World Trade Organization: Ensuring China's Compliance Requires a 
Sustained and Multifaceted Approach (30-OCT-03, GAO-04-172T).	 
                                                                 
China's accession to the World Trade Organization (WTO) in	 
December 2001 created substantial opportunities for U.S.	 
companies seeking to expand into China's market. In joining the  
WTO, China agreed to liberalize its trade regime and open its	 
markets to foreign goods and services. However, the U.S.	 
government has become concerned about ensuring that China honors 
its commitments to offer a more predictable environment for	 
trade. GAO was asked to describe (1) the monitoring of compliance
challenges associated with the scope and complexity of China's	 
WTO commitments and (2) the efforts to date of the key players	 
involved in ensuring China's compliance: the executive branch,	 
Congress, the private sector, the WTO and its other members.	 
GAO's observations are based on its prior analysis of China's WTO
commitments, its previous survey of and interviews with private  
sector representatives, and its examination of first-year efforts
to ensure China's WTO compliance.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-172T					        
    ACCNO:   A08779						        
  TITLE:     World Trade Organization: Ensuring China's Compliance    
Requires a Sustained and Multifaceted Approach			 
     DATE:   10/30/2003 
  SUBJECT:   Foreign trade agreements				 
	     International economic relations			 
	     International organizations			 
	     International trade				 
	     International trade regulation			 
	     Monitoring 					 
	     China						 

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GAO-04-172T

United States General Accounting Office

GAO Testimony

Before the Committee on Ways and

Means, House of Representatives

For Release on Delivery
Expected at 2:00 p.m., EST
Thursday
October 30, 2003

                                  WORLD TRADE
                                  ORGANIZATION

Ensuring China's Compliance Requires a Sustained and Multifaceted Approach

Statement of Loren Yager, Director International Affairs and Trade

GAO-04-172T

Highlights of GAO-04-172T, a testimony before the Committee on Ways and
Means, House of Representatives

China's accession to the World Trade Organization (WTO) in December 2001
created substantial opportunities for U.S. companies seeking to expand
into China's market. In joining the WTO, China agreed to liberalize its
trade regime and open its markets to foreign goods and services. However,
the U.S. government has become concerned about ensuring that China honors
its commitments to offer a more predictable environment for trade.

GAO was asked to describe (1) the monitoring of compliance challenges
associated with the scope and complexity of China's WTO commitments and
(2) the efforts to date of the key players involved in ensuring China's
compliance: the executive branch, Congress, the private sector, the WTO
and its other members.

GAO's observations are based on its prior analysis of China's WTO
commitments, its previous survey of and interviews with private sector
representatives, and its examination of first-year efforts to ensure
China's WTO compliance.

www.gao.gov/cgi-bin/getrpt?GAO-04-172T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Loren Yager at (202)
512-4347 or [email protected].

October 30, 2003

WORLD TRADE ORGANIZATION

Ensuring China's Compliance Requires a Sustained and Multifaceted Approach

The scope and complexity of China's WTO commitments present two main
challenges to verifying China's compliance with its WTO accession
agreement. First, the agreement is very broad: It encompasses more than
800 pages, spans eight broad areas, and sets forth hundreds of individual
commitments on how China's trade regime will adhere to the WTO's
agreements, principles, and rules and allow greater market access. Second,
the agreement is complicated: Interrelated parts will be phased in at
different times, and some commitments are so general in nature that it may
not be immediately clear whether China has fully complied with its
obligations.

Each of the key players involved in ensuring China's compliance-the
executive branch, Congress, the private sector, and the WTO and its
members--has made efforts to ensure China's compliance. However, the
first-year experience in this regard has demonstrated that these efforts
will need to be sustained over a long period. The executive branch has
applied additional resources and new intra-agency teams to these efforts,
but it takes time to organize these activities. Congress has enacted
legislation and established new entities to increase oversight of China's
compliance. The private sector also has provided information to the
executive branch and to Congress on the status of China's compliance
efforts. And, within the WTO, a China-specific mechanism was established
as a means for WTO members to annually review China's implementation of
its commitments. Nonetheless, GAO's analysis indicates that a sustained
approach is needed to ensure China's compliance.

Multifaceted Approach Essential to Ensuring China's WTO Compliance

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss our observations on the
challenges involved in ensuring that China honors its commitments to the
World Trade Organization (WTO). This hearing takes place not only at a
time of increasing trade between the United States and China, but also at
a time of increasing concern about broader aspects of the U.S.-China
relationship. Although China's implementation of its WTO commitments
cannot fully eliminate those concerns, compliance with its WTO obligations
is a central feature of China's economic relationship with the United
States and other WTO members. However, as we have found in our analysis of
the first year's efforts to monitor and enforce China's compliance with
its WTO commitments, the scope and complexity of the agreement indicate
that ensuring compliance will be difficult and will require sustained
efforts from all the key players to be successful.

To provide you with an update on these issues, today I will discuss (1)
the compliance challenges associated with the scope and complexity of
China's WTO commitments and (2) the efforts to date of each of the key
players involved in ensuring China's compliance with its WTO obligations:
the executive branch, Congress, the private sector, and the WTO and its
members. My observations are based on a series of studies that we
initiated at the request of this Committee and of the Senate Committee on
Finance. That work has included a comprehensive analysis of China's
commitments,1 our survey and interviews with the private sector
representatives,2 and our examination of first-year U.S. compliance
efforts.3 Before I turn to the specifics on these issues, let me provide a
brief summary.

1See U.S. General Accounting Office, World Trade Organization: Analysis of
China's Commitments to Other Members, GAO-03-4 (Washington, D.C.: Oct. 3,
2002).

2See U.S. General Accounting Office, World Trade Organization: Selected
U.S. Company Views About China's Membership, GAO-02-1056 (Washington,
D.C.: Sept. 23, 2002).

3See U.S. General Accounting Office, World Trade Organization: First-Year
U.S. Efforts to Monitor China's Compliance, GAO-03-461 (Washington, D.C.:
Mar. 31, 2003).

  Summary

Background

The comprehensive scope and complexity of China's WTO accession agreement
present two main challenges for successfully monitoring and enforcing
China's compliance with its obligations. First, the broad scope of the
agreement, which covers numerous aspects of China's trade regime and
market access commitments for goods and services, makes it difficult to
determine if each commitment has been fully implemented. Similarly, the
complexity of the agreement also presents challenges for assessing
compliance. Specifically, some interrelated commitments are phased in at
different times, and many commitments are so general in nature that it
will be difficult to immediately assess compliance.

A sustained approach from several key players, including the executive
branch, Congress, the private sector, and the WTO and its members, is
essential to ensuring China's compliance. Since China's accession to the
WTO, these actors have undertaken a range of efforts to ensure China's
compliance: the executive branch has ramped up its resources for China
monitoring and enforcement; Congress has enacted legislation focusing on
China's adherence to its obligations; the private sector has continued to
monitor China's progress and provide input on compliance priorities; and
the WTO and its members have conducted an initial review of China's
implementation. These compliance efforts encountered various challenges in
the first year, thus demonstrating the need for a sustained approach to
successfully ensure that China lives up to its WTO obligations.

China became the 143rd member of the WTO on December 11, 2001, after
almost 15 years of negotiations. These negotiations resulted in China's
commitments to open and liberalize its economy and offer a more
predictable environment for trade and foreign investment in accordance
with WTO rules. The United States and other WTO members have stated that
China's membership in the WTO provides increased opportunities for foreign
companies seeking access to China's market. The United States is one of
the largest sources of foreign investment in China, and total merchandise
trade between China and the United States exceeded $145 billion in 2002,
according to U.S. trade data. However, the United States still maintains a
trade deficit with China: Imports from China totaled $124.8 billion, while
exports totaled $20.6 billion in 2002. Through the first half of 2003,
exports to and imports from China grew about 25 percent compared to same
period in the previous year.

The U.S. government's efforts to ensure China's compliance with its WTO
commitments are part of an overall U.S. structure to monitor and enforce
foreign governments' compliance with existing trade agreements.4 At least
17 federal agencies, led by the Office of the U.S. Trade Representative
(USTR), are involved in these overall monitoring and enforcement
activities. USTR and the departments of Agriculture (USDA), Commerce, and
State have relatively broad roles and primary responsibilities with
respect to trade agreement monitoring and enforcement. Other agencies,
such as the departments of the Treasury and Labor, play more specialized
roles. Federal monitoring and enforcement efforts are coordinated through
an interagency mechanism comprising several management- and staff-level
committees and subcommittees. The congressional structure for funding and
overseeing federal monitoring and enforcement activities is similarly
complex, because it involves multiple committees of jurisdiction.
Congressional agencies, including GAO, and commissions also support
Congress's oversight on China-WTO trade issues. In addition to the
executive branch and congressional structures, multiple private sector
advisory committees exist to provide federal agencies with policy and
technical advice on trade matters, including trade agreement monitoring
and enforcement.

  Scope and Complexity of China's WTO Commitments Present Challenges for
  Ensuring Compliance

China's accession agreement is the most comprehensive of any WTO member's
to date, and, as such, verifying China's WTO compliance is a challenging
undertaking for two main reasons. The first reason is the scope of the
agreement: The more than 800-page document spans eight broad areas and
sets forth hundreds of individual commitments on how China's trade regime
will adhere to the organization's agreements, principles, and rules and
allow greater market access for foreign goods and services. The second
reason is the complexity of the agreement: Interrelated parts of the
agreement will be phased in at different times, and some commitments are
so general in nature that it will not be immediately clear whether China
has fully complied with its obligations in some cases.

4For more information on the overall roles and responsibilities of U.S.
government agencies in monitoring and enforcing trade agreements, see U.S.
General Accounting Office,

International Trade: Strategy Needed to Better Monitor and Enforce Trade
Agreements,

GAO/NSIAD-00-76 (Washington, D.C.: Mar. 14, 2000).

Scope of Commitments Poses Inherent Compliance Issues

The comprehensive scope of China's WTO accession agreement represents a
challenge for the U.S. government's compliance efforts. The commitments
cover eight broad areas of China's trade regime, including import
regulations, agriculture, services, and intellectual property rights.
Within these eight broad areas, we identified nearly 700 individual
commitments that China must implement to comply with its WTO obligations.
China has also committed to lower a variety of market access barriers to
foreign goods. These obligations include commitments to reduce or
eliminate tariffs on more than 7,000 products and eliminate nontariff
barriers on about 600 of these products. Additionally, China made
commitments to allow greater market access in 9 of 12 general services
sectors, including banking, insurance, and telecommunications.

The scope of compliance problems raised in the first year of China's
membership reflects the scope of the agreement itself. Although the
executive branch's first-year assessment of China's implementation of its
WTO commitments acknowledged China's effort and progress in some areas,
the assessment also noted compliance problems in all eight broad areas of
China's trade regime.5 In particular, the executive branch emphasized
problems in agriculture, services, and intellectual property rights, as
well as a crosscutting concern about transparency. Some preliminary
assessments of China's second-year implementation from the private sector
suggest that many of those problems persist and that concern about the
number and scope of compliance issues continues to increase.

5See U.S. Trade Representative, 2002 Report to Congress on China's WTO
Compliance (Washington, D.C.: Office of the U.S. Trade Representative,
Dec. 11, 2002).

Complexity of Agreement Presents Additional Challenges for Assessing
Compliance

While many of China's commitments were due to be phased in upon China's
accession to the WTO in 2001, a number of interrelated commitments are
scheduled to be implemented over extended time frames. For example,
commitments on trading rights and distribution are not scheduled to be
fully phased in until the end of 2004 and 2006, respectively. As a result,
foreign businesses will be unable to fully integrate import, export, and
distribution systems until that time. Additionally, although market access
for most goods and services will be phased in by 2007, some tariffs will
not be fully liberalized until 2010. (See fig. 1.)

 Figure 1: Summary of Key Phase-in Dates for China's WTO Commitments, 2001-2016

Legend
NTM: nontariff measure
TBT: technical barriers to trade
TRQ: tariff-rate quota
TRM: transitional review mechanism

The varying nature of China's commitments also complicates U.S. government
compliance efforts. On the one hand, some of China's WTO obligations
require specific actions from China, such as reporting particular
information to the WTO, or lowering a tariff on a product. Assessing
compliance with these specific types of commitments is relatively easy. On
the other hand, a significant number of commitments are more general in
nature and relate to systemic changes in China's trade regime. For
example, some commitments of this type require China to adhere to general
WTO principles of nondiscrimination and transparency. Determining
compliance with these more general types of commitments is more difficult
and can complicate the dialogue over achieving compliance.

It is useful to note that many private sector representatives told us that
implementing these general types of commitments, such as those that relate
to the rule of law, was relatively more important than carrying out
specific commitments to increase market access and liberalize foreign
investment in China. Specifically, China's commitments in the areas of
transparency of laws, regulations, and practices; intellectual property
rights; and consistent application of laws, regulations, and practices
emerged as the most important areas of China's accession agreement in our
September 2002 survey of and interviews with U.S. companies operating in
China. 6 However, private sector representatives also indicated that they
thought these rule-of-law-related commitments would be the most difficult
for China to implement.

Because China is such an important trading partner, ensuring China's
compliance with it s commitments is essential and requires a sustained
effort on the part of the executive branch, Congress, the private sector,
and the WTO and its other members. (See fig. 2.) For example, the
executive branch has extensive involvement in monitoring and enforcing
China's commitments, and additional resources and new structures have been
applied to these tasks. However, the U.S.'s first-year experience showed
that it takes time to organize these structures to effectively carry out
their functions and that progress on the issues can be slow. In addition
to the executive branch's efforts, Congress has enacted legislation,
provided resources, and established new entities to increase oversight of
China's compliance. The private sector also has undertaken a wide range of
efforts that provide on-the-ground information on the status of China's

  Sustained Effort from Key Players Required to Ensure China's Compliance, but
  First-year Experience Demonstrates Challenges

6For a further description of our results, see GAO-02-1056.

compliance efforts and input to the executive branch and to Congress on
priorities for compliance efforts. Finally, the WTO has existing
mechanisms as well as a new, China-specific mechanism created as a means
for WTO members to annually review China's implementation of its
commitments. Nonetheless, despite the involvement of all of these players
in the first year, the United States will need a sustained-and cohesive-
approach to successfully carry out this endeavor.

Figure 2: Multifaceted Approach Essential to Ensuring China's WTO
Compliance

China's accession to the WTO has led to increased monitoring and
enforcement responsibilities and challenges for the U.S. government. In
response to these increased responsibilities, USTR and the departments of
Commerce, Agriculture, and State have undertaken various efforts to
enhance their ability to monitor China's compliance with its WTO
commitments. Agencies have reorganized or established intra-agency teams
to improve coordination of their monitoring and enforcement efforts.
Additionally, the agencies have added staff in Washington, D.C., and
overseas in China to carry out these efforts. For example, estimated
full-time equivalent staff in key units that are involved in China
monitoring and enforcement activities across the four agencies increased
from about 28 to 53 from fiscal years 2000 to 2002, with the largest
increases at the Department of Commerce. On a broader level, USTR has
established an interagency group to coordinate U.S. government compliance
activities. The interagency group, which utilizes the private sector to
support its efforts, was very active in monitoring and responding to
issues during the

Key Executive Branch Agencies Have Increased Focus on China's Compliance,
but First-Year Efforts Demonstrate Challenges

first year of China's membership. Nevertheless, it took some time for
agencies to work out their respective roles and responsibilities in the
interagency group.

Monitoring and enforcing compliance with WTO requirements is a complex and
challenging task, as shown by our 2002 assessment of the U.S. government's
efforts to ensure China's compliance with commitments regarding
administration of tariff-rate quotas (TRQ)7 for certain bulk agricultural
commodities.8 TRQ implementation problems in 2002 included concerns about
Chinese authorities missing deadlines for issuing TRQs on certain bulk
agricultural commodities; disagreement over whether China's interpretation
of its commitments met WTO requirements; and questions about whether
China's administrative practices were in keeping with its obligations. The
United States has undertaken both bilateral and multilateral efforts to
settle these complex issues. The large number of U.S. government
activities on these issues alone, which still are not fully resolved,
included at least monthly engagements with China and illustrates the
extensive effort agencies must undertake to identify problems, gather and
analyze information, and respond to some issues.

Congressional Focus on China Compliance Issues Has Increased Substantially

Congress has had an active role in overseeing trade relations between the
United States and China and in setting expectations for vigilant
monitoring and enforcement of China's WTO commitments. In the U.S.-China
Relations Act of 2000,9 Congress found that for the trade benefits with
China to be fully realized, the U.S. government must effectively monitor
and enforce its rights under China's WTO agreements. To accomplish this,
Congress

o  	authorized additional resources at USTR and the departments of
Commerce and Agriculture;

o  called for an annual review of China's compliance in the WTO;

7Under China's TRQ commitments, a specific quantity of certain
agricultural bulk commodities is to be allowed in at a low duty, while
imports above that quota face higher tariffs.

8See GAO-03-461.

9This constituted a major part of the legislation that led to China's
receiving permanent normal trade relations status. See Pub. L. No.
106-286, 114 Stat. 880.

o  	established the Congressional-Executive Commission on the People's
Republic of China to monitor China's compliance with human rights and the
development of the rule of law in China;

o  	established a Task Force on the Prohibition of Importation of Products
of Forced Prison Labor from China;

o  	authorized a program to conduct rule of law training and technical
assistance in China; and

o  	enacted legislation implementing China's WTO commitment allowing WTO
members to apply a product-specific safeguard when increases in Chinese
imports threaten or cause injury to domestic industry.

Congress also required that the executive branch issue several China
trade-related reports to assist its continuing oversight. These
requirements included USTR's annual report on China's compliance, which is
based in part on input from the general public. In addition, this
Committee, together with the Senate Finance Committee (on a bipartisan
basis), requested that we continue our work on China-WTO issues and report
on China's compliance, executive branch efforts, and U.S. business views
over 4 years. Finally, congressional committees and commissions have held
at least 35 China-focused hearings since 2001-a further indication of
congressional involvement in U.S.-China issues.

Private Sector Plays Key Role in Monitoring China's Compliance

U.S. businesses operating in China provide valuable assistance in
monitoring the status of China's implementation of its WTO commitments,
and, as such, effective coordination between the U.S. government and the
private sector is essential. For example, industry-specific expertise and
input from within the private sector are indispensable components for
determining whether the scores of highly technical laws and regulations
that the Chinese government issues are WTO compliant and being
implemented. Further, private sector industry and business associations
are active in conducting their own analyses and issuing reports on China's
WTO compliance, providing input to congressional committees and
commissions, engaging the Chinese on specific WTO issues, and representing
their members' interests to the U.S. government in order to inform the
U.S.'s compliance priorities.

WTO Has General and China-specific Mechanisms to Ensure Compliance

Concluding Observations

The WTO's framework of more than 20 multilateral agreements covers various
aspects of international trade and sets forth the rules by which China and
other members must abide. Notably, the WTO's dispute settlement mechanism
is intended to give all WTO members access to a formal mechanism for
pursuing and resolving WTO-related compliance issues with other members,
including China. Thus far, no WTO member has initiated a dispute
settlement case against China, although some Members of Congress and
private sector groups have urged the U.S. government to initiate a case
related to China's administration of TRQs.

Another WTO mechanism relates specifically to China. China's accession
commitments created a Transitional Review Mechanism (TRM), as a means for
WTO members to annually review China's implementation of its commitments
for 8 years, with a final review in the 10th year following China's
accession.10 Just as establishing the TRM was one of the more challenging
issues to negotiate with China, implementing the TRM process during the
first year (2002) also proved challenging. Disagreement among WTO members,
including China, over the form, timing, and thoroughness of the TRM led to
a limited initial review of China's trade practices. The review did not
meet U.S. expectations and illustrated the challenges of gaining consensus
with China and other members within this multilateral forum over
implementation issues. Although U.S. officials cited benefits from
participating in the initial review, they expressed disappointment over
the first-year results. U.S. officials are hopeful that future reviews
will be more comprehensive. The second-year TRM is under way, but it is
still too early to determine if the current review will meet U.S. and
other WTO members' expectations.

In assessing China's first-year implementation efforts, the executive
branch, other WTO member government officials, and many private sector
representatives observed that, despite several first-year compliance
problems, China had demonstrated a willingness to implement its WTO
commitments. For example, the executive branch noted China's progress in
revising the framework of laws and regulations governing various aspects
of China's trade regime. In the second year of China's membership,
however, concerns about the number of compliance

10The TRM is additional to WTO's trade policy review mechanism, which
provides for a broad review of the trade regimes of all WTO members on a
scheduled basis. However, WTO members viewed the trade policy review
mechanism as insufficient to oversee China's implementation of its
commitments and pursued the TRM.

problems have grown, as well as the number of events that have potentially
interfered with China's implementation of its commitments. Specifically,
some observers have noted events such as changes in China's central
government leadership, reconfigurations of key ministries, a growing
concern about unemployment and labor unrest, and the SARS outbreak as
possibly temporarily interrupting progress on implementation.

In closing, Mr. Chairman, the theme of my testimony is that a cohesive and
sustained approach is necessary to monitor and enforce China's commitments
to the WTO. I believe that this hearing that focuses on the key elements
of the U.S.-China economic relationship and brings together three of the
key players is exactly the kind of oversight that is necessary to ensure
that a cohesive and sustained approach is actually carried out.

Mr. Chairman and Members of the Committee, this concludes my prepared
statement. I would be happy to answer any questions on my testimony that
you may have.

Contacts and 	For further information regarding this testimony, please
contact Adam Cowles at (202) 512-9637. Matthew Helm, Rona Mendelsohn,
Richard

Acknowledgments Seldin, and Kim Siegal also made key contributions to this
testimony.

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