assistance.
    I took every opportunity to underscore the importance that both we, 
in the Administration, and Congress attach to WTO compliance. Bringing 
a strong delegation from the professional staff of the Senate Finance 
and House Ways and Means Committees helped demonstrate that point for 
our Chinese hosts. Our delegation was, in and of itself, a 
demonstration for Chinese officials of the importance that both the 
executive and legislative branches of our government place on WTO 
implementation. I plan to travel to China roughly every 6 months 
between now and 2005 to continue that process and I hope to take a 
delegation of Members of Congress or staff with me as often as 
possible.
    Our efforts must, of course, extend beyond high-level attention. We 
need to ensure that we have dedicated our resources to the steady, day-
to-day accumulation of successes. Where the rubber meets the road in 
that regard is the efforts of our Foreign Commercial Service officers 
on the ground in China. The Foreign Commercial Service's representation 
in China is the largest delegation of what I like to refer to as our 
``commercial diplomats'' of any country in the world. We divide our 
staff in mainland China into five sections (Beijing, Shanghai, 
Guangzhou, Chengdu, and Shenyang), and have another office in Hong 
Kong. The staff in mainland China comprises 18 officers and an 
additional 66 foreign service nationals and contractors. In cooperation 
with State Department Economic officers, Foreign Agriculture Service 
officers, and Customs attaches, Commercial Officers monitor China's WTO 
implementation efforts and help organize training programs to educate 
Chinese officials and business leaders on China's WTO commitments. In 
addition, Commercial Officers continue to provide the export promotion 
services of the Commercial Service, including counseling, market 
analysis, advocacy, and an array of services chiefly aimed to benefit 
small- and medium-sized exporters.
    In March 2002, the Department of Commerce opened a Trade 
Facilitation Office (TFO) in Beijing to support and coordinate 
compliance activities in both Beijing and Washington and to act as an 
``early warning'' system. This office will be staffed by two Market 
Access and Compliance (MAC) officers and two Import Administration (IA) 
officers. Maintaining close contact with American firms doing business 
in China and with Chinese officials, these officers will be able to 
help resolve commercial disputes before simple misunderstandings can 
escalate into a point of principle on one side or another. These 
officers will monitor and report on disputes--the primary indicia of 
implementation problems. In addition, these officers will serve as on-
the-ground experts to answer technical questions from U.S. and Chinese 
government officials and business representatives. The TFO works 
closely with the whole China Compliance Team in Beijing and Washington, 
and while security clearances and training are being finalized for the 
four compliance officers, the office is being staffed by detailees from 
the China Compliance Team.
    We also have augmented our staff working on China in MAC's Trade 
Compliance Center and on the China desk. Just 2 years ago, we had only 
five people in MAC's Office of the Chinese Economic Area (OCEA). We 
added six new officers to OCEA in fiscal year 2001 and are adding five 
more in fiscal year 2002. Combined, the nine officers currently in this 
office have approximately 40 years of expertise working on trade 
issues. This office is tasked with the job of monitoring China's 
compliance with its WTO commitments, coordinating technical assistance 
to China, addressing trade problems as early as possible, and promoting 
new trade opportunities for U.S. exporters.
    As management tools, MAC maintains two important data bases. The 
first tracks compliance, market access and commercial disputes in 
China. Our staff in Washington and China routinely update the data base 
so that we can efficiently track these cases and share real-time 
information. The second data base contains information on the training 
programs designed to help China implement its WTO obligations that are 
offered by the Department of Commerce, other agencies, academia, other 
governments, multilateral organizations and non-governmental 
organizations. We are monitoring other assistance efforts to avoid 
duplication, identify training needs and note other countries' programs 
that may favor competing ways of doing business. In addition to sharing 
information through data bases, our Washington staff is in daily 
contact with our staff in China--through e-mails, phone calls, and 
travel. Over the last 3 months, 10 members of our China Team have been 
able to visit China for at least 10 days.
    IA has established a team dedicated to monitoring compliance with 
China's WTO commitments on trade remedies and unfair trade practices. 
IA keeps track of China's use of antidumping and countervailing duty 
laws, monitors and analyzes its subsidy programs in relation to WTO 
disciplines, monitors imports for unusual trends, and provides a point 
of contact for U.S. companies that believe they face potential unfair 
trade problems arising from the Chinese market. These efforts, led both 
by technical experts in Washington and, soon, the overseas-based IA 
officers in the TAO, provide in-country support for the administration 
of U.S. antidumping and countervailing duty proceedings as well as 
close coordination with other offices and agencies to proactively 
identify and resolve problems before they develop into unfair trade 
disputes. The IA team also provides a point of contact for Chinese 
government and business representatives to obtain information and 
technical assistance about trade remedies.
    ITA's Trade Development (TD) unit has undertaken a thorough review 
of China's tariff schedule and continues to work closely with industry 
to ensure that all obligations are fully implemented. TD's industry 
specialists allow us to follow China's implementation efforts on a 
practical level, knowing the day-to-day problems that U.S. companies 
might encounter.
    To coordinate Commerce's action on China's implementation of its 
WTO commitments, the Department of Commerce has developed a China 
compliance team that meets internally twice a week. The goal at this 
stage is to make judgments as to whether and when we need to raise 
issues directly at a political level with our Chinese counterparts to 
get appropriate action.
    To strengthen the force of our efforts, Commerce works hand-in-hand 
with other agencies through the Trade Policy Staff Committee 
subcommittee on China WTO Compliance, which meets on a monthly basis to 
review China's progress with WTO implementation and potential WTO 
compliance issues; to strategically coordinate USG agencies' WTO 
implementation and compliance work; and to decide on appropriate 
responses when problems arise. We are working closely with USTR and the 
State Department to track China's specific WTO commitments and to raise 
any potential concerns. We are working closely with industry to ensure 
that all obligations are fully implemented.
    China has committed itself to a number of major reforms. Of these, 
none is more critical than its obligation to allow for public comment 
before new laws, regulations or other measures are implemented. By 
allowing for input from industry and other affected parties, the 
Chinese can achieve regulatory and economic goals in a manner that 
facilitates rather than inhibits business. We are watching China's 
efforts to revise, create or rescind laws and regulations and are 
providing comments on draft regulations. We meet with MOFTEC regularly 
and consult with other Chinese Government entities. For instance, we 
recently intervened with the State Economic and Trade Commission with 
regard to regulations that could have prohibited companies from using 
independent contractors to provide a myriad of services in a flexible 
manner.
    Beyond those standing functions, Secretary Evans has committed to 
send one senior Commerce official to China every month for the 
foreseeable future to check up on our implementation and trade 
promotion efforts. I am leading that effort with help from the 
Assistant and Deputy Assistant Secretaries at the Department. The 
commitment of those senior resources further reflects the priority we 
place on China's implementation of its commitments.
                          technical assistance
    Compliance, of course, is not just the threat of retaliation for 
the failure to implement trade agreements. In many instances, 
compliance has as much to do with encouraging a greater understanding 
of the WTO rules and their purpose. Dr. Supachai, who will begin 
serving as the Director General for the WTO in September, has said that 
he is concerned that ``the WTO doesn't have the resources to provide 
all the know-how that China requires.'' To help fill that gap, we are 
working with the WTO as well as with other countries and the private 
sector to monitor compliance and to provide technical assistance to 
China.
    By joining the WTO, a rules-based international trading system, 
China has agreed to implement systemic reforms designed to establish a 
more transparent and predictable regime for business dealings. Though 
China's phased-in implementation of its WTO commitments will make the 
market more conducive for U.S. companies, the process will be 
challenging. China has begun the process of creating, revising and 
eliminating thousands of laws, regulations, and rules at the central, 
provincial and local levels.
    During my recent visit to China, I heard repeated requests from 
Chinese officials for joint cooperation on technical assistance and 
training programs. Effective technical assistance programs can help 
China better understand what a particular WTO commitment means in 
practice, so that compliant legislation and practices are put in place, 
not just in Beijing, but throughout China. This will help China comply 
with WTO commitments in a timely manner, which should reduce the number 
of problems we will have to handle in the future.
    Toward that end, in addition to tracking capacity-building 
programs, we are, with help from a variety of other agencies, 
conducting a series of WTO compliance seminars in China. This technical 
training is designed to disseminate as much information as possible 
regarding the practical implications of the WTO agreements to Chinese 
officials both in the central government and in the provinces. The 
seminars to date have focused on those areas, such as intellectual 
property and standards, in which we have had particular problems in the 
China market in the past.
    Even before China became a WTO member, our training team traveled 
to Beijing and Shanghai to review China's WTO obligations with Chinese 
officials and the resident U.S. business community in important areas 
including standards, intellectual property rights and anti-dumping 
requirements. In early 2001, a half-dozen sessions were held in 
Washington for Chinese officials, on topics ranging from e-commerce 
regulation to corporate mergers and acquisitions, to WTO anti-dumping 
rules. These sessions have continued through this year.
    Last year, our China Team officers traveled to China with the 
American National Standards Institute for seminars in Beijing and Xian, 
organized IPR Enforcement Training sessions in Shenyang, Hangzhou, and 
Xiamen, and conducted seminars on information technology and 
telecommunications equipment standards and testing issues in Beijing. A 
medical equipment standards program was held jointly with the medical 
device Global Harmonization Task Force in Kunming in September.
    Now that China has joined the WTO, ITA is sponsoring a series of 
more than half-a-dozen technical assistance programs in fiscal year 
2002, including training in sector-specific areas, as well as more 
general rule of law issues. This year we've already conducted a program 
on the Rule of Law for Distribution and Franchising in Beijing, 
Shanghai and Guangzhou, an IPR Enforcement Training session in two 
Chinese cities to follow up on last year's successful IPR seminar and 
program on the impact of WTO on the telecommunications sector in Xian.
    In April, Secretary Evans and Minister Shi agreed to enhance our 
cooperative training efforts. At the plenary session of the U.S.-China 
Joint Commission on Commerce and Trade, the two sides announced plans 
for future training programs on the impact of WTO on the semiconductor 
industry, pharmaceutical standards and intellectual property 
protection, environmental technologies, antidumping procedures and 
trade facilitation through logistics improvements. The co-chairs also 
announced plans for a potential TDA grant to fund a WTO e-learning 
program that will provide guidance to both Chinese government officials 
and citizens on WTO implementation. We are also exploring a website in 
China for Chinese officials and U.S. businesses, which will provide WTO 
implementation and compliance guidance.
    Our commercial officers who work in ITA's Foreign and Commercial 
Service unit at the U.S. Embassy and our consulates also have a strong 
outreach program in place, including a general WTO introduction 
seminar, which they have conducted in 12 provinces, and an IPR seminar, 
which they have conducted in every province. FCS officers are also 
organizing digital video conferences on WTO issues between the Shanghai 
WTO Affairs Consultation Center and U.S. experts in different fields.
    Many of the IPR programs have been joint efforts between ITA and 
the U.S. Patent and Trademark Office (USPTO). Jim Rogan, the Under 
Secretary of Commerce for Intellectual Property and Director of the 
United States Patent and Trademark Office, and I have worked closely 
together these past months on various IP initiatives. For example, last 
month USPTO in conjunction with the U.S. Consulate/Hong Kong, hosted a 
digital video conference with a group of judges from Jiangsu Province 
attending a WTO training program in Hong Kong. USPTO and ITA also are 
planning another IPR enforcement training program for September; a 
program on technology transfer and intellectual property protection in 
the fall, and a program on judicial enforcement of IPR in the fall. Jim 
advises me that USPTO has also undertaken a number of other initiatives 
in support of U.S. efforts--including hosting a number of digital video 
conferences with various U.S. consulates and Chinese counterparts on 
timely intellectual property matters, and a planned detail of a USPTO 
attorney advisor to the U.S. Embassy in Beijing to advise on 
intellectual property matters during July and August 2002. USPTO also 
is working closely with other foreign IPR offices, such as the European 
Patent Office and Japan Patent Office, in areas where mutual assistance 
can make their efforts more effective.
    My recent trip helped me assess what more we could be doing and 
where we need to focus our training efforts in the future. There is 
much more we could do to help China reform its commercial legal system 
and to help China implement its WTO commitments. The China PNTR 
legislation contained an authorization for the Department of Commerce 
to establish a program to conduct rule of law training and technical 
assistance related to commercial activities in China, and we are 
evaluating how best to employ our resources to satisfy that.
    The Commerce Department has demonstrated expertise in assisting 
other countries to develop their commercial legal systems. Through our 
Commercial Law Development Program (CLDP), we have trained lawyers, 
judges, and government officials throughout Eastern Europe, the former 
Soviet Union, in Africa and elsewhere in Asia to promote commercial 
law. And we would like to do the same in China.
    Effective programs can help China efficiently implement its market 
opening concessions which means greater market access for U.S. firms. 
Other nations--Japan, the EU member states, Canada--all have 
substantial programs in place. At this Commission's staff roundtable on 
May 24, the Asia Foundation's Vice President and Washington Director 
Nancy Yuan testified that it is non-governmental organizations (NGO's), 
rather than the U.S. Government, that have taken the lead in conducting 
on-the-ground rule of law programs in China. She also noted that the 
assistance provided by U.S. NGO's, is ``nowhere on the scale of 
assistance provided by European and other donors.'' As a practical 
matter, the Chinese are faced with choices: do they adopt a U.S., an 
EU, a Japanese, or another approach to regulation and the rule of law? 
Though all these systems may be WTO-compliant, China's utilization of 
the U.S. approach to matters like standards will benefit U.S. firms.
    Just as I regard the CLDP program as one of our ``best practices,'' 
I would like to call your attention to another. The International Trade 
Administration hosts an AID-funded program called the Business 
Information Service for the Newly Independent States (BISNIS), which 
serves as a resource for U.S. companies which want to do business in 
the countries which comprised the former Soviet Union. BISNIS could 
serve as a successful model replicated to provide the same services for 
China--a larger market with even greater potential for U.S. businesses. 
The time to undertake this initiative is now--to ``fill in behind'' our 
agreement in order to help U.S. companies gain from our negotiators' 
hard work on China's accession to the WTO.
                               conclusion
    China joined the WTO with an awareness that it would be difficult 
to fulfill its commitments but with a resolve to do so. The Chinese 
leadership pragmatically recognized that WTO membership would be 
important for continued economic growth. Let us not forget that China's 
economic progress in the last 20 years has been nothing short of 
remarkable, and that the World Bank lauds China for accomplishing in 
poverty reduction in two decades what has taken other countries two 
centuries. Between 100 to 200 million people have been lifted out of 
poverty; a country that knew scarcity now has an economy that boasts 
surpluses.
    Economists at the IMF estimate that, by the time China will have 
been in the WTO for 5 years, its economy will have grown to be $26 
billion larger than it would have if China had not joined the WTO. And 
the IMF was only looking at the effects from tariff cuts. The impact of 
new foreign capital flows will be even greater. China's annual average 
of $40 billion in foreign direct investment is second only to that of 
the United States. This has been one of the most important factors in 
the transformation of the Chinese economy. To fully benefit from these 
capital flows, China's financial and legal system must continue on the 
path of reform. My counterpart at MOFTEC seems to fully understand 
this. The WTO's requirements for legal consistency and fairness will 
help further develop the rule of law in China--which will benefit our 
companies as well as the growing private sector in China.
    As President Bush said when he was in Beijing in February, ``China 
is on a rising path, and America welcomes the emergence of a strong and 
peaceful and prosperous China.'' In a global economy that is just 
beginning to improve, we need China to serve as an engine of growth. 
Beyond that, China's reforms can create a ``virtuous circle'' of 
competitive liberalization in the region--after all, success breeds 
success. This will encourage China's neighbors to undertake the hard 
steps needed to improve transparency, corporate governance, and their 
legal systems. At the end of the day, the rule of law--and the economic 
freedoms that it brings--may be our most important export.
    Mr. Chairman, Mr. Co-Chairman, to answer your question: Yes, I 
believe that China can and will seek to keep its promises, and we 
should do whatever we can to help. I thank you for devoting this 
hearing to this important issue, and I welcome your questions now or at 
any time. It is an honor to serve on this Commission.
                                 ______
                                 

                 Prepared Statement of Susan S. Westin

                              june 6, 2002
    Mr. Chairman and Members of the Commission:
    I am glad to have the opportunity today to discuss aspects of 
China's development of rule of law\1\ practices that are related to the 
commitments China made to the World Trade Organization (WTO), which it 
joined on December 11, 2001. My observations address three areas: (1) 
How elements in China's WTO accession agreement\2\ seek to improve the 
rule of law; (2) What Chinese officials told us about their reform 
efforts; and (3) What the U.S. business community has told us about the 
importance of these efforts and their views on rule of law 
implementation in China to date.
---------------------------------------------------------------------------
    \1\ Definitions of ``rule of law'' are varied. For purposes of this 
testimony, we generally use it to describe a society in which law, for 
the most part, guides people and the government in the conduct of their 
affairs and constitutes the supreme legal authority, in contrast to the 
authority of an individual ruler or a political party.
    \2\ China's WTO commitments are documented in its (1) Protocol on 
the Accession of the People's Republic of China, which contains the 
terms of membership that China negotiated and affirms China's adherence 
to the WTO agreements; (2) the Report of the Working Party on the 
Accession of China, which contains additional commitments as well as 
provides a narrative on the results of China's negotiations; and (3) 
annexes containing market access commitments, which primarily cover 
individual tariff lines for goods and schedules for various service 
sectors.
---------------------------------------------------------------------------
    My statement today is based on our ongoing work; therefore, my 
observations are preliminary in nature. As you know, both the Senate 
Finance and House Ways and Means committees have asked GAO to conduct a 
4-year body of work relating to China's implementation of its WTO 
commitments. This includes analyzing China's final WTO commitments, 
performing annual business surveys, evaluating China's implementation 
of its commitments, and assessing executive branch monitoring and 
enforcement activities. Our work to date has included two trips to 
China; one trip to Geneva, Switzerland; numerous meetings with U.S. and 
Chinese government officials; and an assessment of preliminary results 
from a mail survey and structured interviews of U.S. companies doing 
business in China. We are finishing our analysis and verifying our 
work, and we plan to report the final results of our work in various 
products by mid-October.
                                summary
    Many elements in China's WTO accession agreement seek to improve 
the rule of law. When China joined the WTO, China agreed to ensure that 
its legal measures would be consistent with its WTO obligations. In our 
analysis of China's WTO commitments, we found at least 60 commitments 
that specifically obligate China to enact, repeal, or modify trade-
related laws or regulations. In addition, China has made a substantial 
number of other WTO commitments related to the rule of law areas of 
transparency, judicial review, uniform enforcement of laws, and 
nondiscriminatory treatment.
    Chinese government officials have emphasized their commitment to 
make WTO-related reforms that will strengthen the rule of law. They 
described how their efforts for reform go beyond China's WTO 
commitments and include broad reforms of laws and regulations at the 
national and provincial levels, as well as reforms of judicial and 
administrative procedures. However, Chinese officials acknowledged the 
challenges they face in completing the necessary reforms, including the 
capacity of the government to carry out new functions in a timely 
manner. In addition, despite an extensive training program about WTO-
related reforms throughout the country, officials identified the need 
for outside assistance, because they lacked the expertise and capacity 
to meet all their training needs themselves.
    According to the preliminary results of our survey, U.S. businesses 
in China consider rule of law-related WTO commitments to be important 
to them, especially the consistent application of laws, regulations, 
and practices in China, and enforcement of intellectual property 
rights. However, a majority of businesses answering our survey 
anticipated that these rule of law commitments would be difficult for 
the Chinese to implement, and they identified some concerns over 
specific implementation issues. U.S. businesses told us in interviews 
that they expected WTO reforms, including those related to the rule of 
law, to be part of a long-term process. Nevertheless, they believe the 
Chinese leadership is dedicated to living up to their WTO commitments.
                               background
    Rule of law reform must take place within China's legal and 
political system, and any assessment of rule of law development should 
be judged in the context of Chinese institutions. China's current legal 
system is relatively new and is based, to a great extent, on the civil 
law codes of Germany as adopted by Japan, and, to some extent on the 
legal institutions of the former Soviet Union and China's traditional 
legal system. Two important characteristics of Chinese legal 
development since 1949 have been the subordination of law to Communist 
Party policy and the lack of independence of the courts. Another 
characteristic is the large number of legal measures used to implement 
a law, including administrative regulations, rules, circulars, 
guidance, Supreme People's Court interpretations, and similar local 
government\3\ legal measures. China's central government laws, 
regulations, and other measures generally apply throughout China. 
Although local governments enact laws and regulations, these must be 
consistent with central government measures. In 1996, a number of 
China's top leaders emphasized the principle of administering the 
country in accordance with law. Several years later, China amended its 
constitution to incorporate this principle.
---------------------------------------------------------------------------
    \3\ Local governments include provinces, autonomous regions, 
municipalities directly under the central government, other 
municipalities, special economic areas, and counties.
---------------------------------------------------------------------------
 many elements in china's wto accession agreement seek to improve the 
                              rule of law
    A substantial number of the many commitments that China has made to 
the WTO can be characterized as related to developing rule of law 
practices. In a broad sense, China's WTO commitments suggest that in 
its commercial relations China is on the way to becoming a more rules-
based society, contingent on the faithful implementation of its WTO 
accession agreement. This agreement is highly detailed and complicated, 
running to over 800 pages including annexes and schedules. It is the 
most comprehensive accession package for any WTO member. As part of 
this package, China agreed to ensure that its legal measures would be 
consistent with its WTO obligations. About 10 percent of the more than 
600\4\ commitments that we identified in China's accession package 
specifically obligate China to enact, repeal, or modify trade-related 
laws and regulations. These commitments cover such trade policy areas 
as agricultural tariff-rate quotas, export and import regulation, 
technical barriers to trade, intellectual property rights, and 
nondiscrimination. In addition, by becoming a WTO member, China has 
agreed to abide by the underlying WTO agreements, such as the General 
Agreement on Tariffs and Trade, the General Agreement on Trade in 
Services, the Agreement on Trade-Related Aspects of Intellectual 
Property Rights and the Understanding on the Rules and Procedures 
Governing the Settlement of Disputes.
---------------------------------------------------------------------------
    \4\ This number excludes market access commitments contained in 
China's tariff and services schedules.
---------------------------------------------------------------------------
    China also has made a substantial number of important, specific 
commitments in the rule of law-related areas of transparency, judicial 
review, uniform enforcement of legal measures, and nondiscrimination in 
its commercial policy. In the area of transparency, China has agreed to 
designate an official journal for publishing trade-related laws and 
regulations and to provide a reasonable period for public comment 
before implementing them. China has also agreed to designate an enquiry 
point where individuals, business enterprises, and WTO members can 
request information relating to these published laws and regulations. 
Transparency requirements and commitments to report information to the 
WTO together represent about a quarter of the commitments we identified 
in China's accession package. In the area of judicial review, China has 
agreed to establish or designate tribunals to promptly review trade-
related actions of administrative agencies. These tribunals are 
required to be impartial and independent of the administrative agencies 
taking these actions. In the area of uniform enforcement, China has 
agreed that all trade-related laws and regulations shall be applied 
uniformly throughout China and that China will establish a mechanism by 
which individuals and enterprises can bring complaints to China's 
national authorities about cases of nonuniform application of the trade 
regime. Finally, in the area of nondiscrimination, China agreed that it 
would provide the same treatment to foreign enterprises and individuals 
in China as is provided to Chinese enterprises. China also agreed to 
eliminate dual pricing practices as well as differences in treatment 
provided to goods produced for sale in China and those produced for 
export. (See the appendix for examples of rule of law-related 
commitments included in China's WTO accession agreement.)
chinese officials cite early reform efforts but recognize challenges to 
                             implementation
    Chinese government officials have stated their commitment to make 
WTO-related reforms that would strengthen the rule of law. Furthermore, 
China's plans for reform go beyond conforming its laws and regulations 
to China's WTO commitments and include a broad legal review, as well as 
reforms of judicial and administrative procedures. Chinese officials 
with whom we spoke discussed the numerous challenges they face in these 
areas and said that these reforms will take time to implement. They 
also stated their need for outside assistance to help them with their 
reform efforts.
Early reform efforts in three areas
    First, Chinese government officials are in the midst of a 
comprehensive, nationwide review of laws, regulations, and practices at 
both the central and provincial levels. This review is to lead to 
repeals, changes, or new laws. According to one report, Chinese 
officials have identified more than 170 national laws and regulations 
and more than 2,500 ministry regulations as being WTO related.
    Officials whom we interviewed from the Ministry of Foreign Trade 
and Economic Cooperation (MOFTEC) contend that generally China has done 
a good job of implementing its WTO obligations to date. MOFTEC 
officials said that complete implementation will take time and that 
part of their role is to teach other ministries how to achieve reform 
according to WTO commitments. They noted the importance of their 
efforts to coordinate WTO-related reforms with other ministries because 
Chinese laws tend not to be very detailed and, as a result, it is 
difficult to incorporate the language of specific WTO commitments into 
Chinese laws. Officials said that, consequently, Chinese laws will 
sometimes use general, open-ended phrases that refer to WTO 
commitments, such as the services annexes, while the detail is set 
forth in the implementing regulations.
    Provincial authorities are still reviewing their laws and 
regulations to see if they are consistent with national laws. 
Provincial-level officials told us that in some cases they were still 
waiting for the national government to finish its legislative and 
regulatory processes. This process will guide their own review of laws 
and regulations at their level. Prior to their enforcement, provincial-
level laws, regulations, and other regulatory measures that implement 
the central government's legal measures are submitted to the central 
government for review. Chinese officials told us that they have found 
many provincial regulations that did not conform to national laws and 
regulations. MOFTEC officials estimated that it would take a year or 
two to complete this entire reform process, while some provincial 
officials estimated 2-3 years.
    Second, China is undertaking reform of its judicial processes to 
ensure that they are compatible with its WTO commitments. The Supreme 
People's Court informed us that since China's accession it has been 
revising hundreds of judicial interpretations about laws that do not 
conform to WTO rules. It has also instructed the judiciary throughout 
the country to follow the revised interpretations and to undertake 
similar work at their respective levels. Officials told us that the 
court is also involved in reforms related to the WTO areas of judicial 
independence and uniform application of legal measures. For example, 
with regard to judicial independence, in February of this year the 
court issued new regulations to improve the adjudication of civil and 
commercial cases involving foreign parties. Under these regulations, 
mid-level and high-level courts, in contrast to the basic-level courts, 
will directly adjudicate cases involving, among other subjects, 
international trade, commercial contracts, letters of credit, and 
enforcement of international arbitration awards and foreign judgments. 
Furthermore, China recently amended its Judges Law to require that new 
judges pass a qualifying exam before being appointed to a judicial 
position.
    Third, China is reforming its administrative procedures and 
incorporating the rule of law into decisionmaking. About one third of 
the commitments we identified in China's WTO accession agreement relate 
to guidance about how a particular commitment should be carried out. 
Officials told us that they are attempting to reduce the number of 
layers necessary to approve commercial activities and to make these 
processes more transparent. These actions can help implement rule of 
law practices at the day-to-day level. These reforms are also still 
underway at the central and provincial levels. For example, State 
Economic and Trade Commission (SETC) officials told us that they have 
identified 122 administrative procedures that must be changed to 
conform to WTO rules but that 40 percent of these must still be 
changed. In Shanghai, officials said that they have eliminated 40 
percent of government approvals under their jurisdiction and that they 
are working to make the remaining 60 percent more efficient.
Chinese officials acknowledge challenges
    Some Chinese officials with whom we spoke acknowledged challenges 
in completing all these reforms in a timely manner. These challenges 
include insufficient resources, limited knowledge of WTO requirements, 
and concerns about the effects on the economy of carrying out 
particular WTO commitments. For example, Chinese officials said that 
the effects of the changes needed to conform their tariff-rate quota 
administration process to WTO requirements were so difficult that they 
were unable to allocate the quota and issue certificates in time to 
meet the deadlines set forth in China's WTO commitments. A number of 
Chinese officials also indicated that it has been very difficult to 
fulfill a WTO transparency commitment that requires China to translate 
all its trade laws, regulations, and other measures into an official 
WTO language-English, French, or Spanish. This difficulty is due in 
part to the abundance of the materials to be translated and the highly 
technical quality of many legal measures.
Chinese officials identified the need for more technical assistance
    Many Chinese officials we interviewed emphasized the importance of 
the steps they had taken at both the national and subnational levels to 
increase the training of government officials about WTO rules. For 
example, the State Economic and Trade Commission and the General 
Administration of Customs said they have been holding training sessions 
for over a year at the national, provincial, and municipal levels on 
general WTO rules and China's WTO obligations. In addition, the 
National Judges College plans to train 1,000 judges from local courts 
across the country and send others for training abroad. Furthermore, 
governments in Shanghai, Guangzhou, and Shenzhen have established WTO 
affairs consultation centers that organize training and international 
exchange programs for midlevel Chinese officials on implementing WTO 
reforms.
    Despite these efforts, Chinese officials acknowledged that their 
understanding of WTO rules remains limited and that more training is 
needed. According to several Chinese government officials we 
interviewed, China continues to lack the expertise and the capacity to 
provide all the training necessary to implement WTO rules and, 
therefore, it has asked for technical assistance both multilaterally 
and bilaterally from outside China. As a result, the WTO secretariat, 
the European Union, the United States, and other WTO member countries 
have either given or plan to give training assistance to China in 
numerous areas, including rule of law-related programs. For its part, 
the U.S. Government has provided limited training on a range of WTO-
related topics, including standards, services, antidumping 
requirements, and intellectual property rights. The U.S. private sector 
also has provided technical assistance. In our interviews of U.S. 
businesses in China, almost one third of respondents said that they had 
given some assistance to China that related to implementation of 
China's WTO commitments.
   rule of law-related reforms are important for u.s. business, but 
                        difficulties anticipated
    Preliminary data from our written survey indicate that China's WTO 
commitments related to rule of law reforms are some of the most 
important for U.S. businesses with a presence in China.\5\ For example, 
more than 90 percent of businesses that have responded to date 
indicated that the following reform commitments were important or 
somewhat important to their companies:
---------------------------------------------------------------------------
    \5\  We have surveyed more than 500 U.S. companies with a presence 
in China and have received more than 175 usable responses as of the 
date of this testimony.

     Consistent application of laws, regulations, and practices 
(within and among national, provincial & local levels);
     transparency of laws, regulations, and practices;
     enforcement of contracts and judgments/settlement of 
disputes; and
     enforcement of intellectual property rights.

    When asked to identify the three commitments that were most 
important to their companies, two WTO rule of law-related areas 
received the greatest number of responses in our written survey--
consistent application of laws, regulations, and practices; and 
enforcement of intellectual property rights. We will include a more 
complete analysis of these and other issues considered in our business 
survey in a report to be released this fall.
    A majority of businesses answering our survey expected these rule 
of law commitments to be difficult for China to implement relative to 
its other WTO commitments. Businesses cited a number of reasons for 
this relative difficulty, including (1) the cultural ``sea change'' 
required to increase transparency; (2) a reluctance to crack down on 
intellectual property right violations stemming from a fear of 
destabilizing the labor force; and (3) the challenge of implementing 
laws, rules, and regulations consistently among provinces and within 
and among ministries.
    Similarly, in our interviews, company officials noted the magnitude 
of WTO-related reforms, including those that would strengthen the rule 
of law.\6\ They said that successful implementation would require long-
term effort. Commensurate with the expected difficulty in carrying out 
reforms, we heard numerous specific individual complaints from U.S. 
companies, including concerns about:
---------------------------------------------------------------------------
    \6\ We interviewed representatives from more than 50 companies in 
China as well as representatives from U.S. industry associations.

     Vague laws and regulations that create uncertainty for 
foreign businesses;
     lack of transparency, which denied foreign companies the 
ability to comment on particular draft laws or regulations or to 
respond to administrative decisions;
     conflicting and inconsistent interpretations of existing 
laws and regulations from Chinese officials;
     unfair treatment by, and conflicts of interest, of Chinese 
regulators; and
     uneven or ineffective enforcement of court judgments.

    Nevertheless, U.S. businesses in China believe that the Chinese 
leadership is strongly committed to reform and that the leadership has 
communicated this commitment publicly. Several private sector officials 
noted a more open, receptive, and helpful attitude on the part of the 
government officials with whom they had contact. Other private sector 
officials noted more specific positive actions. For example, officials 
noted improvements in intellectual property right protections including 
crackdowns against counterfeiters in Shanghai, and a case where a U.S. 
company won a judgment against a counterfeiter in a Chinese court that 
included an order to cease the operations of the copycat company.
                        concluding observations
    First, it is very clear that China has shown considerable 
determination in enacting the numerous laws, regulations, and other 
measures to ensure that its legal system and institutions, on paper, 
are WTO compatible. Nevertheless, the real test of China's movement 
toward a more rule of law-based commercial system is how China actually 
implements its laws and regulations in fulfilling its WTO commitments. 
At this point, it is still too early for us to make any definitive 
judgments about China's actual implementation. Second, as you know, it 
has been the hope of U.S. Government officials and others that China's 
accession to the WTO would constitute a significant step forward in 
China's development toward becoming a more rule of law-oriented 
society. It is worth noting that China's reform efforts, which have 
been ongoing for more than 20 years, have included substantial legal 
developments that could be described as rule of law related. These 
include the enactment of numerous laws, regulations, and other measures 
that apply to many aspects of Chinese society beyond the WTO, the 
recent proliferation of law schools and legal training, and the 
recognition of the need for judicial reform. It is still too early to 
know where this process will lead, but there is hope that the many 
rules-based commitments that China made to become a WTO member will 
influence legal developments in other areas.
    Mr. Chairman, this completes my prepared statement. I would be 
happy to respond to any questions you or other Members of the 
Commission may have at this time.
                      contacts and acknowledgments
    For future contacts regarding this testimony, please call Susan 
Westin at (202) 512-4128. Adam Cowles, Richard Seldin, Michelle Sager, 
Matthew Helm, Simin Ho, Rona Mendelsohn also made key contributions to 
this testimony.

    Appendix--Examples of Rule of Law-Related Commitments Included in
       China's World Trade Organization (WTO) Accession Agreement
------------------------------------------------------------------------
-------------------------------------------------------------------------
                              Transparency
------------------------------------------------------------------------
 Trade Framework: China shall make available to WTO members,
 upon request, all laws, regulations and other measures pertaining to or
 affecting trade in goods, services, TRIPS or the control of foreign
 exchange, before such measures are implemented or enforced. (Protocol
 paragraph 2.C.1)
 Services: China would publish in the official journal, by
 appropriate classification and by service where relevant, a list of all
 organizations that were responsible for authorizing, approving or
 regulating services activities whether through grant of license or
 other approval, including organizations delegated such authority from
 the national authorities. (Working Party report paragraph 332)
------------------------------------------------------------------------
                             Judicial Review
------------------------------------------------------------------------
 Trade Framework: China shall establish or designate, and
 maintain tribunals, contact points and procedures for the prompt review
 of all administrative actions relating to implementation of laws,
 regulations, judicial decisions and administrative rulings of general
 application referred to in Article X:1 of the GATT 1994, Article VI of
 the GATS and relevant TRIPS provisions. (Protocol paragraph 2.D.1)
 Intellectual Property Rights: Appropriate cases, including
 those involving repeat offenders and willful piracy and counterfeiting,
 would be referred to relevant authorities for prosecution under the
 criminal law provisions. (Working Party report paragraph 299)
------------------------------------------------------------------------
                           Uniform Enforcement
------------------------------------------------------------------------
 Trade Framework: China shall apply and administer in a uniform,
 impartial and reasonable manner all central government laws,
 regulations and other measures and local regulations, rules and other
 measures issued or applied at the sub-national level. The laws,
 regulations and other measures covered are those that pertain to or
 affect (1) trade in goods, (2) services, (3) trade-related aspects of
 intellectual property rights (TRIPS), and (4) the control of foreign
 exchange. (Protocol paragraph 2.A.2)
 Trade Framework: China would strengthen the uniform enforcement
 of taxes, tariffs and non-tariff measures on trade between its special
 economic areas and the other parts of China's customs territory.
 (Working Party report paragraph 225)
------------------------------------------------------------------------
                            Nondiscrimination
------------------------------------------------------------------------
 Import Regulation: China would adopt and apply tariff
 reductions and exemptions so as to ensure MFN treatment for imported
 goods. (Working Party report paragraph 111)
 Import/Export Regulation: Except as otherwise provided for in
 this Protocol, foreign individuals and enterprises and foreign-funded
 enterprises shall be accorded treatment no less favorable than that
 accorded to other individuals and enterprises in respect of the
 distribution of import and export licenses and quotas. (Protocol
 paragraph 8.2)
------------------------------------------------------------------------
Source: Protocol on the Accession of the People's Republic of China and
  Report of the Working Party on the Accession of China, World Trade
  Organization.

                 Prepared Statement of Christian Murck

                              june 6, 2002
    Mr. Chairman and Members of the Commission:
    Thank you for the opportunity to testify today before this 
distinguished body on the rule of law in China. I am here today 
representing the American Chamber of Commerce in China, an organization 
in Beijing of over seven hundred fifty companies and approximately 
1,500 individuals formed to represent the commercial interests of the 
American business community in China. There are few subjects of greater 
interest to our members than the development, current state, and future 
prospects of the Chinese legal system. My personal interest in China 
began in 1965 as a teacher at the Chinese University of Hong Kong, 
continued through a Ph.D. in Chinese history at Princeton, and 
intensified during a business career beginning in 1980. I lived in 
Taipei, Taiwan from 1991 to 1996. In 1996 I moved to Beijing, where I 
am Managing Director for China of APCO Worldwide.
    In my testimony today, which focuses on the rule of law as it 
affects business conditions, I will define rule of law in terms of 
transparency and consistency. By transparency, I mean the promulgation 
of laws and regulations that have been developed with the participation 
by affected parties and which are easily accessible, objective, and 
clearly understandable. By consistency, I refer to the fair, reliable, 
and nondiscriminatory application and enforcement of laws, regulations 
and contracts. China is proof that economic growth and social progress 
can occur despite a legal system that is manifestly neither transparent 
nor consistent. But AmCham China has been an outspoken advocate of the 
proposition that economic growth and social progress can only be 
sustained and maximized over the medium and long term by establishing 
and enhancing the rule of law. A transparent, consistent legal system 
is required to treat participants in the economic system fairly and is 
one of the foundations of a just society; its absence is a deterrent to 
investment and encourages socially damaging recourse to non-legal means 
of redress and protection.
    The concept of the rule of law outlined above is relatively narrow. 
A broader definition might include references to economic systems such 
as a market economy, to political institutions such as free and fair 
elections, to the balance between liberty and responsibility within 
society, and to conceptions of universal human rights. Defined in this 
fashion, the rule of law takes many forms. Many would agree, for 
example, that the rule of law exists in Canada, the United Kingdom, 
Germany, Japan, Taiwan, and Singapore, but it takes quite different 
institutional and substantive forms in each. The advantages of a narrow 
definition of the rule of law for my purposes today are: there is broad 
consensus as to its elements; it is at the core of all legal systems 
commonly recognized as embodying rule of law in its broader sense; and 
it provides a framework sufficient to encompass most commercial issues, 
such as property rights and contractual rights.
    In thinking about China, it is always useful to consider trends, as 
well as conditions at a particular point in time. When China began its 
reform process in 1979, it did so essentially without a legal system. 
The legal profession did not exist, there were few published laws, the 
courts were political instruments intended to administer substantive 
``justice'' defined ideologically and morally rather than legally, and 
the National People's Congress functioned as a consultative and 
advisory rubber stamp rather than as a legislature. The only constraint 
on the power of the government bureaucracy was the overlaid bureaucracy 
of the Party, and the only restraint on the Party was the PLA. There 
was also the theoretical possibility of popular revolt, but that had 
been exhausted in the excesses of the Cultural Revolution and other 
mass movements in the thirty years after 1949.
    Since 1979, China has made extraordinary progress in drafting laws 
and administrative regulations, establishing law schools, training 
lawyers, and improving courts. The basic elements of a comprehensive 
system of economic and commercial law have now largely been put in 
place. Moreover, they are fundamentally consistent with international 
practice, though not always US practice. It is a stated goal of China, 
enshrined in its constitution, to establish the rule of law, though the 
government and Party do not necessarily share our conceptions of the 
rule of law. There is an intense public discussion in the press and on 
television on this concept and explicating the legal rights of 
citizens. But the standards of transparency and consistency are much 
more difficult than simply passing adequate laws and regulations with 
the expressed intent of establishing rule of law. Just as a financial 
center is not simply a group of tall buildings labeled ``Financial 
Center'', so too the rule of law depends on the professionalism and 
values of many players, on what might be called ``legal system 
software'' throughout the society. In particular, the rulemaking 
process and the enforcement process are both crucial.
    An important corollary of establishing a transparent, consistent 
legal system in China is the acceptance by the government and Party of 
limits on its authority and a reduction in its administrative 
discretion. The Party as an institution and senior leaders as 
individuals have assumed the right to act arbitrarily and to enjoy 
special privileges in order to achieve goals justified in Marxist 
terms. In the reform process since 1979, the National People's Congress 
has typically written broad legislation stating general principles to 
be later amplified by implementing regulations issued by the relevant 
Ministry or other agency. The implementing regulations often contained 
not objective standards, but rather subjective standards that could 
only be applied to specific facts by recourse to government personnel 
on a case-by-case basis. To some extent this was necessary given a 
hectic pace of legislation in areas with few precedents in Chinese 
practice or law since 1949. It was also deliberately intended to 
preserve wide latitude for officials to manage many aspects of the 
economy as they wished. In the shift toward a market economy, it has 
become widely accepted in China that the Party and government must 
reduce their roles as owner and investor in the economy, largely 
withdraw from their roles as manager of the economy, and focus 
primarily on their functions as a regulator. The rule of law will 
facilitate this difficult transition. Establishment of the rule of law, 
even in the narrow sense used here, is therefore not trivial, nor is it 
irrelevant to broader political and social issues. To the extent it is 
successful, it will protect companies and individuals from the exercise 
of arbitrary power.
    Moreover, the rule of law is not easily compartmentalized or 
confined to a single sector, such as commercial transactions of foreign 
companies. If, for example, the government wished to encourage 
development of the privately owned residential housing market by 
allowing foreign banks to issue home mortgages to Chinese individuals, 
it must also establish the ability of the foreign bank to take a clear 
lien, and in the event of default, seize the home and sell it on the 
open market. It will then be obvious that the same rights must be 
available to local bank competitors. Perhaps not so obviously though, 
the individual homeowner must have clear title to his property in order 
to mortgage it. This in turn implies a much greater degree of certainty 
in owning such property and may lead as well to a degree of protection 
against the arbitrary exercise of eminent domain or failure to pay 
legally required compensation by local governments and developers.
    To summarize these points, I do not believe that the rule of law 
will necessarily or inevitably lead to a particular outcome with 
respect to economic system, political institutions or human rights 
regime, but I do believe that it will strengthen the accountability of 
institutions and generally improve the protection of the rights of 
individuals.
    In our 2001 White Paper issued almost 18 months ago, AmCham China 
noted past progress in legal reform but expressed the view that it had 
stalled in recent years. We cited vague, poorly drafted laws and 
regulations that depend on subjective interpretations from government 
officials; continued reliance on internal regulations formally 
considered State secrets but used to regulate the economy; 
inconsistent, selective enforcement; lack of independence of the 
judiciary; and local protectionism.
    Local protectionism is not simply a matter of favoritism. It is 
exacerbated by the fact that most judges are not university graduates, 
much less lawyers; by the widespread practice of ex parte 
communications; by corruption; and by the willingness of local courts 
to uphold local regulations inconsistent with higher level government 
laws. Lack of independence is often cited as the fundamental weakness 
of the Chinese judiciary, a view that AmCham China shares, but given 
these other problems, it is not clear that truly independent local 
courts would immediately improve the legal system. It will be necessary 
to improve the courts and the legal system generally on many fronts 
over a long period of time. We have called for independence of the 
courts from political direction, trials open to the public, improved 
evidentiary rules and procedures, appointment of judges based on 
professional merit, and salaries sufficient to discourage corruption.
    We were cautiously optimistic in the 2001 White Paper on business 
conditions in general, but with respect to rule of law suggested that 
lack of progress was outweighing positive developments.
    On December 11, 2001, China became a member of the World Trade 
Organization. Regarding the rule of law, as in other areas, WTO 
accession resulted in new energy, greater political will, and a clearer 
sense of direction. China has committed to:

     Administer in a uniform, impartial and reasonable manner 
all its laws, regulations and other measures of the central and local 
governments governing its trade and foreign investment regime;
     To conform central government laws, as well as all 
administrative and sub-national government regulations, rules, and 
measures to WTO obligations;
     To establish a mechanism under which both individuals and 
enterprises can bring to the attention of the national government cases 
of non-uniform application of the trade and foreign investment regime;
      To enforce only published laws and regulations (thus 
eliminating the legal force of internal documents) and to make them 
available before they are implemented or enforced;
     To designate an official journal dedicated to the 
publication of all laws, regulations and other measures affecting the 
trade regime, and to establish a single enquiry point where information 
on all such laws can be obtained;
     To establish impartial and independent tribunals for the 
prompt review of administrative actions, and to provide contact points 
with respect to administrative actions.

    These commitments are extremely important with respect to 
establishing the rule of law in trade and foreign investment and to 
encouraging it generally.
    Literally thousands of laws, regulations and rules have been 
reviewed for consistency with WTO rules and China's commitments and the 
process of revising or abolishing those with inconsistencies is 
basically complete. It will be some time before the legal and business 
communities are able to draw conclusions as to how well this task was 
done, but there is no doubt the effort was massive and in good faith. 
The promised enquiry points have been established, laws are 
increasingly being made available prior to their effective date and in 
some cases in draft form for comment, and a study is underway to 
establish a publication similar to the Federal Register to bring 
together information now published in many separate places.
    It is to be hoped the central government will also be able to use 
WTO accession to strengthen its control over the provinces. All 
provincial Governors have been called to Beijing for WTO training 
seminars and told in blunt terms that lack of compliance at provincial 
or local level with the WTO framework will be damaging for their 
careers. Whether such measures will be sufficient to meet the 
commitment to administer laws and regulations in a uniform, impartial 
and reasonable manner locally as well as centrally remains to be seen. 
Two years ago, a Law on Legislation was passed by the National People's 
Congress attempting to rationalize the legislative process and 
establish the principle that sub-national jurisdictions may not pass 
laws and regulations inconsistent with those of the central government. 
This has reportedly had little practical effect and the issue will 
undoubtedly be revisited.
    The statement of principle provided by the new WTO commitment is 
important, but uniformity, impartiality and reasonableness are 
subjective criteria difficult to evaluate. Moreover, meeting this 
commitment will require significant changes in behavior that will be 
perceived as damaging various special or local interests. Our argument, 
of course, is that the interests of all stakeholders in the society, 
not simply foreign investors and businessmen, will be served by making 
this effort.
    Reflecting WTO accession, the AmCham China 2002 White Paper 
released last month emphasized the great, but uncertain opportunity we 
now face. WTO accession has given the reform process new energy, but we 
are also aware of the difficulties and constraints. As to the rule of 
law specifically, we cite a number of areas of modest progress, while 
reiterating the same basic problems with respect to transparency and 
consistency (now further distinguished as uniformity and enforcement).
    A concrete example of the countervailing pressures at work on the 
ground is the vexed area of intellectual property rights.
    Intellectual property rights were not recognized in Chinese law in 
1979, and a pattern of rampant violations of copyrights, trademarks and 
patents soon became a problem for foreign investors. Pressure from the 
United States, the European Union and others had some effect in 
changing Chinese policy statements, but these were somewhat grudging 
and were not reflected in changes on the ground. In the last 3 years, 
however, the policy debate on this question has been won. A study by 
the Ministry of Information Industry identified copyright violations as 
the single biggest obstacle to the development of a Chinese software 
industry. This was followed by State Council regulations in 1999 
requiring all government offices to use legal software and again in 
2000 requiring all entities, including enterprises, to do the same and 
demanding enhanced, coordinated enforcement of the law. The Development 
Research Center, the leading think tank under the State Council, in 
early 2000 issued a report quantifying the economic losses of 
counterfeiting to the State in the form of lost revenue, to enterprises 
in the form of lost sales and damage to their reputation, and to 
consumers in the form of poor quality, even dangerous goods. 
Counterfeiting was identified as one of the major targets of the market 
rectification campaign launched last year, along with smuggling, fraud, 
and other violations of commercial law. Leaders such as Premier Zhu 
Rongji and State Councilor Wu Yi provided strong, focused attention to 
these problems.
    Substantial revisions have been made in copyright, trademark and 
patent laws. While further improvements could be suggested, in general 
the legal framework is close to international standards and capacity 
building continues, often with foreign assistance. The European Union, 
for example, has funded a program to develop IPR laws that trains 
judges and law professors. Our member companies participate in such 
seminars to present case studies, and have also assisted with 
additional funding. Foreign companies also regularly hold training 
programs for local prosecutors, customs officials and other relevant 
authorities. The U.N. Development Program is sponsoring a program to 
train local economic planning officials in sustainable development that 
includes a substantial focus on how to transition away from 
specializing in counterfeiting, as some localities do. Foreign 
companies have supported the UNDP with funding as well as direct 
participation.
    Our member companies have actively fought to protect their 
intellectual property. One large consumer products company routinely 
gathers evidence and presents it to the authorities, which conduct 
raids observed by company personnel, confiscate counterfeit goods and 
bring prosecutions. Last year that one company was involved in over 
three hundred such raids. In one case, a factory that was about to be 
closed because of dropping sales was rescued by putting counterfeiters 
out of business. The company invited the police and prosecutors who 
worked on the case to tour the factory, where the grateful work force 
greeted them with applause. In another case, a company making batteries 
saw its sales increase by 135 percent in 1 year by closing down a 
single counterfeiter. There have been recent court victories in 
copyright cases as well, such as a case involving an internet domain 
name squatter where the rights of the foreign company were firmly 
upheld.
    Unfortunately, however, these positive examples do not reflect the 
general situation. China is not a single economy; it is a group of 
large, disparate regional economies. Although the central government 
can be described as authoritarian, its ability to control what happens 
in local areas is limited. Many factors such as those outlined above 
weigh against successful litigation for those attempting to protect 
their rights. Our members continue to report continued, large economic 
losses due to IPR violations. For those selling brand products in the 
Chinese market, the general estimate is that 15-20 percent of revenue 
is lost due to counterfeiting.
    In response, our member companies are shifting their focus from the 
content of the laws to problems of enforcement. In many cases, the 
dollar value of confiscated goods is low, so violators are dealt with 
in administrative procedures and assessed low fines, often never paid. 
There are also administrative bottlenecks in effectively transferring 
cases from civil to criminal authorities. Foreign companies are thus 
emphasizing criminal proceedings with modest success in the last year.
    One of the unanticipated consequences of WTO accession is likely to 
be an increase in the export of counterfeit goods manufactured in China 
to the rest of the world. China committed in the WTO protocol to give 
trading rights, presently restricted, to all legal entities in China. 
This means it will be much easier to import and export goods, and is a 
major improvement for US exporters and their customers in China. WTO 
will bring increased trade and the Customs will improve its efficiency 
in order to move a larger volume of goods across the borders of China 
in both directions. This is also a good thing, but unfortunately these 
developments will also make it easier for counterfeiters to export and 
increased enforcement in China will lead them to do so. If the fakes 
are sold in Latin America, Eastern Europe or the United States, it is 
more difficult to gather evidence and prosecute in China.
    We thus see a mixed picture: progress with respect to IPR law and 
policy, but continued failure to make enforcement effective. AmCham 
China is convinced that this problem will eventually be brought under 
control, because there are strong local interests in doing so. Chinese 
companies are damaged more than foreign companies by IPR violations and 
they know it. The Chinese government finds its economic ambitions 
hindered by its IPR environment and it is trying to change it. Our 
members will continue to defend their legal rights and assist further 
development of the legal system.
    The IPR case can stand as representative of the status of 
commercial aspects of rule of law in China. Given this situation, what 
approach should we take to encourage further progress toward 
transparency and consistency in the legal system generally?
    First, we should recognize that despite a rapid pace of social 
change since 1979, likely to be accelerated by WTO accession and a new 
generation of leaders, capacity building is a long-term enterprise 
dependent on institutional and cultural change in many sectors. In my 
opinion, it is a reasonable goal to strive for the rule of law as 
defined above with respect to property rights and contractual rights 
during the anticipated 10 years in power of the next generation of 
leaders, that is, roughly 2003-2013. Full establishment of the rule of 
law will probably take longer.
    Second, given the complexity of the process, we should encourage a 
multiplicity of players to pursue diverse avenues of institutional 
change, preferably in partnership with Chinese counterparts. The most 
active and important supporters of development of rule of law have been 
the European Union through the EU-China Legal and Judicial Cooperative 
Program, the Ford Foundation, the Canadian International Development 
Agency, the German government through the German Technical and 
Cooperation Corporation (GTZ) program to train MOFTEC lawyers.
    The Asia Foundation and The US-China Legal Cooperation Fund, a 
program of the education and research arm of the US-China Business 
Council also have small, but effective grant programs. The Fund has 
attracted support from approximately forty corporate donors. To quote 
the Fund, ``Contributors .  .  . share the belief that the people and 
the economies of the United States and China will benefit from further 
development of strong, transparent, impartial and equitable legal 
institutions. .  .  .'' Grants are made is such areas as training of 
judges and lawyers, legal protection of human rights, administrative 
law, commercial law and arbitration, and legal aid for the poor and 
special focus is on projects that demonstrate support from both US and 
Chinese sources. We strongly encourage member companies with sufficient 
resources to consider support for this Fund as part of their corporate 
social responsibility programs in China.
    Academic cooperation between American universities such as 
Columbia, Harvard, Stanford, and Yale and various Chinese universities 
in research and legal education is well established and productive.
    The American government, though it takes an active public role of 
advocating improvements in the rule of law in China, has been 
conspicuous by its absence. Recently a three million dollar 
appropriation was made, primarily to support a legal education program 
of Temple University Law School. Though a welcome beginning, this is a 
meager record compared with that of the European Union, individual 
European countries and American private sector donors such as the Ford 
Foundation. Furthermore, while we welcome the sustained effort of the 
EU to improve the rule of law in China, I should parenthetically note 
that the adoption of European legal concepts and practices tends to 
favor the commercial interests of European companies familiar with 
them. AmCham member companies would welcome a material effort by the 
United States to balance this influence.
    Another way in which the US government can assist the development 
of rule in law in China and at the same time assist American economic 
interests is to support the efforts of US law firms to be permitted to 
hire PRC qualified lawyers to practice PRC law. If permitted to hire 
PRC lawyers to practice PRC law, the US firms can have a significant 
positive impact on the sophistication and professionalism of the PRC 
lawyers and judges through their internal training programs, the impact 
of their corporate cultures, and the increased competition they will 
foster in the legal arena. They will also be able to provide better 
service to their clients, including many of our members. China made no 
WTO commitments on this point, highlighting the need for continued 
bilateral discussion on the economic reform process beyond the WTO 
framework.
    Third, we should not assume that we can know the outcome or that 
there is only one satisfactory result. Forces such as economic 
development, modernization, and globalization have not led to 
convergence among nations in the past, and will probably not do so in 
the future. The Chinese are a very large nation, with a well-honed 
sensitivity to foreign pressure. As has been the case with smaller 
nations, the Chinese legal system will reflect the interplay of its own 
social, cultural and institutional forces much more than standards 
suggested from abroad.
    We should recognize, but not be discouraged by the fact that our 
goals for Chinese legal reform are not those of the current leadership. 
China has stated it is attempting to build a socialist market economy 
governed by rule of law. Whatever the term ``socialist'' may mean, it 
does suggest a greater degree of State ownership of major enterprises 
than in the United States. Moreover, the Chinese government has 
articulated a conception of human rights placing more emphasis on 
responsibility to the community than individual rights, in which the 
right to subsistence is more important than personal liberty. Finally, 
the Communist Party intends to continue its rule. But if one reviews 
the history of such stated goals since 1949, and particularly since 
1979, it is apparent that they have changed frequently and 
dramatically. If the past is any guide, China's stated goals today will 
not necessarily be her goals in the future.
    If a legal system is established that protects property and 
contractual rights by promulgating accessible, objective and 
understandable laws with participation by affected parties, and 
enforcing them in a fair, reliable, and nondiscriminatory manner, the 
continued existence of the special, extra-legal privileges of the 
apparatus of the Party and government and of senior cadres and their 
families personally will be more and more anomalous. I personally do 
believe that establishment of the rule of law in the narrow sense 
defined here will inevitably and positively impact broader social and 
political trends. It is therefore to be desired that the rule of law be 
expanded as rapidly as possible.
    Considering actions that this Commission might recommend to the 
Congress and the Executive branch in support of this process, I would 
like to call to your attention the Commercial Law Development Program 
(CLDP) of the Office of the General Counsel in the Department of 
Commerce. CLDP provides training and consultative services seeking help 
in guiding the evolution of legal systems. It specifically focuses on 
``international economic agreements, foreign investment laws, project 
and trade finance, export controls, intellectual property rights, and 
government ethics''. All of these areas are currently under development 
in China, important to implementation of its WTO accession commitments, 
and key building blocks of commercial rule of law. CLDP has not been 
able to work in China, despite our strong national interest in having 
it do so, because it is partially funded by the Agency for 
International Development (AID). As you know, the Congress has barred 
AID from China since 1989 in reaction to the Tiananmen Square incident. 
In order to bring the CLDP to China, where it is badly needed and could 
make a contribution in the interest of both countries, AmChina China 
supports either removing the ban on AID funds in China, or finding 
another acceptable way to fund the program.
    We also encourage the Congress to appropriate a material level of 
funding for the Department of Labor and the Department of State to 
develop their own programs to assist development of the rule of law in 
China.
    Thank you very much. I look forward to your questions.
                                 ______
                                 

                 Prepared Statement of Donald C. Clarke

                              june 6, 2002
    Mr. Chairman, Mr. Co-Chairman, and Members of the Commission:
    I am very pleased to have the opportunity to address the Commission 
today on issues of the commercial rule of law and WTO implementation in 
China. I have been involved in Chinese studies in one way or another 
since the early 1970's and have been interested in Chinese law for over 
20 years. I have taught Chinese law since 1985, first at the University 
of London and now at the University of Washington, and have also spent 
time in practice advising companies doing business in China.
                               background
    It is well understood both inside and outside of China that the 
task of making China's laws and regulations conform to WTO requirements 
is a huge one. But a key feature of China's accession to the WTO that 
sets it apart from most other countries is not the size of the task, 
but the fact that accession is part of a larger strategy of massive and 
fundamental economic reform.
    China's economic reform era is now over 20 years old. The scope of 
the planned economy has been steadily shrinking, and few state-owned 
enterprises can afford to ignore market principles. Tariffs and non-
tariff trade barriers had been steadily dropping prior to WTO entry, 
while rules on foreign investment were gradually liberalized. The 
Chinese government has embarked on this strategy for its own sake, not 
to fulfill treaty commitments to foreigners, and Chinese leaders have 
sought WTO membership not simply because they believe that it will open 
more markets to Chinese products, but because they see membership as 
giving them extra leverage to force through difficult changes in the 
domestic economic system. Many in the leadership understand that 
China's WTO commitments, while labeled ``concessions'' in the language 
of international trade negotiations, are not really ``concessions'' to 
be reluctantly yielded at all, but rather sound policies that China 
would be wise to adopt even without WTO membership.\1\ Reforms simply 
imposed from outside are unlikely to go beyond surface compliance--if 
they get even that far--and truly take root. But many of the reforms 
required by China's WTO accession, from market opening to greater 
transparency in administrative procedures, have a strong domestic 
constituency as well as a foreign one. The influential ``Legal System 
Daily,'' for example, last November published no fewer than three 
commentaries by prominent law professors welcoming the pressures that 
WTO membership would impose in the direction of limited government and 
increased transparency.\2\ Thus, although China's trading partners may 
encounter rules and practices inconsistent with China's commitments and 
delays in curing these inconsistencies, it is not necessarily due to 
bad faith and foot-dragging by the central government (although of 
course that is a possibility). In many cases it will be due simply to 
the normal and well-documented difficulty the central government faces 
in getting many things done.
---------------------------------------------------------------------------
    \1\ See, for example, the remarks of Kong Xiangjun, a judge in the 
administrative tribunal of the Supreme People's Court:
    [W]e should not .  .  . conclude that [China's commitments 
regarding judicial review] are some kind of price or sacrifice that had 
to be made for China to enter the WTO. This kind of provision reflects 
the serious attitude and commitment of China to promoting the 
advancement of the rule of law .  .  . . It is completely in accord 
with China's strategy of governing the country according to law and 
will advance China's progress in establishing the rule of law. The 
beneficiary in the end will be China.
    Kong Xiangjun, ``Jianli yu WTO yaoqiu xiang shiying de sifa shencha 
zhidu'' (Establish a System of Judicial Review that Meets the 
Requirements of the WTO), Zhongguo Faxue (Chinese Jurisprudence), no. 
6, 2001, p. 8.
    \2\ See Yuan Chengben, ``Ru Shi wei sifa gaige tian dongli'' 
(Joining the WTO Pushes Forward Judicial Reform), Fazhi Ribao (Legal 
System Daily), Internet edition, Nov. 30, 2001 (interviewing Professor 
Li Shuguang); Ma Huaide, ``WTO yu zhengfu zhizheng linian'' (The WTO 
and the Guiding Concept of Government), Fazhi Ribao (Legal System 
Daily), Internet edition, Nov. 26, 2001; Wang Feng ``'Ru Shi' yaoqiu 
zhengfu juese zhuanbian'' (Entry into the WTO Requires a Change in the 
Role of Government), Fazhi Ribao (Legal System Daily), Internet 
edition, Nov. 12, 2001; see also Nan Xianghong, ``WTO: fa de chongxin 
goujia'' (WTO: The Restructuring of Law), Nanfang Zhoumo (Southern 
Weekend), Internet edition, Oct. 25, 2001 and Guo Guosong, ``Wei sifa 
gongzheng jianli zhidu bingzhang'' (Establish Institutional Protections 
for Judicial Justice), Nanfang Zhoumo (Southern Weekend), Internet 
edition, Oct. 25, 2001 (addressing the need for better court 
procedures, from improving the quality of judges to achieving greater 
transparency). For Chinese language sources, I have placed the author's 
surname before the given name in accordance with Chinese usage.
---------------------------------------------------------------------------
    This is by no means a counsel of inaction and infinite patience in 
the face of a failure by China to live up to its commitments in certain 
areas. As I have noted, part of the whole point of joining the WTO--a 
central government decision essentially imposed on local governments--
was to add foreign pressure to existing domestic pressures for reform. 
It does nobody any favors to pretend that specific and binding 
obligations do not exist. But it is necessary to bear in mind that not 
all violations will be deliberate, and that not all delay is 
obstruction.
            domestic applicability within china of wto norms
    One issue that has been the subject of some debate both inside and 
outside of China is that of the effect within the Chinese legal system 
of China's WTO obligations. In my view, as a practical matter, China's 
WTO obligations will not become part of its domestic law, binding on 
courts and government bodies, until appropriate domestic legislation 
and regulations incorporating those obligations are promulgated.
    China became a WTO member through its internal procedures for the 
signing and ratification of treaties.\3\ There are three ways in which 
China's treaty obligations might become part of its domestic law. 
First, they can be embodied in domestic legislation--a term I use here 
to include all authoritative sources of State norms in China, including 
``interpretations'' and other documents issued by the Supreme People's 
Court and other bodies. This approach is known as ``transformation,'' 
and it is one that China has adopted on many occasions.\4\ Second, they 
can be incorporated through specific reference in domestic legislation. 
This approach, which I shall call ``mediated incorporation,'' can be 
seen in Article 142 of the General Principles of Civil Law and Article 
238 of the Law on Civil Procedure, each of which directs courts, in 
cases involving foreigners, to apply the provisions of international 
treaties to which China is a signatory when such provisions conflict 
with relevant provisions of the law in question.\5\ This approach has 
also been taken in directives issued to lower courts by the Supreme 
People's Court. In 1987, for example, the court issued a notice to 
lower courts instructing them to give priority to the provisions of the 
Convention on the Recognition and Enforcement of Foreign Arbitral 
Awards in cases where the Convention applied and domestic law contained 
contrary provisions.\6\ While the mediated incorporation approach 
requires Chinese courts and government bodies ultimately to look 
directly to treaty texts instead of the texts of domestic law, it is 
domestic law that tells them to do so.
---------------------------------------------------------------------------
    \3\ Prof. Bing Ling of the City University of Hong Kong makes a 
persuasive argument that the ratification procedure was defective in 
that the National People's Congress Standing Committee granted a 
before-the-fact authorization (on August 25, 2000, long before the 
accession protocol had taken its final form and been signed by the 
Chinese government's representative), not an after-the-fact 
ratification. Prof. Ling's argument is available in full at , last visited June 3, 
2002; see also James Kynge, ``Academics hit at procedure to join WTO,'' 
Financial Times, Nov. 20, 2001, p. 14. As Prof. Ling points out, the 
validity of China's accession in spite of any procedural defects seems 
unquestionable as a matter of international law under Articles 45 and 
46 of the Vienna Convention on the Law of Treaties. I would argue 
further that as a practical matter it is unquestionable--or at least, 
will not be questioned--as a matter of Chinese domestic law as well.
    \4\ In 1986, for example, the Standing Committee of the National 
People's Congress adopted the Regulations of the People's Republic of 
China on Diplomatic Privileges and Immunities, thereby tranforming into 
domestic law China's obligations under the Vienna Convention on 
Diplomatic Relations.
    \5\ Similar provisions can be found in Article 72 of the 
Administrative Litigation Law (applying to foreign-related 
administrative litigation), Article 24 of the Frontier Health and 
Quarantine Law, Article 42 of the Postal Law, Article 51 of the Water 
Law, Article 28 of the Law on Taxation of Foreign Enterprises and 
Enteprises with Foreign Investment, Article 59 of the Tax 
Administration Law, Article 268 of the Maritime Commerce Law (applying 
to foreign-related matters), and Article 96 of the Negotiable 
Instruments Law (applying to foreign-related matters).
    \6\ See Supreme People's Court, ``Guanyu zhixing woguo jiaru de 
'Chengren ji zhixing waiguo zhongcai caijue gongyue' de tongzhi'' 
(Notice on the Implementation of the ``Convention on the Recognition 
and Enforcement of Foreign Arbitral Awards'' of Which China Is a 
Member), April 10, 1987, Art. 1.
---------------------------------------------------------------------------
    While the above two methods of making treaty obligations part of 
domestic law are not controversial, real debate revolves around the 
issue of whether bare treaty obligations, without more, can or should 
be considered a source of binding norms by legal decisionmakers. While 
academic views on this question are divided, the views of government 
officials are fairly consistently in the negative: specific 
transformation or mediated incorporation is necessary. This was 
certainly the view China presented in the meetings of the WTO Working 
Party. In Para. 67 of the Working Party Report, for example, China 
undertakes to meet its WTO commitments ``through revising its existing 
laws and enacting new ones fully in compliance with the WTO 
Agreement.''
    Whether treaty obligations can become part of domestic law without 
further mediation (a theory I shall call ``unmediated incorporation'') 
is a subject for debate because both the constitution and China's 
legislation are silent on the issue. Many years ago Prof. Wang Tieya, a 
noted international law scholar, laid down the view that China had a 
system in which its international law obligations automatically became 
part of domestic law, and this view has carried considerable weight in 
Chinese academic circles. This view was formed, however, in an era when 
China's international law obligations were all State obligations, and 
private rights were not implicated. Thus, China had essentially no 
international law obligations about which court enforcement in private 
litigation might be an issue. Its obligations were obligations of the 
government to do or not to do things with respect to other governments 
and their officials. Hence, it was possible for Wang and others to hold 
that there was and could be no conflict between international law and 
China's domestic law, because the government would always do what 
international law required of it.
    Once one begins talking about private rights being recognized, 
however, the argument becomes more difficult to support. Wang and 
others support their argument by noting the existence of some statutes 
providing that where the provisions of the statute conflict with 
China's international treaty obligations, China's international treaty 
obligations shall override the provisions of the statute.\7\ But surely 
this shows precisely that a specific rule in a domestic statute is 
necessary to give domestic legal effect to a treaty obligation; the 
very fact that the rule needs to be stated in a domestic statute or 
other official norm contradicts their position.
---------------------------------------------------------------------------
    \7\ See, e.g., the examples cited above in footnote 5 and the 
accompanying text. This argument is made in Tieya Wang, ``The Status of 
Treaties in the Chinese Legal System,'' Journal of Chinese and 
Comparative Law, vol. 1, no. 1 (July 1995), pp. 1-18, and Meng 
Xianggang, ``Woguo shiyong WTO guoji guize de liang wenti'' (Two Issues 
in the Application in China of the International Rules of the WTO), 
Renmin Fayuan Bao (People's Court News), Internet edition, March 29, 
2001. It appears in many other sources as well. The strongest argument 
I have seen from a court or government official appears in Sun Nanshen, 
``Cong Zhongguo ru Shi kan WTO xieyi zai Zhongguo fayuan de shiyong'' 
(Viewing the Application of the WTO Agreements in Chinese Courts from 
China's Accession to the WTO), Falu Shiyong (Application of Law), no. 
9, 2000, pp. 2-5, 20 (the author is a vice president of the Jiangsu 
Province Higher Level People's Court, only one level below the Supreme 
People's Court). In addition to the argument from incorporation favored 
by Wang Tieya, Sun argues (as do others) that the similarity in 
procedure for national legislation and treaty ratification means that 
they should have equal legal validity.
---------------------------------------------------------------------------
    The key proof of the theory of unmediated incorporation would be a 
case where a court, in the absence of an authoritative instruction to 
refer to treaty provisions, nevertheless applied such provisions 
although the rules of domestic dictated a different result. I know of 
no such cases.\8\
---------------------------------------------------------------------------
    \8\ Qingjiang Kong, a professor at the Hangzhou Institute of 
Commerce, cites two cases that he believes demonstrate the direct and 
unmediated application of treaty provisions by Chinese courts. See 
Qingjiang Kong, ``Enforcement of WTO Agreements in China: Illusion or 
Reality?'', Journal of World Trade, vol. 35, no. 6 (Dec. 2001), p. 
1208. In both cases, Chinese courts purported to apply the 
International Convention for the Unification of Certain Rules of Law 
Relating to Bills of Lading (the ``Hague Rules''). A reading of the 
cases reveals that they did so, however, because the parties had agreed 
contractually to apply the Hague Rules to their disputes. Indeed, China 
is not even a signatory to the Hague Rules, and thus there was no 
treaty obligation in the first place. The cases in question are China 
Material Supply Corp. of Xiamen Special Economic Zone of Fujian 
Province v. Europe-Overseas Steamship Lines NV Belgium, in Priscilla 
Leung Mei-fun (ed.), China Law Reports, 1991, vol. 3 (Singapore: 
Butterworths Asia, 1995), pp. 740-744, and Japan (Taisho) Sea Fire 
Insurance Co. Ltd. v. Tianjin Branch of China General Foreign Trade 
Transportation Company, in ibid., pp. 745-748.
---------------------------------------------------------------------------
    Whatever academic views might be,\9\ I believe the views that 
count, from the standpoint of China's trading partners and those doing 
business in China, are those of government officials, and in particular 
court officials. As noted above, I believe the statement of China's 
representative to the WTO Working Party constitutes a denial of the 
doctrine of unmediated incorporation. Equally important, however, are 
statements from senior officials of the Supreme People's Court (which 
has authority over the court system) and academics published in 
official or semi-official sources. Prof. Jiang Guoqing, for example, 
states in a lecture posted on a website administered by the Office of 
the National People's Congress Standing Committee that treaty norms do 
not apply in domestic law unless there is a specific domestic law norm 
making them apply.\10\ Similar views are voiced by Kong Xiangjun of the 
Administrative Chamber of the Supreme People's Court\11\ and Cao 
Shouye, also a judge in the Supreme People's Court.\12\ Finally, the 
President of the Supreme People's Court recently declared:
---------------------------------------------------------------------------
    \9\ A good statement in English of the position against unmediated 
incorporation is Zhaojie Li , ``The Effect of Treaties in the Municipal 
Law of the People's Republic of China: Practice and Problems,'' Asian 
Yearbook of International Law, vol. 4 (London: Kluwer Law 
International, 1994).
    \10\ Jiang Guoqing, ``Guoji fa yu guoji tiaoyue de jige wenti'' 
(Some Issues of International Law and International Treaties), Quanguo 
Renda Changweihui Fazhi Jiangzuo Jianggao Zhi Shisi (National People's 
Congress Standing Committee Lectures on the Legal System, No. 14), July 
4, 2001, available at  (website administered 
by the Office of the National People's Congress Standing Committee, 
News Bureau, Information Center).
    \11\ See Kong Xiangjun, ``Tongyi jieshi yuanze yu WTO falu de sifa 
shiyong'' (The Doctrine of Consistent Interpretation and the Use in 
Adjudication of WTO Law), Fazhi Ribao (Legal System Daily), Oct. 14, 
2001, p. 3; Kong Xiangjun, ``WTO falu de guonei shiyong'' (The Domestic 
Application of WTO Law), Fazhi Ribao (Legal System Daily), Internet 
edition, Dec. 16, 2001; Kong Xiangjun, ``Jianli yu WTO yaoqiu xiang 
shiying de sifa shencha zhidu'' (Establish a System of Judicial Review 
that Meets the Requirements of the WTO), Zhongguo Faxue (Chinese 
Jurisprudence), no. 6, 2001, pp. 3-14.
    \12\ See Cao Shouye & Wang Fei, ``Zhongguo fayuan shiyong WTO 
guize'' (The Application of WTO Rules by Chinese Courts), Renmin Fayuan 
Bao (People's Court Daily), Internet edition, October 15, 2001 and Cao 
Shouye, ``Zhongguo ru shi dui renmin fayuan de yingxiang'' (The Effect 
Upon People's Courts of China's Entry Into the WTO), Renmin Fayuan Bao 
(People's Court Daily), Internet edition, October 15, 2001.

         In the course of adjudication, People's Courts must be 
        knowledgeable about both domestic law and WTO rules; they must 
        both grasp the technique of application of international treaty 
        through transformation into domestic law, and do a good job in 
        making judicial interpretations in accordance with the 
        provisions of domestic law; they must both ensure the correct 
        implementation of international treaties in China, and pay 
        attention to upholding State judicial sovereignty and the 
        dignity of law.\13\
---------------------------------------------------------------------------
    \13\ Quoted in Xu Lai, ``Xiao Yang zai renmin fayuan 'ru shi' hou 
shenpan gongzuo zuotanhui shang tichu zhuanbian sifa guannian tigong 
sifa baozhang'' (Xiao Yang Suggests Transforming Judicial Concepts and 
Providing Judicial Protections at Roundtable Discussion on People's 
Court Adjudication Work After Accession to the WTO), Fazhi Ribao (Legal 
System Daily), Nov. 21, 2001, p. 1.

    While this statement is not as resolutely unambiguous as one might 
wish, it seems, with its constant references to domestic law and State 
sovereignty, to put the Supreme People's Court in the camp of the anti-
unmediated incorporation school. Certainly this is consistent with what 
we know of the operation of Chinese courts already. As I have discussed 
elsewhere,\14\ the hierarchy of rules Chinese courts follow tends to be 
the opposite of the putative hierarchy set forth in the constitution: 
while National People's Congress legislation should take priority over 
conflicting State Council regulations, for example, in reality it is 
usually the other way around. It is hard, therefore, to imagine that 
Chinese courts, which would uphold a State Council rule against a 
contrary, and theoretically higher, National People's Congress statute, 
and a National People's Congress statute against a contrary, and 
theoretically higher, provision in the constitution, would override a 
very clear provision in an authoritative Chinese regulation in favor of 
a claim based solely on a right allegedly granted in one of the WTO 
agreements.
---------------------------------------------------------------------------
    \14\ Donald C. Clarke, ``State Council Notice Nullifies Statutory 
Rights of Creditors,'' East Asian Executive Reports, vol. 19, no. 4 
(April 15, 1997), pp. 9-15.
---------------------------------------------------------------------------
    The practical import of this discussion is twofold. First, the fact 
that such an important issue--whether or not courts can or should 
directly apply the provisions of China's treaty obligations without 
further domestic legal authority--could go unresolved for so long shows 
the limited role traditionally played by courts and the legal system in 
the Chinese polity. This question has not been answered because it has 
never been a very important question before. Second, assuming that the 
dominant official view is the one that will actually be adopted by 
courts and government institutions, this need not be a source of great 
alarm to foreign governments and traders. It is no more than the 
position taken by the United States respecting its own WTO obligations, 
and in any case the number of private lawsuits before Chinese courts 
potentially implicating private rights granted under the WTO agreements 
is likely to be small.\15\
---------------------------------------------------------------------------
    \15\ The main areas where rights under WTO agreements might be 
directly asserted are (1) administrative litigation against Chinese 
government departments for (for example) failure to grant permits on a 
most-favored-nation basis, to reduce tariffs, or to take other actions 
promised in China's accession protocol, and (2) proceedings to enforce 
intellectual property rights, in which the substantive and especially 
the procedural protections of the Agreement on Trade-Related Aspects of 
Intellectual Property Rights (the ``TRIPS Agreement'') could be 
attractive to plaintiffs.
---------------------------------------------------------------------------
     china's ability to comply with wto commitments and procedures
    This section will look at China's ability to comply with WTO 
commitments and procedures with respect to its legal system in general, 
my particular area of expertise. I will not be attempting to predict 
whether China will indeed fulfill its commitments regarding, say, 
customs valuation procedures (see Para. 143 of the Working Party 
Report).
    In assessing China's ability to fulfill its commitments and to 
comply with WTO procedures in such matters as the Transitional Review 
Mechanism and dispute resolution, we need both to look backward and to 
look forward. Looking back, one cannot fail to be impressed by the 
amount of work that has been done so far in identifying, and revising 
or abolishing where necessary, laws and regulations inconsistent with 
China's WTO obligations.\16\ This work began, of course, long before 
China's formal accession last November. The scope of the effort can be 
appreciated by seeing what the Ministry of Foreign Trade and Economic 
Cooperation is reported to have achieved by the end of 2000 in 
anticipation of WTO membership: the review of over 1400 laws, 
regulations, and similar documents, including six statutes (of which 
five were revised), 164 State Council regulations (of which 114 were to 
be repealed and 25 amended), 887 of its own ministry regulations (of 
which 459 were to be repealed and 95 amended), 191 bilateral trade 
agreements, 72 bilateral investment treaties, and 93 tax treaties.\17\ 
In the first 2 months of the year 2001, the various ministries and 
commissions of the State Council are reported to have reviewed some 
2300 laws and regulations, of which 830 were identified as in need of 
repeal and 325 as in need of revision.\18\
---------------------------------------------------------------------------
    \16\ As this statement is intended to be largely forward-looking, 
it is not the place to canvass in detail what China has already 
accomplished in terms of WTO implementation. The United States-China 
Business Council has compiled useful summaries that can be found at 
 (dated June 2001) and on 
page 14 of the January-February 2002 issue of the China Business Review 
(dated September 2001).
    \17\ Nan Xianghong, ``WTO: fa de chongxin goujia'' (WTO: The 
Restructuring of Law), Nanfang Zhoumo (Southern Weekend), Oct. 25, 
2001.
    \18\ Ibid.
---------------------------------------------------------------------------
    Needless to say, the process of trying to identify inconsistent 
regulations in the abstract is bound to miss many problem areas. 
Identifying inconsistency is sometimes easy, but at other times takes a 
high level of expertise and a full hearing by a dispute settlement 
panel in the context of a particular set of facts. Thus, we should not 
be surprised if many inconsistencies remain despite the government's 
efforts. Nevertheless, I believe that the government has so far shown a 
great deal of energy in addressing problems of legislative 
inconsistency.
    Outside of the field of legislative revision there has also been a 
great deal of activity. The last several months have seen a flood of 
new regulations designed to implement China's commitments. There have 
also been countless training sessions for Chinese officials, many with 
foreign financial support.\19\ The government has begun restructuring 
to facilitate the meeting of WTO requirements. For example, the 
Ministry of Foreign Trade and Economic Cooperation (MOFTEC) has 
established a Department of WTO Affairs to handle implementation and 
litigation, and a ``China WTO Notification and Enquiry Center'' in 
order to help implement its transparency commitments.\20\ It has also 
established a Fair Trade Bureau for Import and Export to handle issues 
relating to unfair trade practices.\21\ The courts, for their part, 
have also undertaken training and other activities, such as review for 
WTO-compatibility of existing Supreme People's Court interpretations 
and other directives, designed to meet the requirements of WTO 
accession.\22\
---------------------------------------------------------------------------
    \19\ A partial, but nevertheless very long, list of such programs 
can be found in Brian L. Goldstein & Stephen J. Anderson, ``Foreign 
Contributions to China's WTO Capacity Building,'' China Business 
Review, vol. 29, no. 1 (Jan.-Feb. 2002), pp. 10-11.
    \20\ See Ministry of Foreign Trade and Economic Cooperation, 
``Guanyu Zhongguo zhengfu WTO zixun dian zixun banfa (zanxing)'' 
(Measures Regarding the Making of Inquiries at the Government of 
China's WTO Inquiry Point (Temporary)), issued Jan. 1, 2002, effective 
Jan. 14, 2002. This document provides the inquiry point with the 
official English name of ``China WTO Notification and Enquiry Center.'' 
A report dated April 11, 2002 stated that as of that time the Center 
had received over 300 inquiries. See Xinhua Wang (New China Net), 
``Jiangqiu chengxin! Woguo qieshi luxing jiaru shimao zuzhi de gexiang 
chengnuo'' (Stress Sincerity! China Conscientiously Implements Each 
Commitment Made Upon WTO Entry), April 11, 2002, available at , last visited June 3, 
2002.
    \21\ See Xianwu Zeng,''Trading Rights After China's WTO Entry,'' 
China Business Review, vol. 29, no. 1 (Jan.-Feb. 2002), p. 19.
    \22\ For a general account of activities within the court system, 
see Guoguang Li , ``To WTO Accession, Chinese Courts Think Ahead,'' 
China Law, February 2002, pp. 58-59.
---------------------------------------------------------------------------
    While much work remains to be done, then, there can be little doubt 
of the energy and commitment shown so far by the government. And this 
is to say nothing of the enthusiasm for knowledge about the WTO 
displayed outside of government. Almost any lecture or presentation 
with the word ``WTO'' in it is guaranteed to draw a large audience, and 
indeed among urban Chinese the English abbreviation is probably as 
common as, if not more common than, the original (and shorter) Chinese 
abbreviation (shi mao).
    Looking forward, I am generally sanguine about the prospect of 
China's compliance with its commitments and its willingness and ability 
to modify its rules if it loses a WTO dispute settlement proceeding. 
But there will be disappointments, and it is necessary to understand 
and anticipate them in order to put them in proper perspective and 
distinguish real and pressing problems from temporary and minor ones.
    As noted earlier, China undertook in Para. 67 of the Working Party 
Report to meet its WTO commitments ``through revising its existing laws 
and enacting new ones fully in compliance with the WTO Agreement.'' The 
extent to which China revises its existing laws and promulgates new 
ones is something that can be monitored with relative ease. But clearly 
it is not enough simply to promulgate new regulations. They must be 
applied and enforced. Here, there are at least two major issues worthy 
of discussion.
    The first is the extent to which local governments will engage in 
WTO-inconsistent practices that the central government is unable or 
unwilling to stop. We should be clear about one thing: there is no 
question that, as a legal matter under China's constitutional system, 
local governments may not do what the central government forbids them 
to do, and must do what the central government requires them to do. 
Because the central government has the legal capacity to require local 
governments to conform to WTO obligations, it has the obligation to do 
so.
    Some members of the WTO Working Party on China's accession were 
reported to have expressed concern that subnational governments in 
China might take measures inconsistent with China's WTO obligations, 
and that the central government would not or could not remove such 
measures. The representative of China assured them (see Para. 70 of the 
Working Party Report) that local governments had no autonomous 
authority over trade-related matters, and that the central government 
would ``ensure'' (not merely take the ``reasonable measures'' called 
for by Art. XXIV:12 of the General Agreement on Tariffs and Trade (the 
``GATT'') 1994) that local government regulations conformed to China's 
WTO obligations. This assurance is one of China's formal commitments. 
Art. XXIV:12 of the GATT 1994, which presupposes a degree of 
independence on the part of local governments, simply does not apply.
    Obviously, however, the real question is not quite so simple as the 
legal question. Subnational governments in China can enjoy considerable 
de facto autonomy from Beijing; this is a fact, not simply a convenient 
excuse for inaction cooked up by the Chinese central government. China 
suffers from numerous internal trade barriers that the central 
government is continually struggling, often unsuccessfully, to remove. 
We should not be surprised if, with the best will in the world, it has 
at least as much difficulty removing barriers to foreign goods and 
services.
    The phenomenon of local protectionism is one that has attracted the 
attention and concern of academics and policymakers in China for some 
time. Internal trade barriers are just one aspect of it; favoritism to 
local parties in courts is another. But it is important to understand 
that it is not just foreigners who want to get rid of it. It is 
generally in the interest of the central government to expand its own 
sphere of actual authority and to reduce such local protectionism, and 
it is practical considerations more than ideological ones that have 
stood in the way of progress in this area. It has been proposed for 
years, for example, that judges in local courts should be appointed and 
salaried by the central government instead of the local government. So 
far, however, the central government has not been willing to expend the 
political and financial resources necessary to put this reform into 
practice. But pressure for such reform is building, as shown by the 
recent appearance in Jingji Yaocan, the internal (non-public) journal 
of the State Council's think tank on development issues, of an article 
advocating precisely such a reform.\23\
---------------------------------------------------------------------------
    \23\ See Wang Xu, ``Tuijin sifa tizhi gaige, ezhi sifaquan 
difanghua qingxiang'' (Push Forward Reform of the Judicial System, 
Block the Trend Toward Localization of Judicial Power), Jingji Yaocan 
(Economic Reference), no. 74, 2001 (Nov. 31), pp. 11-22.
---------------------------------------------------------------------------
    The main factor behind local economic protectionism is the 
dependence of local government upon local enterprises for revenues. To 
the extent a government takes revenues, whether in the form of taxes or 
profits, from an enterprise, it is of course not unlike an owner and 
has the same interest in protecting those revenues. When the owner of 
an enterprise can control the conditions under which that enterprise 
competes, the results are utterly predictable. With the further 
progress of economic reform in China, one might expect to see a 
widening of the tax base and a reduction of the dependence of local 
governments upon specific enterprises for revenues. Needless to say, 
however, the influence of powerful local businesses seeking protection 
will not disappear in China any more than it has disappeared in China's 
trading partners.
    The second issue I wish to raise here is that of the capacity of 
China's courts to handle a substantial workload of reasonably complex 
cases. Here the news is neither especially good nor especially news, 
since it has been widely known for some time that China's courts are 
weak and its judges, on the whole, poorly qualified. China's courts 
will continue to present difficulties in the years ahead. On the other 
hand, as in many other areas of Chinese legal and political life, we 
can expect the most reform in areas where there is a solid domestic 
constituency for it, and court reform is undoubtedly one of those 
areas. The key issues in court reform from the standpoint of China's 
fellow WTO members are the qualifications of judges, the willingness 
and capacity of courts to render fair judgments free of corruption and 
pressure from local government, and the ability of courts to execute 
those judgments once rendered.
    The low qualifications of China's judges are no secret, and indeed 
are a regular subject of discussion by high government officials, 
including the President of the Supreme People's Court.\24\ As of 1995, 
for example, only 5 percent of China's judges nationwide had a 4-year 
college degree in any subject (let alone in law),\25\ and it is 
currently estimated that about 10 percent of judges have 4-year college 
degrees in law.\26\ A 1998 study of nine basic-level courts (the lowest 
level) in a major provincial city revealed that only 3 percent of the 
judges had a bachelor's degree in law and that the ``great majority'' 
had had other types of jobs in the court administration such as 
bailiff, clerk, or driver before being promoted to the rank of 
judge.\27\
---------------------------------------------------------------------------
    \24\ See the remarks of Xiao Yang reported in ``Xiao Yang zai 
renmin fayuan 'ru shi' hou shenpan gongzuo huiyi shang tichu zhuanbian 
sifa guannian tigong sifa baozhang'' (Xiao Yang Proposes to Change 
Judicial Concepts, Supply Judicial Guarantees at Conference on 
Adjudication Work of People's Courts Following WTO Accession), Fazhi 
Ribao (Legal System Daily), Internet edition, Nov. 21, 2001. Two other 
senior Supreme People's Court officials comment to the same effect in 
Guoguang Li , supra note 22, pp. 55-60, and Cao Shouye, supra note 12. 
However accurate the comments, one must wonder about morale among lower 
court officials constantly held up for contempt by their superiors.
    \25\ See Deng Ke, ``Sifa gaige: xianshi yu keneng'' (Judicial 
Reform: Reality and Possibilities), Nanfang Zhoumo (Southern Weekend), 
Internet edition, Oct. 25, 2001.
    \26\ Author's interview with members of Beijing University Faculty 
of Law, March 2001.
    \27\ See Li Xiaobin, ``Shenpan xiaolu ruhe neng you da fudu tigao'' 
(How Can There Be a Large Increase in the Efficiency of Adjudication?), 
Faxue (Jurisprudence), no. 10, 1998, pp. 52-54.
---------------------------------------------------------------------------
    The frequency with which situations such as this are reported 
suggests strongly that there is no political difficulty with advocating 
reform and that such advocacy is supported in important sectors of the 
central government. China has in fact recently taken solid steps toward 
improving the qualifications of judges. Last March, for example, saw 
the first administration of a new unified judicial examination for 
lawyers, prosecutors, and judges. Although sitting judges will not be 
required to take or pass the examination, to require this of judges 
going forward is already a very far-reaching (indeed, surprisingly so) 
reform at this stage of China's legal development--so far-reaching, 
indeed, that one wonders whether the pool of those who pass and are 
willing to serve as judges will be big enough to serve the needs of the 
court system. In any case, however, this reform--and the political 
difficulties that must have been overcome to effect it--is solid 
evidence of the potential for significant reform to occur where there 
is a domestic constituency for it. Fortunately, there is a domestic 
constituency for significant further reforms in the judicial system.
    In addition to the problem of the quality of judges, China's courts 
are at present not fully reliable as enforcers of statutorily 
guaranteed rights. This is true for a number of reasons. First, while 
statutes are superior to regulations issued by government ministries in 
China's formal constitutional structure, a ministry regulation that is 
directly on point will generally be considered in fact to be directly 
applicable rule by both government officials and court officials. This 
is simply a matter of what might be called customary legal culture; it 
has been both noted and criticized in China as well as abroad,\28\ and 
among many critics WTO accession was viewed as a helpful spur to 
change. Nevertheless, change will not come quickly. Second, there is 
the well known problem of corruption in the judiciary. This problem is 
not of course unique to China. Third, Chinese courts often have 
difficulty enforcing their judgments. As this problem is also well 
known and has been the subject of considerable commentary elsewhere by 
myself and others,\29\ I will not go further into it here.
---------------------------------------------------------------------------
    \28\ See, for example, Donald C. Clarke, ``State Council Notice 
Nullifies Statutory Rights of Creditors,'' East Asian Executive 
Reports, vol. 19, no. 4 (April 15, 1997), pp. 9-15.
    \29\ See Randall Peerenboom, ``Seek Truth from Facts: An Empirical 
Study of the Enforcement of Arbitral Awards in the People's Republic of 
China,'' American Journal of Comparative Law. vol. 49, no. 2 (2001), 
pp. 249-327, and Donald C. Clarke, ``Power and Politics in the Chinese 
Court System: The Execution of Civil Judgments,'' Columbia Journal of 
Asian Law, vol. 10, no. 1 (Spring 1996), pp. 1-125.
---------------------------------------------------------------------------
    Fourth, and less well known, is the tendency of Chinese courts not 
to aggressively seek jurisdiction over cases, but on the contrary to 
fear it and often go to great lengths to avoid taking difficult or 
sensitive cases. Courts in China have the choice of accepting or not 
accepting a case. This is somewhat akin to the institution of summary 
judgment in its gatekeeping function, but very much unlike it in that 
it is not governed by any consistent set of principles other than the 
court's general sense of whether the case seems meritorious and 
deserving of further proceedings. Courts can use this power simply to 
decline to hear, and thus avoid ruling on the merits of, cases that 
look troublesome and likely to cause serious offense to powerful 
interests no matter how the court decides.
    Most recently, the Supreme People's Court of China stirred up a 
major controversy when it instructed lower courts simply to stop 
accepting shareholder suits for damages based on certain violations of 
China's Securities Law.\30\ This instruction, it is important to note, 
was not based upon a theory that the shareholders had no legal right of 
action under the Securities Law. It was explicitly based on the grounds 
that adequate procedures had not yet been worked out for hearing such 
suits, and that they would therefore have to wait.\31\ The real reason 
was simply that the courts were terrified of a number of looming 
actions in which shareholders were bringing, or about to bring, suit in 
several courts around the country, and the specter of overloaded 
judicial resources and inconsistent decisions on similar facts was too 
much to contemplate.
---------------------------------------------------------------------------
    \30\ See Supreme People's Court, ``Guanyu she zhengquan minshi 
peichang anjian zan bu shouli de tongzhi'' (Notice on Temporarily Not 
Accepting Securities Cases Involving Civil Suits for Damages), Sept. 
21, 2001.
    \31\ See ``Gao yuan biaoshi shenli zhengquan jiufen an jiang zhubu 
tuikai'' (Supreme Court Indicates that the Hearing of Cases Involving 
Securities Disputes Will Gradually Be Increased), Zhongguo Zhengquan 
Wang (China Securities Net), Oct. 11, 2001, available at  (reporting remarks of Supreme People's Court official 
Cao Shouye).
---------------------------------------------------------------------------
    Just a few months ago, on January 15, the Supreme People's Court 
finally announced that investors would be allowed to proceed with 
actions based on claims of false disclosures in securities trading, but 
only where China's Securities Regulatory Commission had established the 
existence of such false disclosures.\32\ While this is no doubt welcome 
news to investors, it underscores the casual attitude toward 
statutorily granted rights taken not only by government agencies, but 
by the courts themselves. The Court apparently agrees with the 
plaintiffs that they State a valid claim under the Securities Law, but 
has interposed, without any statutory foundation whatsoever, the CSRC 
as a gatekeeper in order to ensure that claims not approved by the 
government will not come before the courts. (And all other claims 
remain barred for at least the time being.)
---------------------------------------------------------------------------
    \32\ See Richard McGregor, ``China to Allow Investors to Sue Listed 
Companies,'' Financial Times, Internet edition, Jan. 15, 2002.
---------------------------------------------------------------------------
            what kind of legal system does the wto require?
    Despite the problems discussed above, it must be recalled that the 
WTO does not mandate a perfect legal system, or even a basically fair 
one, outside of a few specific areas. At times, according to some of 
the more ambitious claims, it seems that China must utterly revamp its 
legal and political system--in short, stop being China--or risk being 
found in violation of its WTO commitments. One analyst goes so far as 
to State that the national treatment and transparency requirements of 
the GATT require China to amend its constitution to eliminate any 
special position for the Communist Party and to delete or amend the 
word ``socialism'' to the extent that it implies or authorizes Party 
control over the operation of the legal system.\33\
---------------------------------------------------------------------------
    \33\ Pitman Potter, ``The Legal Implications of China's Accession 
to the WTO,'' China Quarterly, no. 167 (Sept. 2001), p. 603.
---------------------------------------------------------------------------
    This is going too far. First, the requirements of the WTO 
agreements for fairness and transparency are in fact surprisingly 
limited. The only WTO agreement that comes close to a general 
requirement of fairness in the operation of the legal system is the 
TRIPS Agreement. This agreement does indeed set forth in Part III 
(``Enforcement of Intellectual Property Rights'') a number of 
requirements for fair judicial proceedings for the protection of 
intellectual property rights.\34\ However, it is worth noting that 
Article 41.5 specifically states that this Part [III] does not create 
any obligation to put in place a judicial system for the enforcement of 
intellectual property rights distinct from that for the enforcement of 
law in general, nor does it affect the capacity of Members to enforce 
their law in general. Nothing in the Part creates any obligation with 
respect to the distribution of resources as between enforcement of 
intellectual property rights and the enforcement of law in general.
---------------------------------------------------------------------------
    \34\ See generally Part III of the TRIPS Agreement, Articles 41 to 
50.
---------------------------------------------------------------------------
    Once this disclaimer of obligation is taken into account, there is 
not much left of the Part III obligations beyond the obligation to pass 
appropriate legislation. It is hard to see a strong mandate here for 
institutional reforms.
    Moreover, the very fact that the requirements of Part III are 
specifically listed in the TRIPS Agreement suggests that those 
requirements do not apply to the other WTO agreements and do not attach 
to WTO membership generally; they could almost be read as a list of 
things a country's judicial system does not need to have outside the 
realm of intellectual property. Finally, of course, the TRIPS 
Agreement's obligations apply only to proceedings for the protection of 
intellectual property rights. These are a small part of the legal 
system's activity.
    Other WTO agreements such at the GATT and the General Agreement on 
Trade in Services (the ``GATS'') also have provisions spelling out 
transparency requirements, but once again the obligation is more 
limited than generally assumed. Article X of the GATT contains 
requirements respecting transparency and the impartial administration 
of law, but these apply only to a limited subset of China's laws: those 
affecting trade in goods. Similarly, the corresponding provision of the 
GATS applies only to scheduled sectors--those that China has agreed to 
open up at least partially.
    In short, there is no general obligation under the WTO agreements 
to have a fair and well functioning legal system. That obligation 
applies only to specific actions in specific sectors. Of course, it is 
unlikely that a State could produce a fair and well functioning legal 
system in those sectors and be unable or unwilling to produce it in 
others. Thus, a good legal system is likely to be an all-or-nothing 
proposition. Nevertheless, it is important to bear in mind that the 
undoubted problems of China's legal system cannot uniformly be 
condemned as violations of its WTO commitments. Many members of the WTO 
have or have had legal systems of questionable fairness, and nobody has 
ever suggested that that disqualified them from WTO membership. The 
fact that China happens to be a major actor in the world trading 
system, whereas these members may not have been, does not change the 
argument.
    A second answer to the claims that accession requires major 
revisions to China's entire legal system is to note that the WTO system 
cares much less about what you say than about what you do. The 
constitutions of the WTO member states contain any number of vague 
provisions susceptible of various interpretations, many of which might 
be WTO-unfriendly. But the issue for China's trading partners is not 
whether its constitution gives primacy to the Communist Party in 
judicial proceedings. It is not even whether the Communist Party in 
practice controls judicial proceedings. It is whether those proceedings 
as actually conducted meet the GATT, GATS, and TRIPS Agreement tests of 
fairness and transparency.
    The area of the Chinese legal system that will probably cause the 
most difficulty is its present inability to provide, at least on a 
consistent basis, truly independent review of administrative actions. 
The financial dependence of courts on local government is compounded 
first by the lower political status of judges relative to many of the 
officials whose actions they will be called upon to judge, and second 
simply by the tradition of judicial deference to administration. This 
tradition is reinforced in a very concrete way by the structure of 
courts, which are at every level part of the so-called ``political-
legal'' system at the same level, a vehicle of Party control that 
coordinates the activities of courts, police, and prosecutors. Parties 
may be justly dubious of receiving an impartial hearing in an 
environment where ex parte contacts are common, corruption is 
widespread, and courts are allowed and even encouraged to contact 
superior courts (without notice to the parties) for their advice on 
specific cases before rendering a judgment.
    Future reform is not, of course, out of the question. As I have 
noted earlier, the problems were diagnosed in China long ago and the 
solutions to at least some of them are there on the table: among them, 
for example, putting power over staffing and financing of courts to the 
central government, raising judicial salaries in order to attract a 
higher calibre of personnel, and ending the use of courts as a dumping 
ground for demobilized army officers.
    Bearing in mind the problems outlined above, I shall now turn to a 
few specific commitments relating to China's legal system (I am not 
addressing here any of China's commitments respecting specific trade 
matters such as tariff levels, quotas, etc.) where I see potential 
difficulties in compliance. Three relate to transparency. In Para. 334 
of the Working Party Report, China promised to make available in one or 
more of the official WTO languages all laws, regulations, and other 
measures pertaining to or affecting trade in goods or services, TRIPS, 
or foreign exchange control not less than 90 days following their 
implementation. Considering the vast array of potential sources of 
relevant measures, including central ministries, local governments and 
people's congresses, and even the court system, this is an 
astonishingly ambitious commitment. It is worth noting that despite the 
great thirst in the private sector for such translations, not a single 
service, commercial or otherwise, exists today that can truly say that 
it provides translations of all such laws and regulations. The universe 
is simply too vast.
    China has undertaken a similarly vast commitment in Para. 336 of 
the Working Party Report. It has promised to designate one or more 
enquiry points where information about all laws, regulations, and other 
measures pertaining to or affecting trade in goods or services, TRIPS, 
or foreign exchange control, as well as texts, can be obtained. To 
fulfill this promise completely, the enquiry point will have to be 
fully informed as to all relevant provincial and local regulations from 
all parts of China. One wonders whether any country could carry this 
out successfully.
    Finally, in Para. I.2.C.3 of the Accession Protocol, China has 
promised that any individual, enterprise, or WTO member can get 
information about any measure required to be published under the 
Accession Protocol at a designated enquiry point, and that a response 
must be forthcoming within 30 or at most 45 days. Although China has 
promised an ``authoritative'' reply only to fellow WTO members, it has 
nevertheless promised an ``accurate and reliable'' reply to individuals 
and enterprises. Even this standard could prove difficult to meet if 
the enquiry point is flooded with questions. In short, these three 
provisions all seem to promise to make available a kind of knowledge 
that does not currently exist, and which it will be very burdensome to 
provide.
    Similar problems are likely to afflict the Transitional Review 
Mechanism, which on China's part consists primarily of the obligation 
to supply information. It seems inevitable that China will interpret 
the requirements for information narrowly, given the vast range of 
information called for. While procuring the statistical information 
called for is merely a question of requiring the relevant authorities 
to collect it, it will be more difficult to provide the complete lists 
of relevant regulations and administrative measures that are called 
for, since it will not always be obvious that a particular regulation 
may have an impact on, for example, trade in goods or services.
    In addition to the specific problems indicated above, the Working 
Party Report and the Accession Protocol also pose somewhat 
contradictory demands both at the conceptual level and at the concrete 
level. They generally promote the strengthening of legal institutions 
in China, but in some places seem to promote the opposite and to 
encourage China to continue its tradition of administrative 
omnipotence. More generally, China's government is paradoxically being 
asked to exercise central power to further decentralization, and to 
exercise administrative power to strengthen judicial power.
    Consider, for example, Para. 68 of the Working Party Report: China 
promised that administrative regulations, departmental rules and other 
central government measures would be implemented in a timely manner, 
and that if they were not changed in time, the government would still 
honor China's WTO commitments. Presumably China made this promise at 
the behest of the members of the Working Party, but it is tantamount to 
saying that the government may decide at any time simply to ignore its 
own duly promulgated regulations and to operate according to some other 
set of standards. Fortunately for the rule of law in China, the Chinese 
government was apparently not asked to promise to ignore ``laws,'' 
i.e., legal requirements issued by a constitutionally superior body, 
the National People's Congress or its Standing Committee.
    Perhaps more troublesome is the fact that apparently not only is 
the government to ignore its own regulations if they cannot be changed 
in time, but so also are the courts. Here, the issue is how courts are 
to be notified, other than through the normal process of formal repeal 
and replacement, that duly promulgated State Council regulations they 
would normally be bound to implement have lost their effectiveness. The 
only method would seem to be one that China's trading partners are in 
other arenas encouraging her to move away from: the unofficial note or 
telephone call from a senior official instructing courts how to operate 
in a way that is both arbitrary and opaque.
    Similarly, Para. 203 of the Working Party Report contains a promise 
not to enforce the terms of contracts containing foreign exchange 
balancing, local content, or export requirements. The demise of such 
obligations will cause few tears among foreign investors. If the 
government is saying that as a regulator, it will decline to exercise 
its discretionary authority to seek sanctions against those who do not 
fulfill those terms of their joint venture contracts, that is one 
thing. But if it is claiming the power to order courts not to enforce, 
between parties, contract rights arising under laws passed by the 
National People's Congress or its Standing Committee (both 
constitutionally superior bodies), that is quite another. It may indeed 
have such power as a matter of fact, but whether China's trading 
partners should be encouraging its exercise is questionable.
                               conclusion
    China is a large country in which the central government has a 
serious problem in making its writ run in a number of sectors of 
activity. Moreover, it is just emerging from a period of extensive, and 
perhaps WTO-inconsistent, government control over economic activity. 
Even assuming the utmost good faith on the part of the central 
government, therefore, there are bound to be WTO-inconsistent measures 
and practices--quite possibly a good number of them--that persist after 
China's accession. Those who predict problems are not wrong to point 
this out. What is unlikely, however, is that these problems will amount 
to more than routine frictions, and will bring either China or the 
world trading system crashing down, or will require major changes in 
the way China is governed, such as removal of the Communist Party from 
its traditional spheres of influence.
    First of all, any dispute settlement proceedings that are 
undertaken will take time. This is insufficiently realized by many 
Chinese commentators, who are afflicted perhaps by too strong a sense 
of urgency. It is commonly said, for example, that the need to identify 
and revise inconsistent regulations is pressing because if 
inconsistencies are found once China is in the WTO, its trading 
partners can impose trade sanctions. In fact, of course, the process is 
not nearly so fast. The complaining State would first have to notify 
China of its complaint and enter into discussions with it; only if it 
were dissatisfied with the results might it bring a proceeding under 
the WTO's dispute settlement procedures, and if China ultimately lost 
it would then still have a reasonable time (Article 21.1(c) of the 
Dispute Settlement Understanding suggests 15 months as a general 
guideline) within which to modify the offending regulations.
    Second, it has become clear even in the very short time since 
China's accession that its trading partners have no intention of 
flooding the Dispute Settlement Body with complaints. Individual 
companies cannot bring complaints in this forum against WTO members; 
only other member governments can. The trade authorities of those 
member governments have limited resources and must pick and choose the 
cases they want to bring. Moreover, they are limited by diplomatic 
considerations. Thus, there is no evidence of a hurry on anyone's part 
to bring large numbers of complaints.\35\
---------------------------------------------------------------------------
    \35\ See, e.g., Reuters, ``US Business Says [sic] Patient on China 
WTO Commitments,'' Feb. 8, 2002.
---------------------------------------------------------------------------
    I would like to end with a few words on potential United States 
assistance with compliance and capacity-building. Because of China's 
relative lack of experience with a market economy, it is inevitable 
that despite the government's efforts to identify and weed out WTO-
inconsistent legislation, some inconsistent rules and practices will 
remain, and new ones will crop up. It is in fact likely that many such 
inconsistent rules will be discovered over time. As I have discussed, 
the government has already devoted considerable energy to making 
Chinese laws and regulations consistent with its WTO obligations. As in 
any country, there may be rules the government wishes to retain that 
its trading partners view as questionable under WTO principles, like 
the E.U.'s rules on bananas or the U.S. rules on Foreign Sales 
Corporations. And there may be rules that displease China's trading 
partners that do not in fact run afoul of the WTO agreements. But there 
is no reason to doubt that the government is in principle genuinely 
committed to getting rid of many of the old rules that shackled the 
economy and has seized WTO accession as an opportune moment to do it. 
There is no reason to think that the Chinese government is committed to 
defending every WTO-inconsistent rule to the bitter end.
    The United States is now very much involved, both at the 
governmental and the non-governmental level, in activities aimed at 
promoting compliance and building capacity. These activities should 
continue. Considering the volume of trade at stake, the required 
expenditure is probably quite modest.
    The United States should work with China to develop formal 
mechanisms--some of which are already in existence--that can identify 
questionable rules and practices, hear arguments from affected parties, 
and deliver advice to the appropriate governmental body on the WTO-
consistency of the rule. This would give the Chinese government the 
opportunity to continue, in a structured and unified way, its review of 
its own regulations, and could serve to obviate the need for formal WTO 
dispute resolution procedures in many cases.
    In particular, compliance and capacity-building efforts should be 
directed at local governments. The degree of local government 
commitment to reform and receptivity to WTO standards and principles 
varies. But almost all local governments have one thing in common: they 
are drastically less informed than the central government about the WTO 
in general and about China's specific commitments in particular. Only 
recently have the WTO accession documents been available in Chinese 
(they can now be downloaded from MOFTEC's web site), and even so it is 
no more realistic to expect Chinese local officials to understand their 
details than to expect American local officials to understand the WTO. 
There is a great need at the local level for seminars and workshops 
that will explain the basic principles of non-discrimination and 
transparency. Local governments need to be encouraged to set up their 
own offices for hearing and resolving complaints about WTO-inconsistent 
measures so that recourse need not be had to Beijing or, failing that, 
the WTO Dispute Settlement Body.
    It is important, however, to pay some attention to the target 
audience. It may make a great deal of sense to train judicial officials 
in the principles of transparency and due process, for example, but 
they have very little need to be acquainted with China's substantive 
commitments under the WTO. Those commitments mean little to courts 
until they have been translated into domestic law. On the other hand, 
it is probably a good idea to train local government officials in the 
principles of non-discrimination and national treatment, since the 
granting of special breaks and favors on an ad hoc basis is a deeply 
rooted government practice as natural and unremarkable as 
breathing.\36\
---------------------------------------------------------------------------
    \36\ In its 2002 National Trade Estimate Report on Foreign Trade 
Barriers--China (March 29, 2002), p. 48, the Office of the United 
States Trade Representative reflected concerns that local officials 
``do not understand China's WTO commitments.'' These concerns seems 
well founded. See, for example, the (barely) post-accession Zhejiang 
Province Regulations on Protecting the Investment of Taiwanese 
Compatriots (Zhejiang sheng Taiwan tongbao touzi baozhang tiaoli) 
passed by the Zhejiang Provincial People's Congress Standing Committee 
on Dec. 28, 2001 and effective January 11, 2002. These regulations 
promise special benefits for Taiwanese investors, thus apparently 
violating most-favored-nation principles to the extent that the 
investment is in a sector covered by, for example, the GATS, and 
further specifically encourage investment in projects that will produce 
for export. To the extent that the ``encouragement'' constitutes an 
export subsidy, it will of course violate the GATT.
---------------------------------------------------------------------------
    I sometimes think of the Chinese legal system as an aircraft 
carrier, and of foreign assistance projects as rowboats attempting to 
change its course. To a very large extent, the path of that aircraft 
carrier will be determined by what goes on in the engine room and on 
the bridge. This is a counsel not of despair but of humility, patience, 
and thoughtfulness. Effective compliance and capacity-building programs 
must be designed to work over the long term and to build relationships 
with specific institutions. They must strike the balance between asking 
too much and asking too little, either of which will lead to nothing 
being done. And the U.S. must be willing to work with and through non-
governmental organizations, other WTO members, and multilateral 
organizations in order first to demonstrate that WTO compliance is not 
simply a narrow American political interest, and second to avoid having 
discussions about Chinese compliance with multilateral standards turn 
into possibly contentious, and certainly fruitless, discussions about 
U.S. trade practices vis-a-vis China.
                                 ______
                                 

                Prepared Statement of Jeffrey L. Fiedler

                              june 6, 2002
    Thank you Mr. Chairman for this opportunity to appear before the 
Commission.
    I would like to offer some thoughts on the commercial rule of law 
and the WTO and raise what I believe is a policy question that must be 
addressed by the United States government in its dealing with the PRC 
over the next few years.
    There is widespread and legitimate concern within the Congress, the 
executive branch and the business community about whether China will 
fully comply with WTO rules and the agreements it made when it gained 
entrance. This concern has roots in three concerns: one, Chinese 
government officials and business executives do not understand the 
complex maze of rules and agreements; two, China has a dismal record of 
compliance with bilateral and international agreements; and three, the 
concern that domestic unrest will cause the Chinese government to 
ignore or, at a minimum, postpone compliance with its agreements. These 
concerns are further complicated by the prospect that compliance is 
expected under the tutelage of a new group of little known and untested 
national leaders about to assume power.
    Permit me, as a non-lawyer, to make a few comments on the rule of 
law generally and commercial law specifically. All discussion of the 
law in China must be had with the understanding that there is no rule 
of law as we know it in China. Legal concepts of any variety or 
derivation do not guide government officials, business executives or 
ordinary citizens in their daily lives. It is power, specifically the 
power of the Communist Party, which guides most decisions of 
consequence in China. That is not to say that everything is simple, it 
is not. The complex web of power relationships is ever changing. There 
are various dynamics of power at work, but none of them are rooted in 
the participants' desire to comply with one law or another.
    During the various debates in the Congress over the past decade we 
have heard much about the power of free trade and capitalism to bring 
about change in China. Now that the principal debate is over, we are 
hearing less about it. But, what we are now hearing more about is the 
rule of law, and the how commercial law can help change China. I hope 
we don't have to hear too much about this for just as capitalism 
doesn't bring democracy, commercial law does not give birth to the rule 
of law. Commercial law was pretty well developed in Mississippi and 
elsewhere in the 1960's, but respect for the rule of law left much to 
be desired.
    If the US government and the business community want to experiment 
with developing a system of functioning commercial law within the 
context of authoritarian political rule so that American corporations 
can do business in China with some measure of what they perceive to be 
equity and predictability, so be it. But, we should be spared the 
rationalizations about how much this contributes to the development of 
civil society.
    If the US government wants to spend taxpayer money training Chinese 
``judges'' so they can better understand contract law, so be it. Just 
do it without pretending that this somehow advances the development of 
civil society. The problem with the Chinese legal system is not 
untrained judges. The problem is that it is not a legal system. It is a 
system designed primarily to maintain the power of the Communist Party, 
and only secondarily to govern the conduct of individuals within 
society. It certainly has no significant function in governing the 
relationship between the government and its citizens.
    Training lawyers and judges absent systematic change is analogous 
to training the officials of the All Chinese Confederation of Labor 
(ACFTU) to be better labor leaders. Certainly safety and health 
training for staff at all levels of this phony union structure is 
intrinsically a good thing. It might even save a few people their arms 
and legs. But in the end, the ACFTU will still be a phony union, albeit 
with some staff who now know better what they are not doing.
    The central concern of the Chinese government and the ruling 
Communist Party is so-called ``social stability.'' It is also the 
primary concern of the United States government, and of US 
corporations. The US government expresses its concern slightly 
differently. At various times, mostly during political debates, the 
specter of ``chaos'' has been held up for all to consider--a billion 
something people running amok. The net result has been a conscious 
decision among Members of Congress and various Administrations, both 
Democratic and Republican, to support efforts of the so-called 
``reformers'' within the Communist Party. It has helped everyone 
rationalize this action knowing that few if any members of the 
Communist Party actually believe in communism any more.
    The leaders of the Party believe in their own power. They believe 
that they can cobble together a new foundation of power based on 
economic growth. Foreign investment and trade is crucial to generating 
this growth. To the extent that it is necessary and in its interests, 
the Party is willing to share the fruits of this growth with foreign 
corporations. Both the Party and the US government viewed China's 
entrance into the WTO as lubricant for this continuing economic 
relationship. Furthermore, both view it as a catalyst for continued 
change. The US views it as getting the Chinese used to complying with 
international rules, and the ruling Party views it is a convenient 
justification for such moves as dismantling its State enterprise 
system.
    The question of continued ``social stability'' remains wide open. 
The critical issue is not whether China develops a deeply rooted system 
of commercial law, or even whether its various actors understand WTO 
rules and regulations. The real issue is what will the Party do when 
WTO implementation clashes with its own view of what is in its 
interests, i.e. threatens its continuing ability to rule.
    It is in dismantling the State enterprises system that all of the 
many conflicts in China come together. No one outside China disputes 
the necessity of this. In the first instance, the Chinese financial 
system depends upon it. In any other country, the banking system would 
have already collapsed under the weight of the bad loans made to the 
State enterprises.
    Despite foreign investment and various ``economic reform'' 
policies, the State enterprise sector still employs a majority of the 
industrialized work force in China. That it does so unproductively is 
beside the point. The destruction of this economic and social system 
creates a political reality. This political reality is further 
complicated by a pervasive corruption at all levels of politics and 
society. The corruption has produced a deep seated and widespread 
resentment among ordinary people, especially workers.
    They do not trust their factory managers. Many of the managers have 
looted the enterprises. They do not trust their Party-controlled 
``unions'', the local leader of which is usually the deputy plant 
manager. No real labor leader, or lawyer for that matter, needs further 
training to know that workers expect to be paid for their labor. And 
yet, one of the most common reasons for worker unrest is the owing of 
back wages.
    The Party greatest fear is that workers will revolt on scale. They 
believe that allowing the existence of independent trade unions is 
tantamount to giving up power. A number of US government officials I 
have spoken to over the years agree with them.
    The Chinese government without the slightest hint of embarrassment 
entered a ``reservation'' on the clause concerning independent trade 
unions when it signed in 1998 the International Covenant on Economic, 
Social and Cultural Rights. The US business community, also without a 
hint of embarrassment, remained silent. I did not notice any noteworthy 
comment from proponents within the United States for the rule of law in 
China.
    As a matter of policy both the United States and the ruling Party 
in China have bet worker unrest can be managed successfully. To be sure 
it has been ``managed'' successfully thus far. Workers are allowed to 
protest about legitimate grievances such as back pay so long as these 
protests are largely confined to the workplace, and so long as the 
workers don't ask why the government let it happen. They are even 
allowed to engage in some disruption such as blocking traffic. The 
government moves relatively quickly to settle the dispute, usually by 
paying the workers a portion of what they are due. During the dispute, 
the security services usually determine who the leaders are. 
Afterwards, they are arrested, threatened, fired, or punished in some 
other way. These leaders are particularly dangerous in the minds of 
security officials. They have risen naturally out of the circumstances, 
and they have organized their peers. Rarely are they arrested in the 
workplace. Usually it happens at home and at night. It is a time-tested 
way of dealing with workers who display their entrepreneurial talent 
for organizing.
    When the government believes a protest is getting out of hand or 
must be stopped it uses the People's Armed Police. This is a force of 
some 1.4 million, whose growth from 300,000 in the early 1980's mirrors 
remarkably the Party's increasing concern with the impact of economic 
change. These troops are used primarily to deal with worker and farmer 
protests.
    The key question for US policymakers is what will the United States 
government do if the increased pace of State enterprise 
``restructuring'' results in the violent repression of workers on a 
mass scale? The Chinese government, in my view, is prepared to use 
force to suppress workers. One of the key determinants of the decision 
to use force in 1989 was the increased activity of workers in support 
of the students. It fears them.
    It is somewhat ironic that compliance with WTO requirements is the 
justification most likely to be used by the Chinese government for 
repressing workers. The reality is that workers are faced with no 
choice but to take to the streets in order to secure a modicum of what 
they deserve. Should they instead be allowed to organize independent 
unions to give strength to their aspirations, there would be many 
alternatives. All of these certainly would involve real power sharing, 
a concept that is found in most countries respecting the rule of law. 
It is not that Chinese government and Party officials are stupid and do 
not understand the meaning of power sharing. It is simply still true 
that the Party is uninterested in sharing power with anyone. Its 
leaders think they can ``manage'' repression and maintain ``social 
stability''. As far I can tell, the US government and business 
community think they are right, and have, at the very least, tacitly 
endorsed the Party's policies. I think this is a grave mistake.
    Thank you.
                                 ______
                                 

  Prepared Statement of Hon. Max Baucus, a U.S. Senator From Montana, 
         Chairman, Congressional-Executive Commission on China

                              june 6, 2002
    Last December, we ushered in a new era with China's formal entry 
into the World Trade Organization. Our task now is two-fold. First, to 
ensure that the Chinese government complies with the terms of accession 
and with the global standards of action embedded in the WTO. Second, to 
encourage continued progress in the development of commercial rule of 
law in China, both as a means to ensure WTO disciplines are being met, 
and as a means to a broader development of the rule of law in that 
country.
    As China's economy grew through the 1990's, and its role as a major 
trading Nation became more significant, the need for China to be 
subject to WTO disciplines became increasingly urgent. Bilateral and 
multilateral negotiations took over a decade. We spent a year in the 
Congress on passage of PNTR. Now we turn to Chinese implementation of 
the commitments they undertook. The monitoring of China's performance 
is a major task--for the United States, for China's other trading 
partners, for the WTO, and for the Chinese themselves.
    Chinese compliance is critical--to the United States, to the global 
economy, and to China's own economic development. Compliance is one of 
America's top trade priorities. We are talking about changes that will 
impact us now, not at some indefinite time in the future. It must be on 
the top of our agenda.
    Why is this so important to the United States? First, total trade 
between the U.S. and China increased from $5 billion in 1980 to $122 
billion in 2001, and China is now our fourth largest trading partner. 
Likewise, U.S. investment in China has grown astronomically. The United 
States is China's largest source of foreign investment outside of Hong 
Kong, with $34.4 billion invested in China between 1979 and 2001, and 
$4.4 billion in 2001 alone. China is also the country with which the 
U.S. has the largest trade deficit. In 2001, our merchandise trade 
deficit with China was almost $83 billion. We must have clear and 
understandable rules governing these relationships, along with far 
greater access to China's markets.
    China's accession to the WTO should provide greater opportunities 
and predictability for American businesses operating there. Some of the 
changes China must make were to be implemented immediately upon 
accession; others are to be phased in over time under special 
transition rules. These were the terms of China's accession, and they 
were the terms under which we granted China PNTR status.
    The second reason WTO accession is so important to the United 
States involves the potential broader impact of the reforms China must 
undergo. Development of commercial rule of law will likely accelerate 
change in governance inside China. For example, one WTO requirement is 
the prompt publication of all laws, regulations, judicial decisions and 
administrative rulings relating to trade. WTO members must agree not to 
enforce those measures before they are officially published. And once 
those measures are published, they must be applied in a uniform, 
impartial and reasonable manner. This is a process far different than 
exists at present.
    Another example is that WTO members must establish and maintain 
judicial, arbitral, or administrative mechanisms to review trade-
related actions by government agencies. These must be able to operate 
independently of the agencies that carried out the actions in question. 
If implemented, this should contribute to the development of a more 
open, market-oriented society in which not only are the people bound by 
the laws and regulations, but so will be the government. China's 
membership in the WTO can be an important force driving the development 
of the rule of law. That is a priority goal of this Commission, and of 
the United States.
    We are at an early stage in China's process of WTO adherence and 
commercial law transformation. Clearly, senior Chinese leaders are 
committed. National bodies have begun to reform and adjust thousands of 
laws, regulations, and judicial decisions that are not WTO-compliant. 
The Chinese government has welcomed assistance from foreign 
governments, as well as non-governmental and private organizations in 
conducting extensive training sessions on WTO requirements, 
administrative law, judicial reform, and a myriad of other topics. 
Chinese government officials, at all levels, have been eager to learn 
about the steps needed to ensure that it is complying with its 
commitments.
    Yet, there have been mixed signals as to whether the Chinese 
government is willing, or able, to adhere to all of the commitments it 
has made. For example, while tariffs have been reduced and quotas have 
been eliminated in some industries, there are reports that equally 
protective non-tariff barriers have been erected in their place. 
Sanitary and phyto-sanitary standards have still been used in some 
areas with no scientific basis. Regulations that were supposed to be in 
effect at accession have not been promulgated.
    There are also questions about the capacity of the Chinese 
government to implement the vast changes needed in so many areas. We 
need to explore this closely and see if there are ways that our 
government can assist more in capacity-building. Finally, although I 
have confidence in the commitment and determination of the senior 
leadership in Beijing to effect the required changes, questions exist 
about Beijing's ability to force provincial and local levels of 
government to change policies and practices. This will require 
continuing and close scrutiny.
    We have embarked on a long and ongoing process. That is why the 
Senate Finance Committee tasked the General Accounting Office with a 
long-term investigation into China's WTO compliance. This study 
includes an examination of the legal and regulatory changes China is 
making, the actual effects in the marketplace on American business, and 
the activities of executive branch agencies in monitoring Chinese 
actions. We will hear more about this from our first panel of 
witnesses. Let me just note now that this GAO study can only proceed 
with full cooperation from the executive branch, and I expect all 
agencies to be cooperative and forthcoming with information, documents, 
and other assistance.
    The task of the Congressional-Executive Commission on China will be 
to monitor the process, to watch how China implements its commitments, 
to gain an understand of how developments in the commercial rule of law 
are unfolding, and to assess the implications for broader rule of law 
developments, public participation, transparency in rulemaking, and 
administrative and legal accountability in China.
    As we scrutinize China's WTO implementation closely, we must also 
remind ourselves that this is one step, albeit a major one, in a 
process of economic reform that began over two decades ago. We must 
evaluate the WTO process by looking both at a snapshot of the current 
reality and at the full video that incorporates trends over a 20-year 
period.
    Today's hearing is the third held this year by the Congressional-
Executive Commission on China. We have two distinguished panels to help 
us examine China's accession to the WTO, the commercial impact on 
American firms, and implications for legal reform and the rule of law 
in China. I look forward to their remarks.

 Prepared Statement of Hon. Joseph R. Pitts, a U.S. Representative in 
                       Congress From Pennsylvania

                              june 6, 2002
    Mr. Chairman, thank you for holding this important hearing on WTO: 
Will China Keep its Promises? Can It?
    Some might believe that China's entry into WTO will help resolve 
many of the problems in China's economy and society, particularly as 
member nations must comply with WTO regulations. WTO entry should help 
raise the standard of living for the Chinese people. However, Chinese 
leadership does not have a history of following international norms if 
those norms do not fit with the aim of the Chinese leadership: keeping 
control over the Chinese people.
    In October 1998, China became a signatory to the International 
Covenant on Civil and Political Rights. However, China still has not 
ratified this Covenant. Unfortunately, contrary to the Covenant's clear 
statements about protection of freedom of religion, freedom of speech, 
freedom of assembly, freedom of worship, violations of those 
fundamental rights and others abound.
    China's lack of compliance with the International Covenant on Civil 
and Political Rights does not bode well for compliance with WTO norms. 
However, unlike the Covenants, the WTO does have accountability 
measures that can be imposed if member nations fail to comply with WTO 
standards. That, and that alone, may force the Chinese government to 
keep its promises.
    I look forward to hearing from our distinguished witnesses.
                                 ______
                                 

   Prepared Statement of Hon. Marcy Kaptur, a U.S. Representative in 
                           Congress From Ohio

                              june 6, 2002
    I would like to thank Congressman Bereuter and Senator Baucus for 
convening a third hearing for Commission Members. I understand that the 
staff-led roundtable discussions have been continuing and the future 
schedule holds some potential.
    Today's hearing on World Trade Organization (WTO) regulation 
implementation is an interesting choice for a hearing topic. As we all 
know, our Commission was charged with examining and monitoring human 
rights and the rule of law in China. It is my sincere wish that China 
will live up to its commitments on implementation. To say that I am 
skeptical, however, may be an understatement.
    Nevertheless, for the purposes of this hearing, I will grant China 
great leeway. Let us suppose that China diligently works to come into 
compliance with WTO obligations. Will this lead to a new world of 
rights and freedoms for the Chinese people? I am doubtful.
    Many proponents of Permanent Normal Trade Relations (PNTR) for 
China purported that China's entry into the WTO would lead to great 
reforms within Chinese society, creating a near utopia. I did not 
support unconditional PNTR and I don't support this naive, if not 
misleading, future-look. Let's be frank: rarely does commercial law 
lead to an expansion of human, labor and environmental rights.
    I think it is safe to say that we all agree that any improvement in 
China's rule of law is a step in the right direction. Chinese officials 
must realize that rule of law means that all--including government 
officials--are held accountable and that the law can be used to 
protect, not just punish. Until now, the Chinese have been less than 
willing to keep their promises when it come to commercial trade 
agreements. If that Nation truly wants to be a world player, I 
encourage them to prove us wrong, to live well beyond the pessimistic 
predictions.
    Commercial transactions may have logic, but they have no ethic. 
Most importantly, the people of China deserve a sincere effort by their 
leaders to uphold internationally recognized human rights--not as a 
condition of a trade agreement, but as a moral right.
                         Questions and Answers

                                ------                                


Response of Jon M. Huntsman, Jr. to a Question From Representative Wolf

    Question.  [W]e had a briefing by our security people saying there 
is a major espionage program by the Chinese government against our 
private sector . .  .  . Have you had that briefing? .  .  . [If you 
have not had that briefing,] can you .  .  . get the briefings and then 
just drop a note to the [Commission] that you had the briefing?

    Answer. I have contacted USTR's security personnel and have asked 
them to provide me with the briefing to which you refer.
                                 ______
                                 

  Response of Jon M. Huntsman, Jr. to a Question From Representative 
                                 Levin

    Question. I think it would be helpful, even before the annual 
report, if you could give us in writing to this Commission an analysis 
of what you are doing, how the inter-agency mechanism works, where you 
are with the hiring of additional people to make sure that this annual 
review is truly meaningful, so that GAO undertakes its first review, it 
does not give you an E, or even a D.

    Answer. Given China's importance as a major trading power and the 
breadth and complexity of China's WTO commitments, the Administration 
has set up a comprehensive inter-agency monitoring effort to determine 
the extent to which China is complying with those commitments. USTR's 
China Office is coordinating this initiative, which is being formally 
overseen by a newly created Trade Policy Staff Committee (TPSC) 
subcommittee whose mandate is devoted exclusively to China and the 
extent to which it is complying with its WTO commitments.
    All TPSC agencies have been invited to participate in this newly 
created subcommittee. The subcommittee held its inaugural meeting on 
December 4, 2001, and, since then, has met on a monthly basis as it 
evaluates and prioritizes the monitoring activities being undertaken, 
reviews the steps that China has taken to implement its commitments and 
decides on appropriate responses.
    The activities being overseen by the subcommittee are taking place 
on several fronts, with continual private sector involvement. In China, 
State Department economic officers, Foreign Commercial Service 
officers, Foreign Agricultural Service officers and Customs attaches 
are very active, gathering and analyzing information, maintaining 
regular contacts with U.S. industries operating in China, maintaining a 
regular dialog with Chinese government officials at key ministries and 
agencies, and working with personnel from like-minded Embassies of 
other WTO members. In Washington, an inter-agency team of experts, 
coordinated by USTR and including principally the Departments of 
Commerce, State, Agriculture and Treasury and the U.S. Patent and 
Trademark Office, is working closely with personnel from the U.S. 
Embassy and Consulates General in China as well as with U.S.-based 
trade associations and companies. Finally, at the WTO in Geneva, USTR 
has been active in voicing concerns about, and working with other WTO 
members to address, problems with China's implementation efforts as 
they arise.
    At USTR, we currently have 4 persons in the China Office and 2 
persons in the General Counsel's Office who devote most of their time 
to China WTO compliance matters. In addition, we will soon be adding 
one other person (in the China Office), who will assist in these 
efforts.
    Many others at USTR also participate in monitoring China compliance 
matters as the need arises. They include USTR policy and legal experts 
on issues such as intellectual property rights, services, investment, 
technical barriers to trade, customs administration, import licensing, 
rules of origin, information technology, tariffs, subsidies, 
agriculture, and sanitary and phytosanitary measures. In addition, 
USTR's representatives in Geneva participate in various WTO meetings 
and reviews addressing China's compliance efforts.
                                 ______
                                 

  Responses of Jon M. Huntsman, Jr. to Questions From Representative 
                                 Kaptur

    Question 1. I would just appreciate, Mr. Ambassador, if you could 
provide to our record the list of firms that you have visited and what 
the wage level is of the people working therein, and whether they are 
Western investment in China or whether they are Chinese-owned 
companies, State-owned or otherwise.

    Answer 1. I have visited numerous firms in China over the years.
    Here is an illustrative list of the foreign-owned enterprises and 
foreign-Chinese joint ventures that I have visited:

    Continental Grain Corporation--A joint venture with a Ministry of 
Agriculture state-owned enterprise, this venture is a grain and poultry 
processing facility in Tianjin, where Western management and free 
market principles positively impacted the culture of local employees.
    Owens Corning Corporation--An insulation manufacturing facility in 
Shanghai, this venture is an example of a U.S. firm promoting Western 
management standards, practices and training to the local workforce.
    ICI--The Imperial Chemical Company of England is a specialty 
chemical manufacturing facility in Shanghai which trained many 
qualified local employees in the practices of international marketing 
and management.
    Foxburough--One of the pioneering U.S.-China joint ventures in 
Shanghai, which specialized in process control technology and 
equipment, this venture is famous for its early contribution to the 
U.S.-China commercial relationship and the creation of high-tech jobs.

    These examples are in stark contrast to the State-run plants which 
I have visited, such as Number One Shanghai Television Factory, Gaochao 
Petrochemical Complex in Shanghai and Ningbo Chemical Works in 
Zhejiang, which typically had factories that were ineffective, 
antiquated and completely uncompetitive. In addition, based on my 
conversations with officials at the various firms that I visited, it is 
my understanding that the wages at the State-run firms were lower than 
those at the Western firms since there was no concept of incentive or 
competitive pay scales introduced by private industry.

    Question 2. I would like to know if any of you could provide for 
the record information as to whether the United States is the major 
recipient of Chinese exported goods, or are other regions of the world 
equally graced?

    Answer 2. Yes. The United States is China's largest export market. 
For calendar year 2001, the United States imported $102.3 billion of 
goods from China.
                                 ______
                                 

     Responses of Grant D. Aldonas to Questions From Senator Baucus

    Question 1. At one of the roundtables the Commission staff held 
recently, several witnesses noted that the United States was at a 
disadvantage in China because others, especially the European Union, 
were putting many more financial resources into training programs in 
the area of commercial law and training than the United States was. The 
concern was that legal developments and standards would then be more in 
tune with European ways of doing things, and that European companies 
would benefit at the expense of American business. Do you have any 
thoughts about this? Also, there are Commerce Department programs in 
other countries to promote commercial legal reform. What is the 
situation in China?

    Answer 1. Other countries have invested significant amounts of 
money in WTO implementation programs for China. The European Union, 
Australia, Japan, and Canada all have aggressive WTO technical 
assistance programs, with substantially more funding than the United 
States. One estimate holds that the EU has spent over $100 million on 
these kinds of programs in the last few years.
    To the extent that other countries' technical assistance improves 
the transparency and predictability of China's trading regime, these 
programs are in everyone's interest. The Commerce Department is seeking 
joint opportunities with other countries to cosponsor training sessions 
with China. For example, our standards training in medical devices last 
August included a speaker from the EU. However, as you suggested in 
your question, should China adopt standards that are more compatible 
with those of other countries, for example European or Japanese 
standards, as a result of technical assistance sponsored by those 
countries, U.S. companies could be at a competitive disadvantage.
    Regarding commercial legal reform, the Department has a long 
history of cooperation in the area of commercial law with our Chinese 
counterparts under the U.S.-China Joint Commission on Commerce and 
Trade Commercial Law Working Group. This cooperation is continuing 
under our recently announced legal exchange program. However, there is 
much more we could do to help China reform its commercial legal system 
and to help China implement its WTO commitments.
    As you mentioned in your written question, the Commerce Department 
has demonstrated expertise in assisting other countries to develop 
their commercial legal systems. Through our Commercial Law Development 
Program (CLDP), we have used funding from the Agency for International 
Development to train lawyers, judges, and government officials 
throughout Eastern Europe, the former Soviet Union, in Africa and 
elsewhere in Asia to promote commercial law. And we would like to do 
the same in China, as we believe this type of assistance would be 
welcomed by the Chinese and would provide benefits both to U.S. 
companies doing business in China and to the Chinese people, but we 
have not done so to date due to funding concerns.

    Question 2.  Much of our interest in trade with China seems to be 
focused on large multinational American corporations. Could you talk 
about the opportunities for small and medium size enterprises in the 
China market and how the U.S. Government assists them?

    Answer 2. China has been and will continue to be an important and 
growing market for U.S. small- and medium-sized enterprises (SMEs). 
China's large consumer market and recent developments such as its 
accession to the WTO make China a promising market for SMEs. The 
Department has actively sought to promote the interests of small 
business in China. We have a number of activities planned or underway 
including:

     A medical device trade mission to China is scheduled for 
September 15-24, 2002. The recruitment process for this mission 
includes a strong outreach effort to SMEs. The mission will focus on 
identifying opportunities for sales of medical and dental devices, 
clinical laboratory products and related supplies.
     We organized a Franchising Trade Mission to Beijing, 
Shanghai and Hong Kong in June 2002. China offers tremendous business 
opportunities for U.S. franchisors which are keen to expand their 
businesses into this market.
     A Department team recently visited Shanghai, Beijing, 
Chengdu, Guangzhou, and Hong Kong to gather information for an ExportIT 
report on China which should be published in the next few months. This 
study will cover the telecommunications, IT, Internet, and electronic 
commerce industries and is aimed at helping SMEs expand into overseas 
markets.
     As a result of current and past Market Development 
Cooperator Program (MDCP) grants, numerous trade associations have 
established offices in China to assist SMEs. These offices help SMEs 
establish themselves in the China market, provide trade leads, and 
conduct market research.
     Through our China Virtual Trade Mission to China's 
Computerworld Expo we enabled 15 small- and medium-sized U.S. 
information technology companies to introduce their products to Chinese 
end-users. We also recruited SME representatives for Secretary Evans's 
trade mission to China in April of this year.

    Additionally, ITA's Advocacy Center has assisted several small and 
medium-sized companies as they sought to secure contracts in China. 
Currently, the Advocacy Center is working with three small business 
companies on projects totaling $245 million. These projects cover a 
broad range of sectors that include aerospace, coal liquefaction and 
aluminum products.
    A California-based SME has, for example, signed a $5 million 
contract to provide China with air monitoring and related services. 
This firm faced strong international competition but won the contract 
with extensive assistance provided by the Department of Commerce. 
During June 2002, a SME signed a contract to provide China with process 
design and other services that pave the way to the world's first direct 
coal-to-liquid fuel plant. The USG provided extensive support for this 
firm through the Trade Promotion Coordinating Committee.
    Our Foreign Commercial Service in China, with offices in Beijing, 
Shanghai, Chengdu, Shenyang, and Guangzhou, has provided export 
assistance to approximately 225 small and 90 medium-sized U.S. 
companies since mid-2000. Extensive trade-related information on China 
is also available through websites, including the Trade Information 
Center site (www.export.gov) and the China Gateway site 
(www.mac.doc.gov/china) which contains a statistical profile of SME 
exports to China.
    In 1999 (the most recent year for which detailed numbers are 
available), 10,086 SMEs exported merchandise to China--which is 83 
percent of the total number of U.S. firms exporting goods to China--and 
accounted for $3.3 billion in exports to China. The number of small and 
medium-sized firms participating in the Chinese market has grown at a 
rapid rate: between 1992 and 1999, the number of SMEs exporting 
merchandise to China rose by 221 percent. Over the same period, SME 
exports to China increased 85 percent, making China the seventh-ranking 
growth market for SMEs among the major U.S. markets.
    China's recent accession to the WTO will provide many benefits for 
SMEs. China's accession to the WTO has improved the environment for 
trade, making it a more transparent and predictable place to conduct 
business. China's agreement to lower tariffs includes products of 
interest to SMEs like medical devices and building products. China has 
also agreed to open access to its telecommunications market by 
increasing foreign participation and investment. In addition, China has 
made commitments in the areas of pollution control. ITA has produced 
over 40 specific industrial goods and services sector reports that 
summarize China's WTO commitments.
    In closing, I would like to reaffirm my commitment to working with 
both you and with the Commission to encourage respect for human rights 
in China, particularly as regards the practice of one's religious 
beliefs. I look forward to working with you toward that end. If there 
is anything else I can provide you in the way of information in the 
meantime, please do not hesitate to let me know directly.
                                 ______
                                 

  Responses of Grant D. Aldonas to Questions From Representative Wolf

    Question 1. Have you received U.S. intelligence briefings on 
China's espionage against U.S. companies that is occurring both in the 
U.S. and in China?

    Answer 1. I have received briefings regarding commercial espionage. 
I intend to continue to follow the issue closely.

    Question 2. Do any American companies speak out on behalf of human 
rights? Do you have any record?

    Answer 2. The Department of Commerce maintains close contact with 
U.S. companies doing business in China and with U.S. associations 
involved in U.S.-China trade issues, but does not keep a formal record 
of companies that have spoken out on human rights. As a general rule, 
American ethical and managerial practices help shape the way U.S. firms 
run their factories, relate to their employees, and contribute to local 
community activities. Through these practices, U.S. companies set a 
positive example of corporate citizenship and contribute to the 
evolution of norms within China and a more open Chinese society.
    Most U.S. companies conducting business in China make positive 
contributions to the country's social, labor, and environmental 
conditions by exporting to China not only products and services, but 
also their operating standards, best business practices, values, and 
principles. For example, the Beijing AmCham has recently established 
its Corporate Responsibility Committee and since 1998 the U.S.-China 
Business Council has been doing important work through its U.S.-China 
Legal Cooperation Fund. Other specific examples of how U.S. companies 
promote worker rights and worker well-being in China can be found in 
the 57-page report, ``Corporate Social Responsibility in China'' from 
The Business Roundtable, which is also available online at www.brt.org.
                                 ______
                                 

 Response of Grant D. Aldonas to a Question From Representatives Wolf 
                               and Kaptur

    Question 2. Is the United States the major recipient of Chinese 
exported goods? What is the trade deficit today with China, and what 
was it over the last 20 years?

    Answer 2. The United States is China's largest export market. For 
calendar year 2001, the United States imported $102.3 billion of goods 
from China and had a bilateral deficit of roughly $83 billion. Both 
U.S. exports to and imports from China have grown over the last 20 
years as the Chinese opened their economy. The Chinese trade surplus 
has grown significantly during that period. I have attached the 
requested data (please see Attachment A).

                                ATTACHMENT A.--Trade Balance with China 1983-2001
                                                 (In US dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                       General Imports CUSTOMS
                                Trade Balance            Exports Total Fas Value                Value
----------------------------------------------------------------------------------------------------------------
1983                                    (72,021,915)                 2,172,071,017                 2,244,092,932
1984                                    (60,776,999)                 3,004,029,667                 3,064,806,666
1985                                     (9,927,450)                 3,851,738,104                 3,861,665,554
1986                                 (1,665,517,101)                 3,105,402,963                 4,770,920,064
1987                                 (2,805,103,905)                 3,488,357,323                 6,293,461,228
1988                                 (3,479,280,774)                 5,032,945,267                 8,512,226,041
1989                                 (6,181,164,282)                 5,807,371,217                11,988,535,499
1990                                (10,416,554,934)                 4,807,332,470                15,223,887,404
1991                                (12,688,964,907)                 6,286,832,744                18,975,797,651
1992                                (18,205,935,594)                 7,469,573,056                25,675,508,650
1993                                (22,767,730,198)                 8,767,103,939                31,534,834,137
1994                                (29,494,383,467)                 9,286,759,231                38,781,142,698
1995                                (33,806,985,282)                11,748,446,559                45,555,431,841
1996                                (39,517,355,520)                11,977,920,628                51,495,276,148
1997                                (49,746,517,782)                12,805,416,498                62,551,934,280
1998                                (56,897,907,649)                14,257,952,774                71,155,860,423
1999                                (68,668,252,218)                13,117,677,381                81,785,929,599
2000                                (83,809,928,735)                16,253,029,349               100,062,958,084
2001                                (83,045,656,308)                19,234,827,272               102,280,483,580
----------------------------------------------------------------------------------------------------------------
Source: US Trade Statistics
According to the official Chinese statistics, the United States was the largest recipient of goods shipped from
  China in 2001. Hong Kong was second, and Japan was third.

                                ------                                


 Responses of Grant D. Aldonas to Questions From Representative Kaptur

    Question 1. Provide examples of how China exports capital to the 
United States. What is China doing with its dollar reserves?

    Answer 1. China has the world's second largest foreign exchange 
reserves (after Japan), totaling $228 billion at the end of March 2002, 
according to official reports, and China's foreign currency reserves 
have more than doubled in the past 5 years, according to China's State 
Administration for Foreign Exchange. These foreign reserves help China 
to maintain a stable currency, which benefits both the U.S. and global 
economy.
    While the exact amount of China's reserves denominated in dollars 
is not known, it is estimated that U.S. dollar reserves make up 
anywhere from 40 to 60 percent of the $228 billion total. The bulk 
(approximately $92 billion) of China's surplus foreign currency 
liquidity is believed to have been invested in U.S. securities, in the 
form of U.S. Treasury bonds and U.S. agency debt, according to Treasury 
and Federal Reserve statistics (March 2000). This benefits the United 
States as these kinds of foreign holdings keep the cost of borrowing 
low for the U.S. Government, and at the same time make more capital 
available, at lower interest rates, for U.S. companies to finance their 
operations and thus create wealth here.
    Direct investment from China in the U.S. has been much smaller than 
its portfolio investment. At the end of 2001, China had $306 million in 
direct investment in the United States, according to statistics from 
the Department of Commerce's Bureau of Economic Analysis. More 
information on foreign portfolio and direct investment in the U.S. can 
be found in the following reports: http://www.ustreas.gov/tic/mfh.txt, 
http://www.ustreas.gov/fpis/shl2000r.pdf, and http://www.bea.gov/bea/
di1.htm.
    By way of context, Japan is the largest holder of U.S. Treasury and 
agency securities, and China ranks fourth after Japan, the United 
Kingdom and Germany. If China's and Hong Kong's holdings were counted 
together, they would rank third, accounting for about 10 percent of the 
total Treasury securities held by foreign governments. By comparison, 
Japan has 27 percent of the total.

                                 Top Five Foreign Holders of Treasury Securities
                                            (In billions of dollars)
----------------------------------------------------------------------------------------------------------------
                    Country                        2002 Mar     2001 Dec     2000 Dec     1999 Dec     1998 Dec
----------------------------------------------------------------------------------------------------------------
Japan..........................................        333.0        337.8        335.9        320.0        276.1
UK.............................................        210.8        202.3        207.3        242.9        264.0
Germany........................................         85.0         87.4         88.6         96.8         95.1
Mainland China.................................         72.5         66.6         48.3         51.8         46.4
Hong Kong......................................         52.1         53.8         44.7         46.7         44.2
----------------------------------------------------------------------------------------------------------------
        Total..................................       1227.7       1231.0       1203.6       1283.8       1273.8
----------------------------------------------------------------------------------------------------------------
Source: Department of the Treasury/Federal Reserve Board


                Value of Foreign Holdings of U.S. Long-term Securities By Major Country and Type
                                  (As of March 31, 2000 in billions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                                      Corporate/
    Rank             Country           Total        Common       Other     US Treasury   USG agency   municipal
                                                    stock       equities    securities      debt         debt
----------------------------------------------------------------------------------------------------------------
1             UK..................          534          288           34           73           30          109
2             Japan...............          431          128           16          221           43           22
3             Canada..............          209          151           22           14            9           13
4             Germany.............          207           94           15           55            8           35
5             Switzerland.........          187          131           17           18            5           17
10            PR China............           92            1            0           71           20            0
----------------------------------------------------------------------------------------------------------------
        Tota    ..................        3,558        1,474          235          884          261          703
         l
----------------------------------------------------------------------------------------------------------------
* Greater than zero but less than 0.5.
Source: Department of the Treasury/Federal Reserves Board

                                 ______
                                 

  Response of Grant D. Aldonas to a Question from Representative Brown

    Question. In private, non-state enterprises, is the right to 
collectively bargain markedly enhanced compared to state-owned 
enterprises? Are the wages significantly different?

    Answer. Collective bargaining does not exist in China in the sense 
that we know it in this country since labor unions in China must be 
affiliated with the All-China Federation of Trade Unions (ACFTU), which 
is a state-controlled entity, and independent unions are banned. U.S. 
companies have been, on the whole, more supportive of worker 
participation than many other foreign investors, and some labor 
activists see activities of this sort as a positive step in the right 
direction. For example, an open union election in a Reebok factory in 
Shenzhen has resulted in a union committee that proportionally 
represents the factory's line workers, supervisors, and office workers. 
This union, while nominally associated with ACFTU (so that may legally 
operate), has been able to maintain functional autonomy. Reebok and 
Kong Tai Shoes Ltd. (Reebok's Hong Kong contract company), in 
coordination with Hong Kong non-governmental organizations, have 
actively supported both the election process and the subsequent 
training of the new union committee. Labor activists have praised this 
election, in which factory workers freely chose their union 
representatives using internationally accepted standards of candidate 
nomination, election campaigning and voting procedure.
    There is a difference in wages. According to China's Ministry of 
Labor and Social Security and the State Statistics Bureau, the national 
average yearly urban employee wage in China is 10,870 yuan or about 
$1,310. This can be subdivided into:

     State units average wage: 11,178 yuan ($1,350)
     Urban collective units average wage: 6,867 yuan ($830)
     Average wage of other urban employees (includes self-
employed and privately employed workers in foreign and domestic 
companies): 12,140 yuan ($1,470)

    I believe that this will be aided by a trend that is going in the 
right direction--namely, the size of China's State sector has fallen in 
the past couple of decades and private ownership has grown.
                                 ______
                                 

   Response of Susan S. Westin to a Question From Representative Wolf

    Question. We had a briefing by our security people saying there is 
a major espionage program by the Chinese government against our private 
sector. Are you aware of that? Have you had that briefing? Do you raise 
that when you are in China? Can all three get the briefings and then 
just drop a note to the committee that you had the briefing?
    Answer. We are generally aware of the problem, based on our 
discussions with various U.S. officials before and during our travel to 
China, as well as our own security program. However, we have not had 
the specific briefing(s) you mention, and we are in the process of 
arranging to receive them, after which we will notify you through the 
Commission.
                                 ______
                                 

  Responses of Susan S. Westin to Questions From Representative Kaptur

    Question 1. Could any of the witnesses provide kind of a textural 
feel as to the ownership of these enterprises, as I have asked?
    Answer 1. Chinese state-owned enterprises provide employment for 
almost 4 out of 10 urban workers (81 million employees out of 213 
million total) in 2000. About 10 percent (21 million) of urban workers 
were self-employed. The rest were employed by entities with other forms 
of ownership, including private enterprises, foreign-funded 
enterprises, and cooperative units.
    In terms of production, figure 1 shows that the share of state-
owned enterprises was about a quarter of gross industrial output in 
2000.
[GRAPHIC] [TIFF OMITTED] TUE66.001

    Figure 2 shows that the share of state-owned and state-holding 
enterprises in gross industrial output has been falling over time. By 
1999, the industrial output share of state-owned and state-holding 
enterprises was only around 28 percent, and the remaining 72 percent 
was accounted for by enterprises of other types of ownership.
[GRAPHIC] [TIFF OMITTED] TUE66.003

    Question 2.  I would like to know if any of you could provide for 
the record information as to whether the United States is the major 
recipient of Chinese exported goods, or are other regions of the world 
equally graced?
    Answer 2. The United States was the largest destination for Chinese 
exports in 2001, according to Chinese trade data. Table 1 shows the top 
five destinations for Chinese exports. It is important to note that 
U.S. and Chinese trade data differ significantly.\1\ For 2001, Chinese 
trade statistics reported that $54 billion (20 percent) of China's 
exports went to the United States. However, U.S. Customs statistics 
reported that China exported $102 billion (38 percent of China's total 
U.S. imports) to the United States in 2001. In either case, the United 
States was the primary destination for Chinese exports.
---------------------------------------------------------------------------
    \1\ China's trade data often differ significantly from those of 
China's major trading partners. One factor affecting this discrepancy 
is that a large share of China's trade passes through Hong Kong. China 
treats a large share of its exports that go through Hong Kong as 
Chinese exports to Hong Kong for statistical purposes, while many 
countries that import Chinese products through Hong Kong generally 
attribute their origin to China (instead of Hong Kong) for statistical 
purposes.
---------------------------------------------------------------------------
    China was the fifth largest supplier of imports to the U.S. market 
in 2001 at $102 billion (9 percent of total U.S. imports), according to 
U.S. trade data. The European Union, Canada, Mexico, and Japan were 
larger suppliers than China. China was the seventh largest export 
destination for U.S. goods in 2001 at $18 billion (3 percent of total 
U.S. exports). (See the Congressional Research Report, China's Economic 
Conditions, May 29, 2002, by Wayne Morrison (Issue Brief: IB98014) for 
a more detailed description of U.S.-China trade patterns.)

                     Table 1.--Top Five Trading Partners to Which China Exported, 1999-2001
----------------------------------------------------------------------------------------------------------------
                                                                 Exports  (US$ in       Percent of total Chinese
                                                                    billions)                   exports
          Rank                         Country             -----------------------------------------------------
                                                              1999     2000     2001     1999     2000     2001
----------------------------------------------------------------------------------------------------------------
0                         World...........................     $195     $249     $267      100      100      100
1                         United States...................       42       52       54       22       21       20
2                         Hong Kong.......................       37       45       47       19       18       17
3                         Japan...........................       32       42       45       17       17       17
4                         European Union..................       30       38       41       16       15       15
5                         Korea, South....................       78       11       13        4        5        5
----------------------------------------------------------------------------------------------------------------
Note: China's trade data often differ significantly from those of its major trading partners (see footnote 1).
  For example, the U.S. Customs Bureau valued Chinese imports in 2001 at $102 billion.
Source: China's General Administration of Customs.

                                 ______
                                 

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