U.S.-China Trade: Implementation of Agreements on Market Access and
Intellectual Property (Letter Report, 01/25/95, GAO/GGD-95-61).

In recent years, market access barriers and inadequate protection of
intellectual property rights have discouraged U.S. firms from doing
business in the rapidly growing economy of the People's Republic of
China. To help overcome these barriers, in 1992 the United States and
China signed two Memoranda of Understanding in which each country made
commitments to improve market access and intellectual property rights
protection. This report examines China's implementation of the two
Memoranda. GAO discusses (1) China's compliance with the provisions of
the market access Memorandum and related progress needed for China to
meet the eligibility requirements to join the General Agreement on
Tariffs and Trade and (2) China's implementation of the Memorandum on
the protection of intellectual property rights. GAO also provides
information on the legal procedures involved in addressing U.S. concerns
about foreign market access and intellectual property rights protection
under Section 301 of the 1974 U.S. Trade Act.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-61
     TITLE:  U.S.-China Trade: Implementation of Agreements on Market 
             Access and Intellectual Property
      DATE:  01/25/95
   SUBJECT:  Patent law
             International economic relations
             International organizations
             Import regulation
             Compliance
             Foreign trade agreements
             Foreign trade policies
             International trade regulation
             International trade restriction
IDENTIFIER:  China
             
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Cover
================================================================ COVER


Report to the Honorable
Hank Brown, U.S.  Senate

January 1995

U.S.-CHINA TRADE - IMPLEMENTATION
OF AGREEMENTS ON MARKET ACCESS AND
INTELLECTUAL PROPERTY

GAO/GGD-95-61

U.S.-China Trade

(280107)


Abbreviations
=============================================================== ABBREV

  AIC - Administration for Industry and Commerce
  BSA - Business Software Alliance
  CD - Compact disk
  COCOM - Coordinating Committee on Multilateral Export Controls
  EU - European Union
  Eximbank - U.S.  Export-Import Bank
  GATT - General Agreement on Tariffs and Trade
  GDP - Gross domestic product
  GLX - general licensing procedure
  IPR - Intellectual property rights
  IIPA - International Intellectual Property Alliance
  IMF - International Monetary Fund
  JCCT - Joint Commission on Commerce and Trade
  MOFTEC - Ministry of Foreign Trade and Economic Cooperation
  MOU - Memorandum of understanding
  MTOPS - million theoretical operations per second
  NCAC - National Copyright Administration of China
  NTE - National Trade Estimate
  PRC - People's Republic of China
  ROM - Record only memory
  SAIC - State Administration for Industry and Commerce
  SETC - State Economic and Trade Commission
  TCK - Tellitia Controversia Kuhn
  TRIPs - Trade-Related Aspects of Intellectual Property Rights
  U.N.  - United Nations
  US&FCS - U.S.  and Foreign Commercial Service
  USDA - U.S.  Department of Agriculture
  U.S.PTO - U.S.  Patent and Trademark Office
  USTR - Office of the U.S.  Trade Representative
  WIPO - World Intellectual Property Organization
  WTO - World Trade Organization

Letter
=============================================================== LETTER


B-259747

January 25, 1995

The Honorable Hank Brown
United States Senate

Dear Senator Brown: 

In recent years, market access barriers and inadequate protection of
intellectual property rights have discouraged U.S.  business activity
in the rapidly growing economy of the People's Republic of China
(PRC).  To help address these barriers, in 1992 the United States and
China signed two Memorandums of Understanding (MOUs) in which each
country made certain commitments relating to improved market access
and intellectual property rights protection.  As you requested, we
have examined China's implementation of the two MOUs.  Specifically,
this report focuses on (1) China's compliance with the provisions of
the market access MOU and related progress needed for China to meet
the eligibility requirements to join the General Agreement on Tariffs
and Trade (GATT)\1 and (2) China's implementation of the MOU on the
protection of intellectual property rights.\2 At your request, we are
also providing information on the legal procedures involved in
addressing U.S.  concerns about foreign market access and
intellectual property rights protection under Section 301 of the 1974
U.S.  Trade Act, as amended.\3

(Apps.  I and II provide more extensive details on the market access
and intellectual property rights MOUs; app.  III gives further
information about U.S.  trade law.)


--------------------
\1 GATT is an international organization created in 1947 pursuant to
the GATT agreement that now has more than 100 nations as signatories. 
GATT is devoted to the promotion of freer trade through multilateral
trade negotiations and was founded on the belief that more
liberalized trade would help the economies of all nations grow.  The
Final Act resulting from the Uruguay Round of GATT negotiations was
signed on April 15, 1994, and as of December 31, 1994, most of the
participating countries had ratified it.  The Final Act created a new
World Trade Organization (WTO) as a successor to GATT, bringing all
member countries under more of the multilateral trade disciplines. 
Throughout this report, the Uruguay Round Final Act will be referred
to as "GATT 1994."

\2 An intellectual property right is the ownership of the right to
possess or otherwise use or dispose of products created by human
ingenuity.  Patents, copyrights, and trademarks are examples of
intellectual property rights. 

\3 Under Section 301 of the U.S.  Trade Act of 1974, as amended, 19
U.S.C.  2411, the President is authorized to take all appropriate
action, including retaliation, to obtain the removal of any act,
policy, or practice of a foreign government that violates an
international agreement or is unjustifiable, unreasonable, or
discriminatory and burdens or restricts U.S.  commerce. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

On the basis of our discussions with U.S.  government officials,
Chinese government officials, and U.S.  company representatives,
China appears to have taken steps to comply with most of the
provisions of the MOUs on market access and the protection of
intellectual property rights.  However, U.S.  companies continue to
experience problems in both areas.  While ongoing efforts may produce
positive results in the short term, U.S.  government officials said
that the full resolution of these problems will likely result only
from gradual and long-term economic change in China. 

  -- The United States Trade Representative (USTR) determined in
     January 1994 that China was substantially in compliance with the
     market access MOU.  The U.S.  government recognizes that the
     Chinese have made progress in the areas of transparency\4 and
     reduction of nontariff barriers.  However, USTR and the U.S. 
     Department of Agriculture (USDA) reported that China's
     compliance was lagging in terms of ensuring that Chinese
     sanitary and phytosanitary standards and testing requirements\5
     are not used as import barriers.  This finding contrasts with
     the position of Chinese officials we met with in March 1994, who
     told us that the government of China had faithfully implemented
     its MOU commitments.  (See app.  I for further information on
     China's compliance with the market access MOU.)

  -- The most frequent concern reported by the 33 U.S.  companies who
     responded to our structured interview questions (see app.  V.)
     on market access issues was transparency, followed by tariffs
     and nontariff barriers.\6 Fewer companies reported concerns or
     problems related to Chinese policies on import substitution\7 or
     product standards.\8

  -- Since 1992, the U.S.  and Chinese governments have met in both
     bilateral and multilateral contexts to discuss the conditions
     for China's accession to GATT or its anticipated successor, WTO. 
     Before establishing a protocol of accession for China that is
     acceptable to all contracting parties, GATT/WTO members and
     Chinese negotiators must resolve a number of critical issues,
     such as increasing the transparency of China's trade laws and
     regulations, setting a timetable for China's tariff reductions,
     and improving Chinese enforcement of intellectual property
     rights protection. 

  -- According to USTR, China has amended and issued intellectual
     property laws and regulations, fulfilling a number of its major
     obligations under the MOU on the protection of intellectual
     property.  The Chinese government has amended its patent law,
     issued copyright regulations, and acceded to the Berne Copyright
     Convention and the Geneva Phonograms Convention.\9 However,
     according to officials at USTR and the Departments of Commerce
     and State, and some U.S.  industry groups, China has not made
     significant progress in complying with the MOU's enforcement
     provision.  Because of China's failure to enforce its
     intellectual property rights (IPR) laws and regulations, in June
     1994 USTR designated China a "priority foreign country" under
     U.S.  trade law, and immediately initiated a Special 301
     investigation.\10 On December 31, 1994, USTR published a
     proposed list of Chinese products that could be subject to
     100-percent tariffs if China does not address U.S.  concerns
     about IPR enforcement. 


--------------------
\4 Transparency refers to the extent to which laws, regulations,
agreements, and practices affecting international trade are open,
clear, measurable, and verifiable. 

\5 Sanitary and phytosanitary regulations are measures taken to
protect human, animal, or plant life or health. 

\6 We conducted structured interviews of 41 companies.  However, only
33 companies responded to the specific questions relating to the
provisions of the U.S.-China market access MOU. 

\7 China's import substitution practices have typically involved
denying approval for certain imports if an equivalent item is
produced domestically, or conditioning import approvals on the
transfer of foreign technologies into local manufacturing ventures. 

\8 Only 1 of the 33 companies that responded to our questions was an
exporter of agricultural products. 

\9 The full titles of these conventions are the Berne Convention for
the Protection of Literary and Artistic Works and the Convention for
the Protection of Producers of Phonograms Against Unauthorized
Duplication of Their Phonograms. 

\10 Under "Special 301" of the 1988 Omnibus Trade and Competitiveness
Act (P.L.  100-418, 1988, 19 U.S.C.  2242), USTR performs an annual
review to identify countries that do not provide adequate or
effective protection for U.S.  intellectual property rights.  If a
country is designated a "priority foreign country," USTR must decide
within 30 days whether to initiate a Special 301 investigation into
the country's IPR practices.  Appendix III describes Section 301 and
Special 301 laws and procedures more fully. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The dramatic growth and reform of the Chinese economy has created
increased potential for U.S.  companies interested in exporting to or
investing in China.  China's economy, measured by real gross domestic
product (GDP), grew at a remarkable rate of almost 13 percent in 1992
and again in 1993.  By comparison, real GDP growth averaged less than
2 percent annually for industrialized countries and about 6 percent
for developing countries in 1992.  Based on estimates by the
International Monetary Fund (IMF), China is now the world's third
largest economy.\11

Despite the expanding needs and market potential of China's economy,
Chinese market access barriers and inadequate protection of
intellectual property rights have restricted U.S.  business activity
in many economic sectors, making it difficult for U.S.  firms to
export to China and contributing to the growing U.S.  trade deficit
with China.  Between 1980 and 1993, the U.S.  trade balance with
China moved from a surplus of $4.5 billion (in 1993 constant dollars)
to a deficit of $22.8 billion. 


--------------------
\11 The IMF's method for measuring China's gross domestic product is
contained in an annex to the IMF's 1993 World Economic Outlook. 
Previous studies have compared each country's economic output by
valuing its goods and services in a single currency, such as dollars,
using market exchange rates.  The method used in the IMF publication,
known as "purchasing power parity," incorporates a valuation of
nontraded output, such as housing and domestic transport. 


      MARKET ACCESS
---------------------------------------------------------- Letter :2.1

In October 1991, USTR self-initiated an investigation into Chinese
market barriers under Section 301 of the U.S.  Trade Act of 1974. 
These barriers included:  failure to publish trade-related laws,
regulations, judicial decisions, and administrative rulings;
nontariff barriers such as import licensing requirements and
quantitative restrictions; and restrictive product standards,
testing, and certification requirements.  After a year of
negotiations, the United States and China resolved the Section 301
investigation by signing a bilateral MOU that commits China to
eliminate certain market access barriers progressively over a 5-year
period.  The United States also made commitments to support China's
achievement of contracting party status in GATT and to liberalize
certain export controls.\12


--------------------
\12 In accordance with Section 306 of the 1974 Trade Act, USTR
monitors the implementation of any measure or agreement that results
from a Section 301 investigation.  If a foreign government is not
satisfactorily implementing an action or agreement, USTR may
determine what further action should be taken. 


      INTELLECTUAL PROPERTY RIGHTS
---------------------------------------------------------- Letter :2.2

In recent years, the need to strengthen protection for U.S. 
intellectual property rights worldwide gained greater prominence as
an important international trade issue for the United States.  The
absence of strong intellectual property rights protection in foreign
markets carries serious economic costs for U.S.  industries.  These
costs include lost sales in third-country markets, diminished
incentives and capital to fund new research and development, and
distortions in trade flows.  In the early 1980s, U.S businesses
focused attention on the extent to which foreign infringement of U.S. 
intellectual property rights was weakening the competitiveness of
their industries, which are recognized as world leaders in the
development and export of intellectual property.\13

In April 1991, USTR initiated a Special 301 investigation into
China's intellectual property rights practices after it determined
that China did not provide adequate or effective protection of U.S. 
intellectual property in China.  The two countries resolved the
investigation on January 17, 1992, when the United States and China
signed an MOU that committed China to provide stronger protection for
intellectual property rights. 


--------------------
\13 See Intellectual Property at a Crossroads:  Global Piracy and
International Competitiveness, Congressional Economic Leadership
Institute (Washington, D.C.:  1990). 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To review China's implementation of the provisions of the market
access and intellectual property rights MOUs, we obtained information
through interviews with U.S.  government agencies, Chinese government
ministries, and U.S.  companies and business associations.  Since
USTR plays the lead role in negotiating and monitoring the MOUs, USTR
was our primary source of information from the U.S.  government.  We
supplemented USTR's perspective with that of other agencies involved
in U.S.-China trade activities, such as the Departments of
Agriculture, Commerce, and State and the U.S.  Customs Service.  We
obtained the Chinese government's perspective on implementation of
the MOUs from Chinese government officials in Beijing during a March
1994 visit. 

To obtain U.S.  business views on China's implementation of the MOUs,
we conducted structured interviews with representatives of 41 U.S. 
companies doing business in China.  This enabled us to draw some
general conclusions about these companies' perceptions of China's
progress in eliminating market access barriers and strengthening
protection for intellectual property protection.  In addition, our
structured interviews provided us with specific examples of how
China's import regime and system for protecting intellectual property
rights affect U.S.  business activities.  However, it should be noted
that the comments of our 41 respondents are not necessarily
representative of all U.S.  companies doing business in China. 

We performed our review from October 1993 to November 1994 in
accordance with generally accepted government auditing standards. 
See appendix VI for more details on our objectives, scope, and
methodology. 


   CHINA HAS TAKEN STEPS TO
   IMPLEMENT MOST PROVISIONS OF
   THE MARKET ACCESS AGREEMENT,
   BUT OTHER ACTION HAS BEEN SLOW
------------------------------------------------------------ Letter :4

USTR has determined that although China has not technically
implemented all of the provisions of the MOU on market access, it has
taken steps and made oral commitments that bring it substantially
into compliance with the agreement.  For example, in the area of
transparency, China has begun to issue trade regulations and policies
in a central document published monthly by the Ministry of Foreign
Trade and Economic Cooperation (MOFTEC).  Regarding nontariff
barriers, China has liberalized some import quotas, licensing
requirements, and controls according to the schedule set out in the
agreement. 

According to U.S.  government officials, progress in implementing the
agricultural standards provisions of the MOU has been slow.  China
continues to restrict imports of U.S.  wheat and various fruits based
on health and phytosanitary (animal and plant health) concerns.  The
U.S.  government claims that Chinese phytosanitary standards are not
scientifically justified and constitute an unfair trade barrier. 

The U.S.  government also made commitments in the market access MOU. 
USTR and Commerce Department officials said that the U.S.  government
has fully met its MOU commitments to (1) pursue the liberalization of
export restrictions on products destined for China and (2) support
China's efforts to join GATT/WTO. 

Lack of transparency, high tariffs, and nontariff import barriers
were the concerns most frequently mentioned by the U.S companies we
interviewed about market access in China.  A number of U.S. 
companies reported that while the government of China has taken steps
to improve the transparency of its import regime, Chinese trade and
investment laws are often unclear, inconsistent, or administered in
an arbitrary manner.  Some U.S.  companies regarded Chinese tariff
rates as prohibitively high for some products and complained that
tariffs are not always administered uniformly from port to port. 
With respect to nontariff barriers, many of the companies we
interviewed expressed particular concern about the import-licensing
process, which they perceived as time-consuming and arbitrary. 

U.S.  government and business officials told us that several factors
hinder China's full implementation of its commitments under the
market access MOU.  Declining central government control over
provincial and local governments may limit implementation of the
provisions of the agreement, according to these officials.  In
addition, the Chinese government's vested interests in state-owned
enterprises can lead to arbitrary implementation of trade laws and
regulations, putting U.S.  companies at a disadvantage in some cases. 
For example, according to USTR, an industrial ministry overseeing a
state-owned enterprise may apply trade rules in a way that benefits
Chinese suppliers allied with that industry, rather than U.S.  or
other foreign companies.  Further, China still lacks a convertible
currency (one that is traded on international exchanges), still
regulates prices, and still maintains state ownership in
industry--factors that tend to work against the liberalization of
China's import regime, according to a Commerce Department official. 

The U.S.  government is attempting to resolve the remaining concerns
about Chinese market access barriers through ongoing trade promotion
activities, bilateral negotiations, and through its participation in
international negotiations on China's application to join GATT/WTO. 
In doing so, the U.S.  government has the opportunity to encourage
China to adopt policies that are compatible with free market
economies and internationally accepted trading practices.  The United
States, China, and other contracting parties must resolve a number of
issues in order to agree upon a protocol for China's accession to
GATT/WTO. 


   CHINA HAS STRENGTHENED
   INTELLECTUAL PROPERTY LAWS AND
   REGULATIONS, BUT ITS
   ENFORCEMENT STRUCTURE REMAINS
   WEAK
------------------------------------------------------------ Letter :5

Overall, USTR has determined that China has met its obligations in
implementing major provisions of the 1992 MOU, that is, adopting new
and revising some existing Chinese IPR laws and regulations and
joining international treaties.  The Chinese government has amended
its patent law, providing patent protection for pharmaceutical and
agricultural chemical products and granting administrative protection
for approved pharmaceutical and agrichemical products.  China has
acceded to the Berne Copyright Convention and the Geneva Phonograms
Conventions and has issued regulations for implementing international
copyright treaties. 

While China has established most of the laws and regulations for
obtaining intellectual property rights protection, an effective
system for enforcing these rights is still in its early stages of
development.  Some U.S.  industries, especially those dependent on
copyrights, have reported serious and unabating infringement problems
in China.  In fact, in February 1994, the International Intellectual
Property Alliance (IIPA), the trade association that represents the
copyright industries, recommended that China be identified as a
priority foreign country in USTR's annual Special 301 review.  The
U.S.  government is urging the government of China to continue
developing an effective administrative and judicial system for
resolving cases of IPR infringement and deterring further
infringement.  It has recommended, for example, establishing criminal
penalties for copyright infringement, providing for border
enforcement, and committing greater resources for enforcement
activities. 

In the past, the U.S.  government has pursued several options in its
efforts to encourage improvement in China's protection of
intellectual property rights, such as (1) maintaining bilateral
discussions; (2) utilizing U.S.  trade law, such as Special 301; and
(3) enlisting multilateral organizations, including the World
Intellectual Property Organization (WIPO) and GATT, to assist in
education and training.  For example, in pursuing bilateral
engagement, U.S.  government and industry representatives have
suggested that the United States could play an important role in
assisting China's implementation of enforcement through IPR training
and education programs.  Such active involvement could give U.S. 
industry a prominent role in influencing China's development of an
enforcement regime. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We discussed applicable sections of this report with responsible
program officials from the Office of the U.S.  Trade Representative
and the Departments of Agriculture, Commerce, and State during
August-October, 1994.  These officials suggested some technical
changes and/or factual updates, which we made where appropriate, but
generally agreed with the information presented.  We also gave the
embassy of China in Washington, D.C., an opportunity to comment on a
summary of our results, but we did not receive any response from
Chinese government officials. 

U.S.  Trade Representative officials reviewing the report included
the Director for Chinese and Mongolian Affairs, the Director for GATT
Affairs, and the Assistant General Counsel.  Reviewers in the
Department of Agriculture included the Director, Multilateral Trade
Policy; and the Director, Office of Asia, Africa and Eastern Europe. 
We discussed sections of the report with Commerce Department
officials representing the Office of China and Hong Kong,
International Trade Administration; the Office of the Assistant
Secretary for Export Administration; and the Office of Multilateral
Affairs.  In addition, the State Department's Deputy Director for
Chinese and Mongolian Affairs reviewed and commented on sections of
the report. 


---------------------------------------------------------- Letter :6.1

As you requested, we plan no further distribution of this report
until 10 days after its issue date.  At that time, we will send
copies to the Secretaries of State, Commerce, and Agriculture and to
the U.S.  Trade Representative.  We will also make copies available
to other interested parties upon request. 

If you have any questions concerning this report, please call me at
(202) 512-4812.  The major contributors to this report are listed in
appendix VII. 

Sincerely yours,

Allan I.  Mendelowitz, Managing Director
International Trade, Finance, and
 Competitiveness


IMPLEMENTATION OF 1992 U.S.-CHINA
MEMORANDUM OF UNDERSTANDING ON
MARKET ACCESS
=========================================================== Appendix I

In January 1994, the U.S.  Trade Representative (USTR) determined
that China was "substantially in compliance" with the market access
MOU.  The U.S.  government recognized that the Chinese have made
progress in the areas of transparency and liberalization of nontariff
barriers.  However, USTR and USDA found that China's compliance with
the MOU was lagging in terms of ensuring that sanitary and
phytosanitary standards and testing requirements were not used as
import barriers.  This finding contrasts with the position of Chinese
government officials we met with in March 1994, who told us that
China had faithfully implemented all of its commitments under the
market access MOU. 

Although China was determined to be "substantially in compliance"
with the specific provisions of the MOU, there seems to be some
difference in perception among U.S.  government and private sector
observers about the extent to which market access in China is
actually improving.  State Department and Commerce Department
officials commented that the lack of transparency of China's trade
laws and regulations continues to be a major problem--a perception
mirrored by our interviews with 33 U.S.-based companies doing
business in China.  Moreover, State and Commerce Department officials
expressed concern about the possibility that the Chinese government
may find other ways to restrict imports that are not addressed in the
market access MOU.  For example, they said the central government
continues to restrict imports by (1) limiting access to the foreign
exchange that is necessary for the purchase of foreign goods and
services; and (2) devaluing its currency, which generally has the
effect of discouraging imports by raising their prices to consumers. 

U.S.  government and business officials told us that several factors
may inhibit the implementation of the market access MOU.  These
include the declining Chinese central government control over
provincial and local governments, the interests of Chinese government
ministries in protecting their respective industries from foreign
competition, and the corruption and black market activities that
exist in China. 


   BACKGROUND
--------------------------------------------------------- Appendix I:1

When President Clinton came into office in 1993, one of his five
major trade policy priorities was to "resolutely enforce existing
trade agreements and U.S.  trade laws to open more export markets."
He cited the Pacific Rim as a key region in which to encourage
increased trading opportunities.  According to USTR, China and Japan
are the two major Pacific Rim countries presenting the greatest
opportunities but also the greatest challenges for U.S.  trade
relations. 

With real gross domestic product (GDP) growth of almost 13 percent in
1992 and in 1993, China has been the fastest-growing major economy in
the world.  Based on 1993 estimates by the International Monetary
Fund (IMF), China is also the world's third largest economy, after
the United States and Japan.  Concurrently, the loosening of
government controls over foreign trade, investment, credit, and
prices has contributed to the significant expansion of China's
international trade--from $165 billion in 1992 to $196 billion in
1993. 

The dramatic growth and reform of the Chinese economy have created
increased potential for U.S.  companies interested in exporting to or
investing in China.  In some Chinese industry sectors, estimated
market growth far surpasses real GDP growth.  For example, the
Department of Commerce's U.S.  and Foreign Commercial Service
(US&FCS) predicted that there would be 20-percent growth in China's
market for aircraft and aircraft parts and 42-percent market growth
for computers and computer peripherals between 1993 and 1995.  US&FCS
also expects significant expansion of the Chinese market for U.S. 
telecommunications equipment, electric power systems, and industrial
chemicals, among other things.  Table I.1 summarizes selected market
indicators for 10 sectors identified by US&FCS as the best prospects
for U.S.  exports to China. 



                                    Table I.1
                     
                      US&FCS Assessment of 10 Best Prospects
                            for U.S. Exports to China

                                                       Estimated         China's
                                       Estimated   annual growth       estimated
                       Estimated   annual market      of imports  receptivity to
                    total market     growth rate       from U.S.   U.S. products
                       size 1995         1993-95         1993-95         in this
Industry Sector       (millions)       (percent)       (percent)        sector\a
----------------  --------------  --------------  --------------  --------------
Aircraft & parts         $ 5,993              20              20               5
Electric power          73,136\b              10              29               4
 systems
Computers &                1,763              42              50               5
 peripherals
Telecommunicatio           7,500              20              20               4
 ns equipment
Automotive parts          11,080              15               5               4
 & service
 equipment
Agricultural               8,670               5           -15\c               3
 chemicals
Industrial                16,117              10              12               4
 chemicals
Plastic                    5,700              10             -12               4
 materials &
 resins
Chemical                   3,783              10              10               4
 production
 machinery
Building                  12,541               8               6               5
 products
--------------------------------------------------------------------------------
\a US&FCS rated China's receptivity to U.S.  products in these
sectors on a scale of 1 to 5, with 5 as the highest rating. 

\b This number is deceptively large.  Imports are possible only for
that portion of the market that is denominated in foreign
exchange--about $6 to 8 billion per year. 

\c US&FCS attributed decreasing U.S.  sales in this sector to sales
of pirated versions of U.S.  agricultural chemicals in China. 

Sources:  U.S.  Department of Commerce, 1994 Country Marketing Plan
and China Commercial Guide:  1994-95. 

Despite the expanding needs and market potential of China's economy,
Chinese market access barriers have restricted U.S.  sales in many
sectors, contributing to the growing U.S.  trade deficit with China,
according to USTR reports.  (The U.S.  trade deficit with China
reached an historical high of $22.8 billion in 1993.) In 1991, USTR
initiated an investigation under Section 301 of the U.S.  Trade Act
to determine whether specific market access barriers in China are
unreasonable or discriminatory and restrict U.S.  commerce.  The
investigation included Chinese government practices, such as
inaccessible or unpublished Chinese trade laws and regulations;
nontariff barriers such as quantitative restrictions on imports; and
restrictive standards, testing, and certification requirements.  In
October 1992, the United States concluded the investigation into
these Chinese practices by negotiating a bilateral MOU on market
access with the government of China. 

Both Chinese and U.S.  government officials have acknowledged that
the evolution of China's economy to a truly open market will be
long-term and gradual.  One US&FCS official noted that until China
has a convertible currency, a high degree of enterprise autonomy, and
has removed price controls, it will be impossible to fully eliminate
state control of imports.  This official explained that with tight
control over currency exchange and prices of goods, as well as
procurement by state enterprises, the Chinese government can continue
to regulate imports of foreign goods and services, even if it
liberalizes most other aspects of its trade regime. 


   U.S.  AND CHINESE COMMITMENTS
   UNDER THE MOU
--------------------------------------------------------- Appendix I:2

Under the provisions of the October 1992 U.S.-China MOU on market
access, the government of China agreed to (1) increase the
transparency of its trade regime by openly publishing all
trade-related laws, regulations, and decrees and ending the use of
restricted internal trade directives, among other things; (2) remove
a significant number of nontariff barriers, including quantitative
restrictions, import-licensing requirements, and import controls;\1
(3) eliminate standards and testing requirements as barriers to
trade, especially for agricultural products; (4) eliminate import
substitution policies and measures; and (5) significantly reduce
selected tariffs. 

For its part, the U.S.  government agreed to (1) pursue
liberalization of Coordinating Committee on Multilateral Export
Controls (COCOM)\2 export control lists and procedures, including
restrictions on exports of computers and telecommunications
equipment, providing these measures are consistent with the national
security interests of the United States; and (2) staunchly support
China's achievement of contracting party status to the General
Agreement on Tariffs and Trade (GATT) and work with the Chinese
government and other GATT contracting parties to reach an acceptable
protocol of accession. 


--------------------
\1 According to USTR, quantitative restrictions, also referred to as
quotas, are numerical limits on imports for specified products;
import-licensing requirements are rules or regulations requiring the
buyer in China, whether a domestic or foreign entity, to obtain an
official license or approval from the appropriate Chinese trade
and/or industry sector ministry in order to import certain products;
and import controls are quantitative restrictions on products
designated in China's State Plan, affecting various sectors.  An
annex to the MOU provides a listing of specific products, by
Harmonized Tariff System number, and the year-end dates by which the
Chinese government has agreed to liberalize associated quantitative
restrictions, import licenses, and/or controls.  (The Harmonized
Tariff System was established in 1985 to provide a uniform system of
product classification accepted by all major trading countries.)

\2 COCOM was established in 1949 to protect the strategic technology
advantage of its 17 members.  The organization was officially
terminated in 1994 and has not yet been replaced by a new
organization to coordinate the export of strategic goods. 


   THE CHINESE GOVERNMENT HAS
   COMPLIED OVERALL WITH THE
   TRANSPARENCY PROVISIONS OF THE
   MOU, BUT IMPLEMENTATION AT THE
   PROVINCIAL AND LOCAL LEVELS IS
   LAGGING
--------------------------------------------------------- Appendix I:3

USTR believes that China's commitments on transparency are acceptable
and do meet the requirements of the MOU, but implementation needs to
be monitored closely.  The government of China did not meet all the
MOU requirements by the original October 10, 1993, deadline, but by
December 31, 1993, Chinese officials had made enough progress to
satisfy USTR's concerns.  However, the American Chamber of Commerce
in Beijing\3 told us in February 1994 that a lack of transparency
remained a widespread concern among U.S.  companies doing business in
China. 


--------------------
\3 The American Chamber of Commerce in Beijing has a membership of
approximately 350 U.S.  companies with operations in China. 


      POSITIVE STEPS TAKEN TO
      IMPROVE TRANSPARENCY
------------------------------------------------------- Appendix I:3.1

In the area of transparency, China has begun to publish trade
regulations and policies, as agreed in the MOU.  Of primary
importance was the issuance of Chinese State Council Circular 63 on
September 23, 1993, providing that only those Chinese trade-related
laws, rules, and regulations that have been published may be
enforced.  This action was taken to ensure that one uniform trade
policy, conforming to international standards, would be enforced
across China. 

In October 1993, China's Ministry of Foreign Trade and Economic
Cooperation (MOFTEC) established a daily publication to serve as a
central repository for trade-related laws, regulations, and other
announcements.  As of January 1994, MOFTEC had published 93
previously confidential trade documents in this journal and rescinded
391 other confidential trade documents.  MOFTEC also published a
number of trade-related documents in other publications in Beijing
and in the provinces, including two volumes of trade and investment
regulations. 

In complying with the MOU, the government of China has taken
additional steps, such as (1) publishing lists of products subject to
import licenses, quotas, and import controls by Harmonized System
tariff category for 1993;\4 (2) publishing in the journal China
Tendering a list of major central government projects and selected
projects at the provincial level planned through the year 2000; and
(3) ordering Chinese provinces to bring their trade rules and
regulations in line with those of the central government. 

Although a number of the MOU provisions remain to be addressed,
Chinese officials made commitments in December 1993 negotiations with
USTR to, among other things, (1) provide to the United States all
"internal" trade-related documents that continue to be in effect and
that have been issued by central government ministries other than
MOFTEC; (2) undertake investigations in 1994 to determine whether
local governments have implemented trade regulations that have not
been published or issued trade-related investment measures that are
not in compliance with central government policies; and (3) make
public all trade documents and provide to the United States a list of
all previously published trade-related documents. 


--------------------
\4 According to USTR, these lists do not include adequate information
on the quantity or value of specific products affected by these
controls. 


      AREAS WHERE PROGRESS ON
      TRANSPARENCY HAS BEEN SLOW
------------------------------------------------------- Appendix I:3.2

Although China has recently taken steps to improve transparency,
China's trade regime is still far from transparent, according to 1994
statements from the Commerce Department and the American Chamber of
Commerce in Beijing.  U.S.  government and private sector observers
we spoke to seemed to agree that the biggest challenge will be
getting implementation and enforcement at the provincial and local
levels.  In response to these concerns, China's central government
has committed to completing investigations to ascertain the level of
transparency in key commercial provinces.  Any internal and
unpublished trade documents are to be made public and available to
foreign governments and traders. 

In addition, we were told the government of China has not yet ensured
that its trade rules are applied in a uniform manner.  Arbitrary
application of trade rules, particularly by the Chinese Customs
Service, is widespread and a serious impediment to market access in
China, according to USTR.  Further, USTR officials said that MOFTEC
and other ministries responsible for trade in specific industries do
not adequately coordinate their policies and decisions, which adds to
the confusion U.S.  companies face when doing business in China.  In
our March 1994 interview, State Economic and Trade Commission (SETC)
officials told us that the government of China is committed to
implementing import policies consistently across all levels of
government (central, provincial, and local). 

Insufficient commercial information on major projects remains a major
concern for the U.S.  Commerce Department.  With the exception of
World Bank and Asian Development Bank-financed projects, Commerce
officials said that Chinese bid solicitation and contract award
processes are generally not made public.  Although the government of
China gave the U.S.  government a listing of projects to be completed
between now and the year 2000, detailed information regarding
planning status, project funding, projected tender date, and key
government contacts was not included.  According to the Commerce
Department, such information is often revealed to countries offering
more extensive tied aid options than the United States provides.\5

Such discriminatory treatment may put U.S.  companies at a
disadvantage when competing with other foreign companies for project
contracts. 


--------------------
\5 "Tied aid" refers to foreign assistance that is linked to the
purchase of exports from the country extending the assistance.  Until
recently, the U.S.  government generally discouraged the use of tied
aid for major capital projects, due to concerns about the possible
distortion of funds allocation in developing countries.  However, in
February 1994, the U.S.  Export-Import Bank (Eximbank) released a
draft of its new tied aid policies and procedures, signaling a more
proactive approach to tied aid.  As part of this effort, the Eximbank
is administering a new tied aid capital projects fund. 


   CHINA HAS COMPLIED WITH MOST OF
   ITS COMMITMENTS TO LIBERALIZE
   NONTARIFF BARRIERS, BUT SEVERAL
   KEY ISSUES ARE UNRESOLVED
--------------------------------------------------------- Appendix I:4

In the MOU, China pledged to reform its import regime by reducing
nontariff barriers to imports.  These nontariff barriers include
quantitative restrictions, import-licensing requirements, and import
controls for the product categories listed in the annex to the MOU. 
In the MOU, China pledged to dismantle almost 90 percent of its
nontariff barriers between 1992 and 1997.  Officials of China's State
Economic and Trade Commission (SETC) told us that the government's
goal to abandon the centrally planned economy and move to a socialist
market economy was the motivating force behind its commitment to
reduce nontariff barriers.\6 According to USTR, China has complied
with its MOU commitments to reduce import-licensing requirements,
quantitative restrictions, and controls. 


--------------------
\6 SETC was formed in 1993 by the State Council.  SETC's mandate
includes management of the day-to-day operation of the economy,
reform of state enterprises, and coordination of foreign trade
policies. 


      POSITIVE STEPS TAKEN TO
      ELIMINATE NONTARIFF BARRIERS
------------------------------------------------------- Appendix I:4.1

China has made good progress in reducing nontariff barriers to trade
since signing the market access MOU, according to USTR.  For example,
USTR data show that the Chinese government reduced the total number
of quantitative restrictions from about 3,000 in 1992 to about 400 in
1994. 

In late 1992, the government of China took some important initial
steps toward eliminating nontariff barriers.  By December 31, 1992,
China had eliminated import restrictions, quantitative restrictions,
licensing requirements, and controls on goods such as instant print
film, instant cameras, and certain telecommunications equipment,
according to the schedule in the annex to the agreement.  In
addition, China's elimination of restrictions on its
digital-switching systems market\7 allowed two U.S.  suppliers to
sign agreements for major telecommunications projects.  Since that
time, one U.S.  telecommunications company reported that it had sold
about $500 million in digital-switching systems equipment to China. 
Further, China removed import-licensing and quota restrictions on
certain chemical products in 1992, according to officials of China's
Ministry of Chemical Industry and USTR. 

In 1993, China took additional steps to implement the MOU.  For
example, China eliminated import restrictions for 16 high-priority
U.S.  export categories, including 258 items, such as food products,
metals, construction materials, and aircraft.  China also eliminated
most restrictions on 171 machinery and electronics products (subject
to new procurement rules) and lifted ahead of schedule restrictions
on integrated circuits and some chemical products.  Later in the
year, China significantly liberalized quantitative restrictions on
products listed in an annex to the MOU, including heavy machinery,
some auto parts, computers, and medical equipment.  For example,
China reduced quantitative restrictions on electronics and heavy
machinery products by over 40 percent, according to a USTR official. 
In addition, China eliminated internal quotas on imports of distilled
spirits. 

Regarding China's import-licensing and approval system, China has
both reduced licensing requirements\8 and increased the transparency
of the system.  In the MOU, China agreed to eliminate 75 percent of
its import-licensing requirements over a 2-year period, according to
a USTR report.  In keeping with this agreement, China lifted the
first set of import-licensing requirements in December 1993.  USTR
expects this liberalization to greatly benefit U.S.  exporters of
agricultural products, iron and steel products, commercial aircraft,
and electrical machinery. 

Further, the Chinese government published a document outlining a
simplified import-licensing and approval process.  According to USTR
reports, obtaining permission to import products now subject to
quotas or quantitative restrictions appears to be considerably
simpler and more transparent than in the past. 


--------------------
\7 China's State Council Document 56, issued in 1989, restricted the
digital-switching systems market in China to three foreign suppliers. 

\8 Before implementation of the MOU, China's import-licensing system
affected approximately 50 percent of the value of China's imports,
including 53 major product categories of consumer goods, raw
materials, and production equipment. 


      AREAS WHERE PROGRESS ON
      LIBERALIZING NONTARIFF
      BARRIERS HAS BEEN SLOW
------------------------------------------------------- Appendix I:4.2

The U.S.  and Chinese governments are still working to resolve some
issues relating to nontariff barriers, such as investigating U.S. 
industry complaints about quotas and other import restrictions that
are either new or have been recently discovered.  Although China has
pledged to remove import controls from numerous items, some of these
items have been placed on newly created lists as part of China's
efforts to restructure its system for controlling imports of
electronic and machinery products, according to a Commerce Department
report.  Under this new system, certain items previously subject to
import controls would now be subject to quantitative restrictions or
new procurement regulations and approvals.  For example, SETC
officials told us that 18 categories of goods, such as autos,
computers, and audiovisual equipment, would be subject to new
controls. 

In addition, China maintains a significant number of hidden quotas
and nontransparent regulations that effectively keep U.S. 
intellectual property products out of the market, according to USTR. 
These include quotas on the import of foreign films and sound
recordings.  The International Intellectual Property Alliance (IIPA)
reported in July 1994 that China maintains an informal,
nontransparent quota on foreign recordings of approximately 120
foreign record releases per year, which would limit the number of
U.S.  musical compositions that could enter China.  The effect of
these quotas is compounded by an apparent ban on foreign ownership in
a joint venture or enterprise designed to produce and distribute
recorded music.  IIPA has requested that the U.S.  government
negotiate with the government of China to reduce Chinese quotas and
investment restrictions in the sound recording industry as well as in
other industries, such as motion pictures, book publishing, and
computer software. 


   CHINA CONTINUES TO RESTRICT
   IMPORTS OF U.S.  PRODUCTS ON
   THE BASIS OF STANDARDS AND
   CERTIFICATION REQUIREMENTS THE
   U.S.  GOVERNMENT DEEMS
   UNJUSTIFIABLE
--------------------------------------------------------- Appendix I:5

Under the standards provisions of the market access MOU, China agreed
that (1) all sanitary and phytosanitary (animal and plant health)
standards and testing requirements must be based on sound science and
administered in a manner that does not impede or create barriers to
imported products; and (2) the U.S.  and Chinese governments will
apply uniformly across their respective countries the same testing
and certification standards to imported and domestic nonagricultural
products. 

Despite these commitments, U.S.  government officials reported in
August 1994 that China has continued to use standards and
certification requirements as barriers to trade.  According to U.S. 
Department of Agriculture (USDA) and USTR officials, China has yet to
comply with many of the agricultural standards provisions of the
market access MOU.  Despite high-level efforts, China has continued
to refuse to use internationally recognized pest risk analysis
techniques in the application of its sanitary and phytosanitary
regulations, according to USDA.  For example, China continues to
apply sanitary and phytosanitary standards to U.S.  wheat, apples,
tobacco, grapes, and other fruits, as well as some livestock
genetics, based on health and phytosanitary concerns that the U.S. 
government claims are not scientifically justified. 


      POSITIVE STEPS TAKEN TO
      IMPLEMENT STANDARDS
      PROVISIONS
------------------------------------------------------- Appendix I:5.1

According to USDA officials, China has taken some steps toward basing
its agricultural standards assessments on sound science.  To date,
the government of China has (1) signed protocols to eliminate
scientifically unjustifiable sanitary standards for imports of pigs,
dogs, and bovine semen; (2) allowed a trial shipment of wheat from
the Pacific Northwest to Hainan Island, China's southernmost
province, in December 1993; and (3) decided to allow imports of two
varieties of Washington State apples from selected orchards and
packing houses to the Chinese mainland in June 1994. 


      AREAS WHERE PROGRESS ON
      STANDARDS HAS BEEN SLOW
------------------------------------------------------- Appendix I:5.2

Despite some positive actions, Chinese progress in complying with the
agricultural standards provisions of the MOU has lagged behind its
efforts in other areas, and significant standards-related barriers to
U.S.  imports remain, according to U.S.  government officials.  For
example, the Chinese government continues to ban U.S.  exports of
Pacific Northwest wheat to mainland China, claiming that it has
concerns about Tellitia Controversa Kuhn (TCK) smut--a type of
fungus--infestation.  USDA officials told us that these concerns are
not scientifically supported.  They also pointed out that although
China is now accepting Pacific Northwest wheat shipments into Hainan
Island, the lack of milling facilities and the inadequate
transportation infrastructure between Hainan Island and the mainland
will preclude any near-term significant increase in U.S.  wheat
exports to China. 

In addition, the government of China still bans U.S.  exports of
grapes, apples, and other fruit from the state of California due to
concerns about medfly infestation.  USDA officials told us that China
is the only country in the world that (1) restricts importation of
U.S.  fruit based on medfly concerns and (2) cites TCK smut as a
reason to restrict wheat imports.  Further, the United States has not
yet obtained commitments from China on liberalizing restrictions on
imports of stone fruit (plums, peaches, and nectarines), grapes, leaf
tobacco, and some animal genetic products.  According to USDA, the
U.S.  government will continue to pursue progress in China's
compliance with the agricultural standards provisions of the market
access MOU in the context of negotiations on China's accession to
GATT/WTO. 

Regarding nonagricultural standards, USTR reported that Chinese
testing and certification requirements add significant cost and
uncertainty to the transactions of U.S.  exporters.  Since China
generally does not accept U.S.  certification of product quality,
U.S.  companies must go through a time-consuming and expensive
process to obtain a Chinese quality license.  For example, U.S. 
companies exporting automobiles to China must provide two free
samples of their product, pay $40,000 in testing fees, and finance
the inspection of their factories in the United States by Chinese
officials.  The standards and specifications against which foreign
products are evaluated are often unavailable to the exporter. 
Further, the government of China often imposes higher standards and
testing requirements for foreign products than for domestically
produced goods.  According to USTR, these factors combine to protect
Chinese manufacturers and exclude foreign products considered
unnecessary for China's development. 


   THE GOVERNMENT OF CHINA CLAIMS
   THAT IT HAS ELIMINATED ITS
   IMPORT SUBSTITUTION POLICY
--------------------------------------------------------- Appendix I:6

Before the market access MOU, China had a longstanding import
substitution policy, allowing Chinese government agencies to deny
permission to import a foreign product if a domestic alternative
existed.  The government of China claims that it has rescinded its
import substitution policy, as promised in the MOU.  USTR officials
told us in a September 1994 interview that they believe China no
longer practices import substitution.  In March 1994 interviews with
Chinese SETC officials, we were told that the Chinese government has
eliminated its import substitution list of 1,700 products. 

A related issue involves China's local content requirements\9 and
technology transfer policies, which are similarly designed to protect
and promote the development of Chinese domestic industries. 
According to State Department and USTR officials, the Chinese
government is putting pressure on U.S companies in joint ventures to
increase local content in their products within specific time
periods.  U.S.  companies have reported to USTR that local content
requirements are commonplace and nontransparent, despite China's MOU
commitment not to condition issuance of import licenses upon such
things as transfer of technology, investment in China, or provincial
and municipal local content requirements.  For example, U.S. 
automobile and electronics manufacturers operating in China have had
to increase their use of Chinese parts and supplies in order to meet
local content requirements.  In some cases, they have had difficulty
locating Chinese components up to their quality standards, thus
lowering the quality of the final product. 


--------------------
\9 Local content requirements oblige an investor to purchase or use a
specific amount of inputs from local suppliers. 


   CHINA HAS REDUCED TARIFFS AS
   REQUIRED BY THE MOU, BUT
   OVERALL TARIFF RATES REMAIN
   HIGH
--------------------------------------------------------- Appendix I:7


      POSITIVE STEPS TAKEN
------------------------------------------------------- Appendix I:7.1

According to USTR and Chinese government officials, China has met its
MOU commitment to significantly reduce tariffs that were raised in
1988 for product categories, such as edible fruits and nuts, selected
chemical products, machinery and mechanical appliances, and
photographic or cinematographic goods.  To this end, the government
of China reduced tariffs on over 200 items by an overall average of
50 percent. 

In addition to fulfilling its commitments under the market access
MOU, China has indicated an interest in gradually bringing its tariff
system into conformity with international standards.  In early 1992,
the government of China reduced import tariffs on 225 products from
an average rate of 45 percent to 30 percent and abolished its import
regulatory tax, which applied a 20- to 80- percent surcharge on 18
categories of goods.  At the end of 1992, China lowered tariffs by an
average of 7 percent on 3,371 items, according to Chinese government
officials and USTR reports.  For example, China lowered tariffs on
instant print film and instant cameras from the rate of 80 percent ad
valorem to 5 percent, on chocolate and sugar confectioneries from 70
percent ad valorem to 15 percent, and on apples from 40 percent ad
valorem to 15 percent.  At the end of 1993, China reduced tariffs on
an additional 2,818 items by an overall average of 9 percent. 


      THE U.S.  GOVERNMENT IS
      ENCOURAGING FURTHER TARIFF
      REDUCTIONS
------------------------------------------------------- Appendix I:7.2

Although China has fully complied with the tariff reduction
commitments in the market access MOU, overall Chinese tariff rates
are still prohibitively high, according to USTR statements.  A 1994
World Bank study\10 found that in 1992, before China had fully
implemented its MOU commitments, China's unweighted average tariff
rate was 43 percent, while its trade-weighted average tariff rate was
32 percent.\11 At that time, China's average trade-weighted tariff
rate was equal to Brazil's and was the third highest among large
developing countries after India and Pakistan, according to the World
Bank study.\12 The World Bank found that China's average unweighted
tariff rates were typical of most large developing countries in that
they were relatively higher for manufactured consumer goods than for
agriculture, mining, or capital goods. 

U.S.  government officials reported other concerns associated with
Chinese tariffs that may adversely affect U.S.  companies doing
business in China.  For example, Chinese tariff rates may vary for
the same product, depending on whether the product is eligible for an
exemption.  If an item is incorporated into China's state or sectoral
plans, such as certain advanced technologies, the Chinese government
may apply a tariff that is significantly lower than published rates. 
U.S.  companies have also complained to USTR about the lack of
uniformity in duty rates at different Chinese ports, where local
officials may negotiate special rates with Chinese customs officers. 
Moreover, Commerce Department officials in China pointed out that
although tariffs have been lowered on many products, the combined
effect of China's recently devalued currency and the new value-added
tax has increased the tariffs and prices for these products
overall.\13 As a result, U.S.  exporters may still have to charge
prices that are prohibitively high for Chinese consumers. 


--------------------
\10 China:  Foreign Trade Reform, The World Bank (Washington, D.C.: 
Feb.  1994). 

\11 A "weighted" average tariff rate factors in the value of trade at
world prices in each product category, so that product categories in
which imports are minimal receive relatively less weight than those
with a higher level of imports. 

\12 These developing countries included Argentina, Brazil, China,
Colombia, Egypt, Hungary, India, Kenya, Pakistan, and the
Philippines. 

\13 As of January 1994, U.S.  exports to China are subject to China's
new value-added tax, which together with a new consumption tax,
replaces the 1958 consolidated industrial and commercial tax. 
According to a Commerce Department report, the value-added tax rate
for various products is higher, on average, than the former
consolidated industrial and commercial tax, except for products
referred to as luxury items. 


   U.S.  IMPLEMENTATION OF ITS
   COMMITMENTS UNDER THE MARKET
   ACCESS MOU
--------------------------------------------------------- Appendix I:8

USTR and Commerce Department officials said that the U.S.  government
has fully met its MOU commitments to (1) pursue the liberalization of
export restrictions on products destined for China and (2) support
China's efforts to join GATT/WTO. 


      EXPORT CONTROLS
------------------------------------------------------- Appendix I:8.1

The United States made three specific MOU commitments to liberalize
export restrictions on products destined for China.  These included
(1) pursuing the liberalization of COCOM export controls, (2)
considering liberalized treatment of computer exports for civilian
end-use, and (3) significantly liberalizing controls on exports of
telecommunications products. 

Regarding the first commitment, the United States and other COCOM
members agreed in November 1993 to terminate COCOM and to establish a
new organization to coordinate the export of strategic goods.  COCOM
went out of existence on March 31, 1994.  Since then, the United
States and its COCOM allies agreed to work toward completing
negotiations on establishing a new multilateral export control regime
to succeed COCOM by late 1994.\14 However, as of December 1994, a new
organization to replace COCOM had not yet been formed.  In the
interim period between the end of COCOM and the beginning of the new
regime, former COCOM and COCOM-cooperating countries have committed
to maintain the existing control lists of controlled goods and
technologies until agreement is reached on lists for the new regime,
and the new regime begins its operations.  All licensing decisions
are currently subject to national discretion. 

Regarding the second and third MOU commitments on liberalizing export
controls, the U.S.  administration announced on April 4, 1994, a new
general licensing procedure referred to as the "GLX." This procedure
allows liberalized treatment for a broad range of controlled goods
and technologies destined for civilian end-users in formerly
proscribed destinations, including the former Soviet Republics,
Eastern Europe, and China.  For example, the GLX procedure allows
U.S.  companies and individuals to export computers with the
capability of up to 1,000 million theoretical operations per second
(MTOPS) and virtually all civilian telecommunications products to
these destinations.  According to the Department of Commerce, the
removal of certain individual validated license requests by the GLX
procedure will eliminate 35 percent of the individual validated
licenses previously required for proscribed destinations.  Certain
countries--such as Cuba, Libya, Iran, and Iraq--will continue to be
subject to controls on exports of U.S.  telecommunications and
computer equipment.  In addition, the United States will retain
strict controls on items that could assist in the development of
weapons of mass destruction or ballistic missiles. 


--------------------
\14 Founding members of the new regime are expected to include the
former COCOM members and those countries designated by COCOM as
cooperating countries (Ireland, Austria, Sweden, Finland,
Switzerland, and New Zealand).  Russia has been invited to be a
founding member of the new regime, provided it adopts the appropriate
national policies required of members.  Additional members will be
admitted by consensus. 


      CHINA'S APPLICATION TO JOIN
      GATT/WTO
------------------------------------------------------- Appendix I:8.2

Since 1992, the U.S.  and Chinese governments have met in both
bilateral and multilateral contexts to discuss the conditions for
China's accession to GATT or its successor, WTO, as a result of a
completed Uruguay Round.  Negotiators must resolve a number of
critical issues before formulating a protocol of accession for China. 
Among these concerns are (1) the lack of transparency in China's
trade laws and regulations, (2) the timetable for China's tariff
reductions, and (3) the ability of China's central government to
apply GATT 1994 obligations uniformly across regions and provinces. 
(These negotiations are discussed in greater detail in the final
section of this appendix.)


   U.S.  COMPANIES' VIEWS ON
   CHINA'S PROGRESS IN
   IMPLEMENTING THE PROVISIONS OF
   THE MARKET ACCESS MOU
--------------------------------------------------------- Appendix I:9

The most frequent concern reported by the 33 U.S.-based companies who
responded to our structured interview questions on market access
issues was transparency, followed by tariffs and nontariff barriers. 
Fewer companies reported concerns or problems related to Chinese
import substitution or product standards and testing policies.\15


--------------------
\15 The relative lack of concern about Chinese product standards
among the 33 companies we interviewed may be attributed, in part, to
the fact that only 1 of the companies we interviewed was an exporter
of agricultural products. 


      TRANSPARENCY
------------------------------------------------------- Appendix I:9.1

Fifty-two percent of the 33 companies that responded to our
structured interview questions about China's implementation of the
provisions of the market access MOU told us that they have
experienced problems related to the transparency of China's trade
regulations, laws, and policies.  However, six of our respondents
said that transparency has been improving as China has increased its
efforts to move to a market economy.  Twenty-seven percent of the
respondents said that transparency has not been a major problem for
their companies.  Among the latter, two companies said that their
local staffs have been instrumental in obtaining and understanding
Chinese trade policies. 

A majority of the structured interview respondents who identified
transparency as a problem reported that China's trade and investment
laws are unclear and administered in a seemingly arbitrary manner. 
For example, a pharmaceutical company told us that Chinese
enforcement of its requirements for product testing and registration
seemed to vary from one case to the next, depending on the company
involved.  A computer company reported considerable difficulty in
understanding and applying Chinese regulations regarding imports,
foreign exchange, and employment of domestic labor.  Other companies
noted that many Chinese trade and investment regulations are still
unpublished or difficult to interpret.  Two companies commented that
business transactions are based more on personal contacts or
negotiation than on written policies.  Companies we interviewed also
pointed out variations in trade and investment policies among the
Chinese government ministries. 

Six companies reported that problems with transparency were
accentuated at the provincial and local levels.  For example, some
companies perceived inconsistency in the application of Chinese trade
policies between the central government and the provincial/local
government levels.  One company official noted that the national laws
and regulations are generally published but that provincial and local
ones are not.  He added that increasingly powerful local bureaucrats
who want to maximize their economic flexibility may be less apt to
publish local trade regulations.  Another company official observed
that the farther away from Beijing one is, the greater the
variability in the interpretation and implementation of laws and
regulations. 


      NONTARIFF BARRIERS
------------------------------------------------------- Appendix I:9.2

Respondents to our market access questions reported mixed experiences
with Chinese nontariff barriers.  One-third of the 33 companies that
responded to our questions on Chinese market access reported that
they had experienced problems related to nontariff barriers on
imports.  At the same time, 10 companies said Chinese nontariff
barriers posed no major problems for their business in China, while 2
said the situation seemed to be improving.  The remainder said that
the issue of nontariff barriers was either not applicable to their
businesses or that their companies had too little experience in this
area to comment. 

Among the companies that reported problems related to nontariff
barriers, import-licensing requirements were the most frequently
mentioned concern.  Since the buyers of products are often Chinese
state-owned enterprises, the central government is able to exert a
significant amount of control over the issuance of import licenses,
according to some U.S.  companies.  License issuance can be based on
factors ranging from foreign currency availability to protection of
state or local industries to personal relationships between plant
owners and government officials.  In addition, the Chinese government
may use the import-licensing process to promote other interests, such
as technology transfer or increased local content.  For example, one
company believed that China was attempting to pressure U.S.  joint
venture companies into increasing technology transfer by requiring a
certain minimum percentage of local content in order to obtain import
licenses. 


      STANDARDS
------------------------------------------------------- Appendix I:9.3

Only 12 percent of the companies we contacted told us that they had
experienced problems related to Chinese product standards.  For
example, one company expressed concern that Chinese vehicle design
standards are based on European, rather than U.S., standards. 
Another company noted that Chinese product standards sometimes differ
from global standards.  However, a larger number of companies pointed
out that since U.S.  technologies were still more advanced than
Chinese technologies in their industries, Chinese product standards
have not been an impediment. 


      IMPORT SUBSTITUTION
------------------------------------------------------- Appendix I:9.4

Twenty-seven percent of the U.S.  companies we interviewed reported
problems related to Chinese import substitution practices.  One
company official told us that he perceived an increase in the
instances of import substitution for high-technology products, such
as computer equipment. 


      TARIFFS
------------------------------------------------------- Appendix I:9.5

After transparency, the high level of Chinese tariffs was the second
most frequently mentioned concern among the respondents to our market
access questions.  In some cases, Chinese tariffs and, consequently,
prices, are so high that U.S.  products are affordable only to the
wealthiest consumers in China.  Several other companies reported that
in addition to the imposition of unusually high tariffs, Chinese
tariffs are not uniformly applied throughout China.  For example, the
tariff rate for one product may vary depending on (1) the supplier's
personal contacts in Chinese ministries, (2) the port to which the
product is shipped, or (3) the location of company operations in
China.  Other companies noted that the establishment of the new
Chinese value-added tax has reduced the benefits of China's recent
tariff liberalization in certain product categories.  One U.S. 
company official noted that her company feels pressure to establish
operations in China because of high tariff rates. 

Among those companies that told us that Chinese tariffs were not a
major problem were companies that (1) have operations in China and/or
(2) produce items that are not competing with the local Chinese
industries. 


   FACTORS THAT MAY IMPEDE CHINA'S
   IMPLEMENTATION OF THE MARKET
   ACCESS MOU
-------------------------------------------------------- Appendix I:10

U.S.  government officials told us that declining central government
control over provincial and local governments has inhibited the
implementation of China's MOU commitments.  Although provincial
leaders have identified legal reform as a priority, progress in
drafting new standardized regulations has been slow, according to one
State Department official.  Municipal and county bureaucracies
interested in maintaining local autonomy may be resistant to
implementing central government regulations.  To help address this
problem, China's MOFTEC is running seminars to educate and train the
provincial and local governments on how to implement the MOU,
according to a U.S.  embassy official.  In addition, the central
government is attempting to reassert control over the provinces by
developing new taxation policies to be applied throughout China. 

Another obstacle to implementing the MOU arises from the fact that in
many cases, the ministry that oversees the manufacturing of a
particular product is also involved in the import approval process. 
Since these ministries have an interest in protecting state-owned
domestic industries, they may administer import policies in such a
way as to restrict imports.  A Commerce Department official added
that as certain ministries see their power eroding, they are more
inclined to "drag their feet" on implementing market-opening
initiatives. 

Finally, corruption and black market activities, including smuggling
and piracy, may impede the implementation of the MOU, according to
State and Commerce Department officials.  However, it is difficult to
determine the extent to which these activities affect China's
market-opening initiatives and level of imports. 


   U.S.  GOVERNMENT EFFORTS TO
   PROMOTE INCREASED MARKET ACCESS
   IN CHINA
-------------------------------------------------------- Appendix I:11

The U.S.  government has a variety of bilateral and multilateral
tools with which to encourage China to increase access to its growing
market.  On the bilateral level, government/industry exchanges and
training could help China to develop the legal and financial
institutions necessary for participation in international markets,
according to U.S.  government officials.  For example, the
governments of the United States and China signed a framework
arrangement in August 1994 under the U.S.-China Joint Commission on
Commerce and Trade\16 (JCCT) to enhance bilateral cooperation in
certain industry sectors.\17

Proposed cooperative activities would generally take place within the
JCCT Business Development Working Group and would initially include
seven industry sectors, such as information technologies, energy, and
transportation.  (Other sectors may be included as mutually agreed). 
In addition, the JCCT arrangement proposes activities, such as (1)
establishing technical exchange programs; (2) establishing
information centers or other means to exchange industrial,
commercial, scientific, and technological information; and (3)
facilitating the organization of bilateral trade symposia, seminars,
and expositions.  For instance, under the Joint Statement on
Cooperation in Commercial Law (one component of the broader
arrangement) the United States and China agreed to explore ways to
expand cooperation in the area of commercial law, such as organizing
joint legal seminars, exchanging legal experts, and disseminating the
laws of each country.  In addition, the Commerce Department and
China's MOFTEC signed a memorandum of understanding to develop
proposals for a joint Commercial Strategy Center.  The purpose of
this center would be to facilitate mutual understanding of each
country's commercial policies, business environment, and factors
affecting economic growth and stability. 

USDA also has technical assistance and export promotion programs that
could help to increase China's receptivity to U.S.  agricultural
products.  USDA officials told us that the U.S.  government has
tremendous technical expertise in food and drug safety testing that
could be of assistance to China and at the same time improve market
access for U.S.  products.  In addition, USDA's Office of
International Cooperation and Development has a scholarly exchange
program with China's Ministry of Science and Technology. 

U.S.  trade laws authorize USTR to negotiate with our trading
partners, including China, to promote more open international
markets.  If the Chinese government failed to follow through on its
market access MOU commitments, USTR would have authority under U.S. 
trade law to reinstate Section 301 investigation procedures, possibly
resulting in the imposition of higher tariffs on selected Chinese
imports. 

To promote Chinese market access in the multilateral context, the
U.S.  government could continue to work with China and other GATT/WTO
contracting parties to develop an acceptable protocol for China's
accession.  China's desire to join WTO as a founding member gives the
Unites States the opportunity to encourage China to broaden its
economic reform program and build a free market trading system based
on GATT principles. 


--------------------
\16 JCCT, co-chaired by Commerce and China's MOFTEC, was established
in 1983 to provide a forum for consideration of bilateral trade and
investment issues and to serve as a vehicle for promoting commercial
relations.  The U.S.  government suspended annual high-level JCCT
meetings from June 1989 to December 1992 in response to the Chinese
military crackdown in Tiananmen Square.  Since late 1992, the U.S. 
and China have been formulating new JCCT initiatives. 

\17 The majority of the activities proposed under the framework
arrangement are in the early planning stages, and implementation is
contingent upon obtaining funding from government or private sector
sources. 


      STATUS OF RECENT
      NEGOTIATIONS ON CHINA'S
      APPLICATION FOR GATT/WTO
      MEMBERSHIP
------------------------------------------------------ Appendix I:11.1

The commitments that the Chinese government accepted in the market
access MOU were designed to bring China's trade regime closer to the
international trade standards required by GATT.  Thus, from the U.S. 
government's perspective, China's progress in implementing the market
access MOU provisions serves as an important indicator of China's
readiness to undertake GATT 1994 obligations.  As of October 1994,
the U.S.  government, the Chinese government, and other GATT
contracting parties were engaged in negotiations to develop a
mutually acceptable protocol of accession to enable China to join
GATT/WTO. 


      BACKGROUND
------------------------------------------------------ Appendix I:11.2

The former Republic of China was an original member of GATT in 1948,
but the nationalist government of Taiwan withdrew from GATT in 1950
after the Communist revolution in China.  The People's Republic of
China (PRC) secured GATT observer status in 1982 and applied for full
GATT membership in 1986.  The GATT Working Group on China met for the
first time in 1987 to begin negotiating the terms under which China
might eventually join GATT. 

Negotiations stalled in the spring of 1989 as China curbed its
economic and trade reforms but regained momentum in 1992 when the
government resumed its reform efforts.  In addition, the successful
negotiation of the U.S.-China MOU on market access in October 1992
gave GATT contracting parties renewed confidence in China's ability
to meet GATT eligibility requirements. 

Since 1992, the U.S.  and Chinese governments have met in both
bilateral and multilateral contexts to discuss the conditions for
China's accession to GATT or its successor, WTO.  The China GATT
Working Party (including GATT members and Chinese negotiators) met in
Geneva, Switzerland, in June and July 1994 to begin consideration of
specific issues for China's terms of accession.  U.S.  and Chinese
GATT delegations met bilaterally in September 1994 to discuss all
aspects of the protocol package, including Chinese market access
commitments for goods and services, commitments on internal supports
and export subsidies for agriculture, and the terms of adherence to
the GATT 1994 agreement.  These technical-level bilateral meetings
should contribute to progress in the negotiations. 


      GATT WORKING GROUP
      NEGOTIATING DOCUMENT
------------------------------------------------------ Appendix I:11.3

In June and July 1994, the Chairman of the GATT Working Party
circulated a negotiating document based on contracting party
contributions containing possible commitment terms for China's
accession to GATT/WTO.  This document was intended to create a
negotiating framework for further discussion with China on
commitments to be contained in the accession documents, including the
protocol.  At the end of July, China tabled a response negotiating
document in the same format that, according to USTR, falls
significantly short of the breadth and level of commitment
anticipated by the contracting parties.\18 Further refinements are
likely as a result of China's ongoing bilateral discussion with the
United States and other WTO members, and the final shape of China's
protocol will be greatly influenced by the government of China's
willingness to adopt and enforce basic GATT 1994 provisions in its
trade regime from the date of accession. 


--------------------
\18 USTR officials stressed that neither document constitutes a draft
protocol, nor is it certain that the document finally negotiated with
China as a protocol will contain all of the current elements. 


      ISSUES TO BE RESOLVED
------------------------------------------------------ Appendix I:11.4

According to USTR, as of October 1994, GATT/WTO members and Chinese
negotiators must resolve a number of critical issues before
formulating a protocol of accession for China.  Among these concerns
are

  -- the lack of transparency in China's trade laws and regulations;

  -- the timetable and level of China's tariff reductions;

  -- the elimination of nontariff measures not permitted under GATT
     1994;

  -- the phased elimination of industrial subsidies prohibited by the
     Uruguay Round Subsidies Agreement;

  -- the expansion of trading rights and elimination of designated
     trade in certain products by certain firms;

  -- the ability of China's central government to apply GATT 1994
     obligations uniformly across regions and provinces;

  -- the extension of national treatment to imported goods and to
     foreign companies operating in China, particularly in the
     services industry;

  -- phasing out of state-fixed prices;

  -- China's ability to provide protection for intellectual property
     rights;

  -- the provisions of a "safeguards" clause to protect WTO members
     against sudden surges of Chinese exports;\19

  -- nontariff measures on agricultural products; and

  -- foreign exchange issues. 


--------------------
\19 A safeguard is a temporary import control or other trade
restriction that a country imposes to prevent injury to domestic
industry from increased imports.  It is designed to facilitate the
adjustment of domestic industries to the influx of fairly traded
imports. 


      U.S.  POSITION COMPARED TO
      OTHER COUNTRIES' VIEWS
------------------------------------------------------ Appendix I:11.5

The U.S.  government and other GATT 1994 contracting parties
participating in the negotiation share many of the same concerns
about China's willingness to undertake basic GATT 1994 obligations
and its ability to apply them to its trade regime from the date of
accession, according to USTR.  To a greater or lesser extent, and
depending on the issue, most current contracting parties are willing
to discuss appropriate transition periods for implementation of
specific aspects of GATT 1994 for China.  None, however, are willing
to automatically grant China all the exemptions from GATT 1994
provisions allowed for developing countries. 

The U.S.  government has held firm in its view that China's request
for transition periods in some areas must be matched with appropriate
commitments from China on the basic issues, e.g., specific schedules
of elimination for Chinese trade policies that are inconsistent with
GATT 1994 standards; establishment of a unified foreign exchange
market; additional Chinese offers for increased market access for
goods and services, including financial services; and commitments
recognizing from the date of accession central GATT 1994 obligations
in trading rights, market access, nondiscrimination, and national
treatment. 

Earlier in 1994, the Commission of the European Union (EU) appeared
to support China's accession to GATT by the end of 1994 on the basis
of less stringent commitments.  More recent EU efforts have focussed
on the need for greater market access commitments by China.  Canada
and Japan have also tabled significant market access requests and
have agreed that progress on completion of the protocol terms should
not outstrip bilateral progress on market access commitments. 
Members of the Cairns Group of agricultural exporting countries have
pressed for greater market access and transparency in the area of
state-traded agricultural products.  Finally, the EU places great
emphasis on the inclusion of a special safeguard mechanism in the
accession provisions to address excessive imports from China during
the transitional period. 

The U.S.  government has also expressed concerns about the extent to
which China's economy remains under state ownership,\20

which, in effect, confers control and direction; China's refusal to
agree to publish quotas on state-traded agricultural products; and
China's demand that it automatically be entitled to take advantage of
the exemptions from standards GATT 1994 confers on developing
countries.  Further, U.S.  negotiators have raised questions about
the consistency between GATT 1994 policies and (1) the provisions of
China's new Foreign Trade Law and (2) the measures employed in the
State Industrial Programs to develop certain industries.  To date,
China has declined to make any commitment to GATT 1994 consistency in
these areas that would address U.S.  concerns. 


--------------------
\20 According to a Congressional Research Service official, 90
percent of Chinese industry is owned by either central, provincial,
or local government entities. 


      CHINA'S POSITION
------------------------------------------------------ Appendix I:11.6

In response to concerns raised by the United States and other
GATT/WTO members, the government of China said that it is taking
steps to improve the transparency of its trade regime and liberalize
nontariff barriers as agreed in the 1992 U.S.-China market access
MOU.  However, Chinese government officials maintain that as a
developing country, China should be allowed to take a gradual
approach toward trade reform in order to protect its economy.  In
addition, Chinese government officials contend that many state-owned
enterprises are now operating according to market principles. 


IMPLEMENTATION OF 1992 U.S.-CHINA
MOU ON THE PROTECTION OF
INTELLECTUAL PROPERTY
========================================================== Appendix II

In recent years, numerous U.S.  industries have been drawn to the
rapid growth and development of the Chinese economy and the huge
potential market it represents.  However, without the presence of an
effective system for the protection of intellectual property rights
(IPR) in China, major U.S.  industries also face the threat of
significant trade losses, according to USTR.  U.S.  copyright
industries, those involved in the production and sales of sound
recordings, motion pictures, computer software, and books, have
estimated losses of $827 million in 1993 due to the infringement of
their copyrights in China.  Other U.S.  industries, especially those
in high-technology areas that depend on patent protection, have been
concerned about exporting or expanding business operations in China
without strong assurance that their intellectual property will be
protected and their rights enforced.  In addition, U.S.  companies
have become increasingly concerned that their products, manufactured
illegally in China, are being exported and sold in third-country
markets. 

The evolution of China's legal framework to protect intellectual
property is a fairly recent development.  In 1980, China joined the
United Nations' (U.N.) World Intellectual Property Organization
(WIPO); and in the following decade, China adopted and enacted
several laws protecting the major forms of intellectual property
(patents, copyrights, and trademarks).  The Chinese laws and
regulations protecting intellectual property and their effective
dates are as follows: 

  -- the Chinese Trademark Law, effective on March 1, 1983;

  -- the Chinese Patent Law, effective on April 1, 1985; and

  -- the Chinese Copyright Law, effective on June 1, 1991, and
     Regulations for the Protection of Computer Software effective in
     the same month. 

For several years, the United States and China discussed ways to
improve China's regime for intellectual property protection and
strengthen protection for U.S.  intellectual property in China;
however, USTR determined in 1991 that China did not provide adequate
or effective protection of U.S.  intellectual property rights.  On
April 26, 1991, pursuant to the Special 301 provision\1 of the Trade
Act of 1974, USTR identified China as a "priority foreign country";\2
on May 26, 1991, USTR initiated an investigation into China's
intellectual property rights practices.  Under Special 301, the U.S. 
government could impose trade sanctions on China if the investigation
resulted in negative findings and the two governments were not able
to reach an agreement successfully resolving their issues. 


--------------------
\1 Pursuant to section 182 of the Trade Act of 1974, 19 U.S.C.  2242,
USTR must annually identify those countries that deny adequate and
effective protection for intellectual property rights or deny fair
and equitable market access for persons that rely on intellectual
property protection. 

\2 Countries that are identified as priority foreign countries are
potentially subject to an investigation under Section 301 of the
Trade Act of 1974 conducted on an accelerated time frame.  In
addition, USTR may identify a trading partner as a priority foreign
country or remove such identification whenever warranted. 


   U.S.  AND CHINESE COMMITMENTS
   UNDER THE MOU
-------------------------------------------------------- Appendix II:1

On January 17, 1992, the governments of the United States and China
signed an MOU that resolved USTR's 1991 investigation into China's
protection of intellectual property rights.  Under the major
provisions of this agreement, the government of China agreed to

  -- revise its patent law, including providing protection for
     chemical products and processes and extending patent protection
     from 15 years to 20 years from the filing date;

  -- provide administrative protection\3 for U.S.  pharmaceutical and
     agricultural chemical product inventions that meet specific
     conditions;

  -- accede to the Berne Convention and the Geneva Phonograms
     Convention and revise its copyright law and regulations in
     accordance with these conventions and the MOU;

  -- enact a law providing protection for trade secrets\4 before
     January 1, 1994;

  -- provide effective procedures and remedies to prevent or stop,
     internally and at the borders, infringement of intellectual
     property rights and to deter further infringement; and

  -- consult promptly at the request of the U.S.  government on
     matters relating to the protection and enforcement of
     intellectual property rights. 

The U.S.  government agreed to

  -- provide effective procedures and remedies to prevent or stop,
     internally and at the borders, infringement of intellectual
     property rights and to deter further infringement;

  -- consult promptly at the request of the Chinese government on
     matters relating to the protection and enforcement of
     intellectual property rights; and

  -- terminate its Special 301 investigation of China and revoke
     China's designation as a priority foreign country. 


--------------------
\3 Administrative protection, which is also referred to as "pipeline"
protection, requires a country that provides product patent
protection for pharmaceuticals and agrichemicals for the first time
to grant patent or administrative patent-like protection for those
inventions not previously considered to be patentable subject matter,
provided that the inventions were not yet marketed in the country and
the inventions are currently under patent in the United States.  The
term of such protection is usually the term remaining on the U.S. 
patent. 

\4 Trade secrets are technical and/or business information, such as
formulas, methods, or processes, that derive value from not being
generally known to the public. 


   CHINA HAS TAKEN STEPS TO
   STRENGTHEN ITS IPR LAWS, BUT
   ENFORCEMENT OF LAWS IS
   CONSIDERED POOR
-------------------------------------------------------- Appendix II:2

According to officials at USTR and the Departments of Commerce and
State, overall China has fulfilled its obligations in amending the
laws and regulations and acceding to the international treaties
agreed to in order to implement the 1992 MOU.  Specifically, China
has amended its patent law, issued copyright regulations, joined
international copyright conventions, and enacted protection for trade
secrets.  In the area of enforcement, however, U.S.  government
officials report that China has made minimal progress in establishing
the legal and administrative framework that would provide effective
procedures and remedies to address IPR infringement and to deter
further infringement. 

U.S.  business representatives, especially the copyright industries,
also reported that widespread infringement of their works occurs,
with inadequate channels for recourse.  An official of the National
Copyright Administration of China also told us that while China has
been successful in strengthening its copyright and patent laws, the
government still has work to do in terms of enforcing the laws for
both Chinese and foreign copyright owners. 


      REVISION OF CHINESE PATENT
      LAW
------------------------------------------------------ Appendix II:2.1

China amended its patent law and enacted implementing regulations,
effective on January 1, 1993.  Officials at USTR and the U.S.  Patent
and Trademark Office (U.S.  PTO) officials told us that these
revisions satisfied its obligations in the MOU, with the possible
exception of the amended provision for compulsory licenses.\5 The
revised Chinese law expanded a patent holder's rights to include the
right to prevent others from using or selling a product from a
patented process and from importing a product obtained from a
patented process.  The amendment made product patent protection
available for all chemical inventions, including pharmaceuticals and
agricultural chemicals, for which only process patents had previously
been granted.  A process patent protects an invention involving a
process or method of making or using a product or for a new use of a
known process or method.  In addition, China extended the term of
patent protection to 20 years from 15 years. 

As provided for in the MOU, China also issued regulations for
administrative protection for U.S.  pharmaceuticals and agricultural
chemicals.  The MOU stipulated that pharmaceutical and agrichemical
products must meet three requirements to be considered for
administrative protection.  Inventions that meet the requirements (1)
must not have received exclusive protection in China before the 1993
amendment to the Chinese law; (2) must have obtained a U.S.  patent
between January 1, 1986, and January 1, 1993; and (3) must not have
been marketed in China.  The term of administrative protection agreed
to was the remainder of the term of patent protection in the United
States, not to exceed 7-1/2 years. 

According to officials at USTR and U.S.  PTO, the
compulsory-licensing provisions may not fully comply with the MOU. 
For example, both USTR and U.S.  PTO noted that uncertainty exists
about how the Chinese government would interpret a provision for
granting compulsory licenses where "the public interest" is at stake,
or where "any extraordinary state of affairs" exists.  An official of
the Chinese Patent Office emphasized that a compulsory license has
never been granted since the enactment of the Chinese Patent Law.  A
USTR official noted that the Chinese government attempted to follow
the model for compulsory licensing used in the GATT 1994 negotiations
on Trade-Related Aspects of Intellectual Property Rights, commonly
referred to as "TRIPs"; however, he said that the Chinese may not
have understood how to achieve compliance. 


--------------------
\5 A compulsory license is an authorization by a government that
permits someone, without the consent of the patent owner, to make,
use, or sell a patented product or to use a patented process. 


      CHINA'S IMPLEMENTATION OF
      THE COPYRIGHT PROVISIONS
------------------------------------------------------ Appendix II:2.2

In accordance with the MOU provisions related to copyrights, China
acceded to the Berne Convention on October 15, 1992, and to the
Geneva Phonograms Convention on April 30, 1993.  China also issued
regulations for the implementation of international copyright
treaties, effective September 30, 1992.  The implementing regulations
govern protection for foreign works as provided for in the Berne
Convention and the 1992 MOU and stipulate that international treaties
and the MOU superseded these and other existing Chinese regulations. 

Although it agreed to do so in the MOU, China has not completely
amended its copyright law to make it fully consistent with the Berne
Convention.  China also has not agreed to a specific timetable by
which it would comply with the convention.  In addition, under the
provisions of the MOU, China agreed to provide retroactive protection
for U.S.  existing works by March 17, 1992, the date when bilateral
copyright relations were established.  However, on April 20, 1993,
China's National Copyright Administration issued "Document Number
28," which stated that continued sale of foreign existing works was
permissible until October 15, 1993.  As it stands, the burden of
proof lies with the copyright owner to prove when an illegal
reproduction of the work was made, which is very difficult to do,
according to USTR.  It remains unclear how the United States and
China would clarify and resolve this issue of retroactive protection
for copyrights. 


      PROTECTION OF TRADE SECRETS
------------------------------------------------------ Appendix II:2.3

China passed an Unfair Competition Law, which became effective on
December 1, 1993, that contained provisions for protection of trade
secrets, as agreed to in the MOU.  The provision stipulated that
trade secrets should not be acquired from the rightful owner by
improper means or used by or disclosed to others in violation of an
agreement or nondisclosure requirement.  However, according to an
official at USTR, while China has fulfilled its commitment to enact
legislation protecting trade secrets, some concerns about the law
remain.  For example, the law requires prior knowledge of an illegal
act, stating that "acquisition, use or disclosure of trade secrets by
a third party who clearly knew or should have known the illegal acts
.  .  .  shall be deemed as an infringement of trade secrets." The
USTR official said he believed that these concerns could be addressed
in the implementing regulations. 


      ENFORCEMENT PROVISION
------------------------------------------------------ Appendix II:2.4

The enforcement provision of the MOU is limited to one sentence. 
Both countries agreed to "provide effective procedures and remedies
to prevent or stop, internally and at their borders, infringement of
intellectual property rights and to deter further infringement."
China did not specifically commit itself in the MOU to enact new
legislation on enforcement, such as authorizing the Chinese customs
service to inspect and seize infringed goods at the borders. 
However, on September 15, 1994, the Chinese government issued an
interim directive providing such authority.  The authority given the
Chinese customs service under the directive is inadequate, according
to USTR, because (1) the IPR holder must prove infringement before
the customs service can intervene and (2) the customs officials will
not destroy goods determined to be infringing; rather, the seized
goods will be returned to the importer or exporter.  As a result, the
procedure does not remove infringing goods from the market; it only
blocks their import into or export from China.  USTR noted, however,
that permanent regulations were expected to be issued at the end of
1994 to become effective by April 1995.  The provisions in these
regulations are not yet known. 

According to officials at USTR and the Departments of Commerce and
State, China has implemented few measures that work toward satisfying
the MOU's provision for enforcement of IPR.  While the Chinese
government has established judicial and administrative channels for
seeking recourse for IPR infringement, U.S.  government and business
representatives said the enforcement system currently available is
generally not adequate.  Similarly, representatives of a major
Chinese nongovernmental trade promotion agency said that China does
not yet have a strong legal structure in place to enforce IPR.  For
example, they believed that China must enact additional laws and
regulations that would grant broader enforcement powers to government
bodies, including the Chinese customs service.  Additionally, they
said that the administrative fines available for IPR infringement
need to be raised in order to have a deterrent effect.  Finally, they
noted that China needs more qualified lawyers and judges to handle
IPR cases. 

Due to the widespread nature of IPR infringement in China and after
failing to see progress from the Chinese government on enforcement of
IPR laws and regulations, USTR elevated China to the priority watch
list from the watch list\6 on November 30, 1993.  In 1994, the U.S. 
government began discussions with the Chinese on building an
effective enforcement system, focusing on the following three areas: 
(1) making China's body of intellectual property law complete,
including adopting provisions for criminal penalties for copyright
infringement; (2) establishing an effective enforcement regime by
creating an administrative enforcement system that is transparent,
responsive, nondiscriminatory, and free from conflicts of interest
and includes border controls; (3) providing broad education programs
for the public and governmental bodies about the nature of
intellectual property rights, the laws that protect against
infringement of those rights, and the government's resolve to enforce
those rights. 


--------------------
\6 USTR prepares a list of countries that it determines lack adequate
and effective protection for intellectual property rights.  The list
is ranked, beginning with those countries that have the most
egregious IPR problems and ending with those that still warrant
monitoring:  (1) priority foreign country, (2) priority watch list,
and (3) watch list. 


         USTR CITES INADEQUATE
         ENFORCEMENT EFFORTS AND
         DESIGNATES CHINA A
         PRIORITY FOREIGN COUNTRY
         IN 1994
---------------------------------------------------- Appendix II:2.4.1

According to USTR, negotiations with the Chinese government to
provide a stronger enforcement structure failed to produce adequate
progress.  On June 30, 1994, USTR designated China as a priority
foreign country under the Special 301 provisions of the Trade Act of
1974, describing the Chinese government's enforcement of its laws and
regulations as "sporadic at best and virtually nonexistent for
copyrighted works." In addition, USTR cited that China maintains
numerous hidden quotas and nontransparent regulations, effectively
barring U.S.  persons who rely on intellectual property protection
from the Chinese market. 

Following this designation, USTR sought negotiations with China to
resolve these enforcement and market access issues.  However, after a
6-month investigation, on December 31, 1994, USTR announced that it
would take retaliatory action if China did not agree to address U.S. 
concerns regarding IPR enforcement.  On this date, USTR also
published a proposed list of Chinese products being considered for
retaliation.  USTR announced that it will make a final determination
on February 4, 1995, on whether "China's IPR practices are
unreasonable or burden U.S.  commerce."


         CHINA'S CURRENT JUDICIAL
         AND ADMINISTRATIVE SYSTEM
         FOR ENFORCING
         INTELLECTUAL PROPERTY
         RIGHTS
---------------------------------------------------- Appendix II:2.4.2

Currently, an intellectual property owner may seek to enforce his or
her rights in China through administrative and/or judicial channels. 
To seek recourse through the judicial system, a suit must be filed in
civil or criminal court.  Criminal penalties are available for
"serious" cases of trademark, patent, and, since July 1994, copyright
infringement.  The Chinese government recently established a number
of specialized legal chambers to handle intellectual property cases. 
These IPR chambers have been established within the People's Courts
in Beijing, Shanghai, Shenzhen, Guangzhou, Hainan, and Fujian. 

In seeking administrative remedies, an intellectual property owner
must petition the Chinese administrative body responsible for the
particular type of intellectual property right to investigate the
alleged infringement.  The National Copyright Administration
administers copyrights; the State Administration for Industry and
Commerce is responsible for trademarks; and the Chinese Patent Office
oversees patent cases.  Enforcement procedures differ for each type
of intellectual property right.  For example, a trademark owner who
seeks administrative redress may petition the Trademark Office in
Beijing and the local/provincial offices of the State Administration
for Industry and Commerce, where the infringement takes place.  A
foreign copyright owner, however, must first file his case with the
National Copyright Administration of China (NCAC), regardless of
where the infringing act occurred.  NCAC can take further action on a
claim in Beijing if it considers the alleged infringement to be
"serious and damages the public interest." NCAC can handle the case
on its own or request that a local government authority in charge of
copyright protection handle it.  (See further discussion of copyright
difficulties below.) USTR officials told us that both the judicial
and administrative processes are still relatively opaque, and to
their knowledge, the acceptance of cases is not based on published
criteria. 


   ABSENCE OF A CLEAR CHINESE
   GOVERNMENT STRUCTURE FOR IPR
   ENFORCEMENT CONTRIBUTES TO
   DIFFICULTIES FOR U.S.  FIRMS
-------------------------------------------------------- Appendix II:3

U.S.  government officials and representatives of U.S.  companies and
their industry associations discussed various difficulties in
protecting U.S.  intellectual property rights in China.  The types of
difficulties they described related mainly to the absence of a viable
enforcement structure, stemming from an inconsistent application of
laws and regulations in China, fragmented and unclear
responsibilities among Chinese ministries, a lack of resources
dedicated to IPR enforcement, and a pervasive lack of transparency. 


      CHINESE LAWS AND REGULATIONS
      APPEAR TO BE APPLIED
      INCONSISTENTLY
------------------------------------------------------ Appendix II:3.1

A number of U.S.  company representatives reported that IPR laws and
regulations are not uniformly applied among the central government
and the provincial and local governments.  They attributed this
inconsistency to several factors, including government
decentralization; differing attitudes toward IPR; and varying levels
of training about intellectual property rights among the central,
provincial, and local governments.  Another contributing factor is
that the laws, regulations, and procedures at the provincial and
local government levels are particularly unclear, according to U.S. 
industry and U.S.  government representatives.  A Chinese official
from MOFTEC also commented about the potential for confusion at the
different levels of government.  He explained that provincial
Administrations for Industry and Commerce (AIC), the governmental
bodies that review and decide trademark infringement issues, fall
under the jurisdiction of the national State Administration for
Industry and Commerce (SAIC).  However, provincial AICs have the
authority to enforce local trademark regulations, which may be
different from those of the central government or another province's
regulations.  Nonetheless, a company that is dissatisfied with the
findings of a provincial AIC may seek a rehearing by a superior AIC
agency. 


      ENFORCEMENT RESPONSIBILITIES
      AMONG CHINESE AGENCIES ARE
      NOT CLEARLY DEFINED, AND
      POTENTIAL CONFLICT OF
      INTEREST EXISTS
------------------------------------------------------ Appendix II:3.2

U.S.  government and industry representatives also said that some
Chinese ministries and agencies have unclear lines of authority,
fragmented responsibilities, and potential conflicts of interest in
enforcing IPR.  For example, according to USTR officials, although
Chinese copyright law designates NCAC as the agency responsible for
copyright enforcement, they said in practice it is not clear which
government agency would investigate and decide cases for motion
pictures, sound recordings, and computer software.  For copyright
enforcement, the Press and Publications Administration, the Ministry
of Radio and Television, and the Ministry of Culture have various
responsibilities, depending on the industry involved.  Moreover, a
MOFTEC official acknowledged that there is no published guidance that
explains the steps that a foreign company should take to seek remedy
for infringement.  He also added that the process can be confusing
since it may involve many different ministries. 

Finally, USTR officials expressed concern that a potential conflict
of interest exists because these ministries, along with the Press and
Publication Administration, have the sole authority to decide which
foreign sound recordings will be imported into China.  The Ministry
of Radio and Television, for example, has 67 audiovisual companies,
and the Ministry of Culture has 20 companies under its purview, and
these companies may be subject to allegations of piracy, according to
USTR. 


         CHINA HAS COMMITTED
         LIMITED RESOURCES FOR
         ENFORCEMENT
---------------------------------------------------- Appendix II:3.2.1

The Chinese government has committed very limited resources for the
enforcement of IPR.  According to U.S.  and Chinese government
officials, the agency with primary responsibility for copyright
enforcement, NCAC, has a staff of three assigned to nationwide
monitoring.  Some US&FCS officers posted in China said that in
addition to having inadequate resources for copyright enforcement
activities, Chinese agencies, such as NCAC, are reluctant to take a
lead role in enforcing rights.  Rather, NCAC has encouraged U.S. 
companies to file civil suits against infringers to delay actions
required of NCAC and to include the participation of other
organizations, such as the Ministry of Justice and the Public
Security Bureaus, which will assume the burden of making a ruling. 


   U.S.  INDUSTRIES REPORT
   DIFFICULTY WITH IPR ENFORCEMENT
   AND CHINA'S APPLICATION OF
   ADMINISTRATIVE PROTECTION
   REGULATIONS
-------------------------------------------------------- Appendix II:4

We administered structured interviews to representatives of 33
U.S.-based companies to obtain information about their experiences in
protecting and/or enforcing intellectual property rights in China. 
Our survey covered companies' experiences with patents, trademarks,
copyrights, and trade secrets.  Since the process to obtain and
enforce IPR protection for these different types of protection varies
significantly, it was difficult to aggregate and provide conclusive
results from the survey. 

Twenty-seven of the 33 companies had sought IPR protection in China. 
The majority of these companies reported that they did not have
serious problems in obtaining IPR protection, that is, in receiving a
patent or registering their trademarks.  More than half of the
companies reported that they did not yet have experience in enforcing
their intellectual property rights in China.  However, of the 12
companies that had had experience in enforcing their rights, only 1
company reported a positive experience, while the remainder reported
various negative experiences.  Of the companies that had taken action
to enforce their IPR, several companies said that they believed that
the Chinese government authorities administering their cases had
conflicts of interest, including one case in which the infringing
party's parent entity was a state ministry. 

In addition to the structured interviews, we obtained information
about companies' experiences with IPR protection in China from
representatives of several industry associations.  In some cases, the
U.S.  companies that we contacted referred us to their industry
association for discussion of industrywide views and concerns. 


      U.S.  COPYRIGHT OWNERS
      REPORT UNABATING
      INFRINGEMENT AND MARKET
      ACCESS BARRIERS
------------------------------------------------------ Appendix II:4.1

In the area of copyright protection, enforcement has been described
as "poor to nonexistent" by U.S.  industry and government
representatives.  The copyright industry's trade association, the
International Intellectual Property Alliance (IIPA), made China its
top priority for 1994 under Special 301, recommending to USTR in
February 1994 that China be identified a priority foreign country. 
According to IIPA, the copyright industry faces nearly 100-percent
levels of infringement in China.  Over the years, USTR and the U.S. 
copyright industries have been urging China to establish criminal
penalties for copyright infringement.  On July 5, 1994, China amended
its criminal code to provide sanctions for criminal copyright
infringement, allowing a maximum sentence of 7 years in prison plus a
fine. 

In addition to the adverse effects that copyright infringement poses,
the U.S.  copyright industries have also encountered various market
access barriers that impede their ability to conduct business in
China.  According to IIPA, these barriers include a lack of
transparency in the rules and regulations for establishment of
operations and investment requirements and for rules that govern the
production and distribution of copyrighted materials by foreign
citizens and companies in China.  IIPA has also noted that foreign
ownership in a joint venture or enterprise appears to be effectively
banned for the sound recording, motion picture, and book-publishing
industries. 


         AVAILABLE REMEDIES FOR
         COPYRIGHT INFRINGEMENT
---------------------------------------------------- Appendix II:4.1.1

As previously discussed, copyright owners have two channels to seek
redress for infringement of their works:  (1) NCAC, through which
administrative fines are possible; and (2) the courts, either through
a criminal suit or a civil suit.  According to IIPA, however, the
administrative channel is inadequate.  NCAC does not have the
authority or the staff to catch offenders, for example, by running
raids of manufacturing facilities, and cannot force infringers to pay
their fines without a separate court order. 

Because criminal penalties have been available for copyright
infringement only since July 1994, it is too early to predict their
effectiveness.  According to USTR, an infringement case can be
introduced in the criminal court system in three ways:  (1) the
copyright holder can bring his case to a special prosecutor assigned
to handle these cases; (2) NCAC can refer the case to the special
prosecutor; or (3) the rightholder can bring a civil case, and if the
presiding judge considers it serious enough, he or she can refer it
to the special prosecutor. 


         COMPACT DISK FACTORIES IN
         SOUTH CHINA REPORTEDLY
         PRODUCE MILLIONS OF
         ILLEGAL COPIES OF U.S. 
         COPYRIGHTED WORKS
---------------------------------------------------- Appendix II:4.1.2

In late 1993, the U.S.  copyright industry and U.S.  government
reported that 26 compact disk (CD) factories were either currently
operating in southern China, illegally reproducing U.S.  copyrighted
works, or were awaiting licensing by the Chinese government.  The
estimated total capacity of these factories by the end of 1993 was
about 75 million CDs, while the demand for legitimate CDs in the
Chinese domestic market is estimated to be about 5 million. 
Counterfeit CDs are being exported to Southeast Asia and other
foreign markets in volumes, according to USTR.  The sound recording
industry estimates that if all these plants were to operate at full
capacity, the value of these infringed CDs would be about $500
million on the world market. 

The recording industry has been active in pursuing innovative ways to
monitor enforcement of copyrights in China.  In August 1993, the
record industry signed a memorandum of understanding with the
Guangdong Province government.  Under the agreement, the provincial
government agreed to set up a special agency, "The Social Culture
Task Force." This task force, with the cooperation of five cities, is
expected to enforce copyright laws by monitoring the activities of
the growing number of CD plants and conducting raids on the
infringing plants.  The record industry would contribute funding to
the task force and would also provide training for its personnel. 
According to a U.S.  representative of the industry, the task force
has not yet come into force because the local Chinese government has
failed to promulgate the law that was to serve as the basis of task
force actions. 


         U.S.  SOFTWARE INDUSTRY
         FILED FIRST CASES IN
         BEIJING IPR TRIBUNAL
---------------------------------------------------- Appendix II:4.1.3

The Business Software Alliance (BSA), which represents U.S.  software
companies, reported that in 1993 the U.S.  software industry had
total losses of $322 million in China.  The association also
estimated that 94 percent of all packaged software used in China was
illegally obtained, according to BSA research that compared the total
number of hardware units sold with the total number of software
packages sold. 

In response to the widespread infringement of its software, in March
1994 BSA filed its first complaints with the Intellectual Property
Tribunal of the Beijing Intermediate People's Court.  BSA named five
Chinese retail outlets suspected of selling unauthorized software,
including one of China's largest distributors of computer software. 
On June 29, 1994, accompanied by BSA representatives, officials of
the tribunal raided the five retail outlets named in the complaint. 
The officials seized more than 300 software programs, CD-record only
memory (ROM) disks, and 6 computers suspected of containing illegal
software.  BSA said that the tribunal officials also ordered the
retailers to produce their financial accounts and other records. 
According to BSA, the tribunal officials accepted the cases of five
U.S.  software companies based on the evidence collected in the
raids. 

Although BSA said it considered the raids a "step forward in the
industry fight against software piracy," the alliance supported
USTR's decision to designate China as a priority foreign country,
"because of the unreasonably long, expensive, and muddled legal
process leading up to the raids." According to BSA, its foremost
concern is that the Chinese government has yet to demonstrate a
long-term interest in reducing software piracy in China. 


      U.S.  TRADEMARK OWNERS ALSO
      SAID ENFORCING RIGHTS IN
      CHINA IS CHALLENGING
------------------------------------------------------ Appendix II:4.2

Although trademark issues were not addressed by specific provisions
of the 1992 MOU, trademark owners' interests were represented in the
enforcement provision of the agreement, according to a representative
of U.S.  PTO.  The International Trademark Association, the industry
association representing trademark interests, wrote in its 1994
Special 301 submission to USTR that revisions to the Chinese
trademark law and implementing rules, effective in July 1993, failed
to address a number of issues.  The major problems the association
cited included the absence of judicial appeals of administrative
decisions, the inability to meet with Trademark Office examiners, and
the retention of the "official agent" system that requires foreign
trademark owners to hire agencies designated by the Chinese
government to process trademark applications.  In addition, the
International Trademark Association said that "most procedures remain
uncodified in published rules and are inconsistent with international
practice."

While China has had an enforcement system for trademarks, including
criminal penalties, since 1983, many U.S.  companies we surveyed
reported infringement of their trademarks.  One U.S.  manufacturer of
athletic footwear told us that counterfeiting of its product is
rampant in China.  A representative from the company told us that it
has received good support from the local Public Security Bureaus\7
and the local AICs, which are responsible for reviewing and
investigating trademark infringement cases.  In cases where the
company had enlisted the assistance of the Public Security Bureau and
AIC, these agencies have searched manufacturing facilities and also
confiscated counterfeit goods.  The problem, according to the company
official, is that the Public Security Bureau and AIC do not have the
authority to destroy the manufacturing equipment used to produce the
counterfeit goods.  Therefore, the Chinese agencies could not
guarantee that the infringing activity would cease after the search
and confiscation of goods. 


--------------------
\7 According to the Department of State, the Ministry of Public
Security supervises local Public Security Bureaus throughout China. 
These offices frequently have wider responsibilities than any single
law enforcement agency in the United States.  Public Security Bureau
functions at the local level, for example, include law enforcement,
criminal investigation, narcotics, some domestic intelligence
functions, and embassy security. 


      U.S.  COMPANIES EXPERIENCE
      DIFFICULTIES IN OBTAINING
      ADMINISTRATIVE PROTECTION
      FOR PATENTED PRODUCTS
------------------------------------------------------ Appendix II:4.3

U.S.  pharmaceutical and chemical companies we interviewed reported a
number of problems in obtaining administrative protection for their
inventions.  These problems included issues related to the
transparency of requirements and the Chinese government's
interpretation of the regulations and the MOU. 


         THE CASE OF THE FIRST
         U.S.  APPLICATION FOR
         PIPELINE PROTECTION
---------------------------------------------------- Appendix II:4.3.1

In 1993, the American Cyanamid Company applied for administrative
protection in China for an herbicide--the first known case of a U.S. 
patent holder to seek this protection.  The application was submitted
to China's Ministry of Chemical Industry, which is responsible for
reviewing and approving administrative protection applications for
agricultural chemicals.  According to a company representative,
American Cyanamid's herbicide comes in two forms:  (1) a 5-percent
formulated, ready-to-use solution; and (2) an active "technical
product" (the pure form).  The company representative said that
American Cyanamid had previously marketed the 5-percent solution in
China but not the technical product, which it would not have
attempted to sell since the product had no protection in China. 
American Cyanamid applied for administrative protection only for the
technical product.  The company believed the technical product met
all the requirements, including the stipulations that the product had
not been marketed in China before the filing date of the application
and had been granted a separate U.S.  patent.  Ultimately, however,
the Ministry of Chemical Industry denied the application on the
grounds that in its view the product had previously been marketed in
China. 

According to Ministry of Chemical Industry officials, the Ministry is
responsible for overseeing development of the domestic chemicals
industry in addition to its purview over applications for
administrative protection for agrichemicals.  This dual
responsibility is problematic, according to American Cyanamid.  The
company believes that two Chinese chemical institutes, with
affiliation to the Ministry of Chemical Industry, were engaged in
copying the company's technical and, thus, the 5-percent solution. 


         U.S.  COMPANIES REPORT
         OTHER DIFFICULTIES IN
         OBTAINING ADMINISTRATIVE
         PROTECTION
---------------------------------------------------- Appendix II:4.3.2

Of the six chemical and/or pharmaceutical companies that we
interviewed, two other companies said that they had experienced
difficulty in obtaining administrative protection related to the
Chinese government's interpretation of the regulations and some
nontransparent requirements.  One U.S.  pharmaceutical company
reported difficulty in obtaining administrative protection as an
"exclusive licensee"\8 of an invention.  The company applied for
administrative protection for a vaccine product with China's State
Pharmaceutical Administration, which is responsible for reviewing
applications for patents and administrative protection for
pharmaceuticals.  China's implementing regulations for administrative
protection state that "[t]he right of applying for administrative
protection of pharmaceuticals belongs to the owner of the exclusive
right of the pharmaceutical." The U.S.  company had received an
exclusive license from the American research institution that
originally had developed the vaccine.\9 The State Pharmaceutical
Administration, however, denied the vaccine administrative protection
on the grounds that the U.S.  company was not the original U.S. 
patent holder.  The U.S.  company representative felt that the State
Pharmaceutical Administration's decision was based on an overly
narrow interpretation of both the regulations and China's commitment
to the provisions of the MOU. 

According to another U.S.  pharmaceutical company, some requirements
for administrative protection currently imposed by the State
Pharmaceutical Administration do not adhere to either the MOU or the
administrative protection regulations.  For example, the company
reported that Chinese officials are now taking the position that an
applicant for administrative protection must both manufacture and
sell the product for which the protection is sought in its home
country.  The company representative said that the "manufacture"
requirement is not consistent with either the MOU or the implementing
regulations, both of which require an applicant to submit only the
"approval for manufacturing or sales of the product" from its home
country.  According to the company representative, the State
Pharmaceutical Administration has rejected at least one application
on the grounds that it did not meet the "manufacture" requirement. 

In the company's view, this requirement is a major concern since it
is a multinational company.  Only a limited number of patents that
were issued in the narrowly proscribed time period stipulated by the
MOU and the implementing regulations can be considered for
administrative protection.  In the majority of cases, the manufacture
requirement would force an applicant to transfer manufacture from its
original manufacturing site to the country where the eligible patent
exists.  As a result, this requirement would seriously affect the
chances of foreign pharmaceutical companies to obtain administrative
protection for their eligible products in China. 


--------------------
\8 A patentee can use the patent himself or herself or allow others
to do so, for example, by licensing its use.  An exclusive licensee
is someone who has been promised by the patentee that no other person
will be granted use of the patented good. 

\9 Research laboratories or universities commonly negotiate exclusive
licensing arrangements with companies, which invest in further
development and marketing of such products. 


   THE UNITED STATES HAS OPTIONS
   FOR ACHIEVING PROGRESS IN CHINA
-------------------------------------------------------- Appendix II:5

The U.S.  government can continue to encourage and press for
strengthened protection of U.S.  intellectual property in China in
several ways.  In pursuing bilateral engagement with China, U.S. 
government and industry representatives suggested that the United
States has a role in providing technical assistance and training.  In
addition, the U.S.  government and business community could utilize
U.S.  trade law, such as Special 301, in addressing problems with
Chinese protection of IPR.  Finally, the United States could pursue a
multilateral approach to effect change in China's IPR regime through
organizations, such as WIPO and WTO. 


      OFFERING CHINA U.S. 
      TECHNICAL ASSISTANCE AND
      TRAINING
------------------------------------------------------ Appendix II:5.1

The U.S.  government and business community have an opportunity to
establish long-term communication and cooperation with the Chinese
government as it continues to develop its intellectual property
regime.  Officials from the Department of State and the US&FCS
pointed out that the United States could play a key role in
developing China's enforcement system by offering assistance through
technical training and education programs.  Similarly, officials from
MOFTEC said that the United States could provide more training in IPR
administration and development, noting that other countries, such as
Germany, have offered more extensive training.  The MOFTEC officials
characterized the United States as adept in "knowing how to use the
big stick" but not as willing to offer positive measures for
improvement. 

U.S.  government officials have identified areas where the United
States, in cooperation with U.S.  industry, could assist China in
further developing its intellectual property regime, particularly its
enforcement structure.  These areas include (1) judicial
training--although China has established several IPR courts, the
Chinese judges need training to develop an expertise in intellectual
property law; (2) law enforcement training--to provide active and
competent enforcement of IPR laws, the local AICs, prosecutors, and
customs and patent agents need to develop an understanding of IPR as
well as specific enforcement skills; (3) administrative practices and
development of laws--in assisting in this area, the United States
could offer its input into issues that have arisen about China's
adjudication of IPR cases and its further development of implementing
regulations and new legislation; and (4) educational programs--U.S. 
industry and the federal government have sponsored a number of
successful IPR seminars in China; however, continued efforts could
help reinforce the message and reach a wider audience. 


      USING SPECIAL 301 TO ADDRESS
      INADEQUACIES IN IPR
      PROTECTION
------------------------------------------------------ Appendix II:5.2

As discussed earlier, USTR has used the Special 301 provision of U.S. 
trade law to investigate and promote change in China's IPR practices. 
U.S.  companies and industry associations could also petition USTR to
investigate China's IPR system.  As previously mentioned, on June 30,
1994, USTR identified China as a priority foreign country for its
failure to enforce its IPR laws and regulations effectively.  This
identification required USTR to decide within 30 days whether to
initiate an investigation, which began immediately in this case.  If
negotiations are not successfully resolved, sanctions could be
imposed on selected Chinese exports to the United States. 


      ENGAGING MULTILATERAL
      COOPERATION TO INFLUENCE
      CHINA'S IPR REGIME
------------------------------------------------------ Appendix II:5.3

The United States has the opportunity to influence further change in
China's system for protecting and enforcing IPR through multilateral
organizations, such as WIPO.  In the past, China has been receptive
to WIPO delegations and invitations to participate in WIPO-sponsored
IPR seminars.  In addition, some representatives of the U.S. 
government and business commented that they have observed positive
changes in China as it aims to align its system more closely to the
GATT 1994 TRIPs model and eventually accede to WTO. 


U.S.  TRADE LAW AND PROCEDURES TO
COMBAT FOREIGN TRADE BARRIERS
========================================================= Appendix III

The U.S.  government has established trade laws to promote the
opening of foreign markets and the protection of U.S.  intellectual
property rights abroad.  Section 301 of the U.S.  Trade Act of 1974,
as amended, and Special 301, 19 U.S.C.  2242, which was added in the
Omnibus Trade and Competitiveness Act of 1988, provide the legal
basis for the U.S.  government to enforce U.S.  rights under
bilateral and multilateral agreements and to seek to eliminate acts,
policies, or practices of foreign governments that burden or restrict
U.S.  commerce. 


   SECTION 301
------------------------------------------------------- Appendix III:1


      LEGISLATIVE BACKGROUND
----------------------------------------------------- Appendix III:1.1

Section 301 of the U.S.  Trade Act of 1974, as amended, gives the
President broad discretion to enforce U.S.  trade rights granted by
trade agreements and to attempt to eliminate acts, policies, or
practices of a foreign government that violate a trade agreement or
are unjustifiable, discriminatory, or unreasonable and burden or
restrict U.S.  commerce.\1 Section 301 provides a domestic procedure
under which affected enterprises or individuals may petition USTR to
initiate actions to enforce U.S.  rights under bilateral and
multilateral trade agreements.  USTR also may initiate Section 301
investigations at its own discretion. 


--------------------
\1 According to USTR, it has initiated 92 investigations pursuant to
Section 301 since 1974. 


      PROCEDURES
----------------------------------------------------- Appendix III:1.2

The Section 301 action process usually begins with the submission of
a petition by a domestic industry alleging a violation of a trade
agreement or an "unjustifiable," "unreasonable," or "discriminatory"
action that burdens or restricts U.S.  commerce.  Once the petition
is filed, USTR is required to review it and determine within 45 days
whether to initiate an investigation of the alleged trade complaint. 
Once USTR elects to accept a petition, the subsequent investigation
is to be based on overall U.S.  policy and national concerns rather
than just the petitioner's interests.\2 USTR is to publish a notice
in the Federal Register as soon as the investigation is formally
initiated.  The notice is to request public comment and may contain
an announcement for a public hearing.  If requested by the
petitioner, the hearing must be held within 30 days of a case's
initiation. 

If the case involves a violation of an international agreement that
has a dispute settlement mechanism, such as the GATT 1994 code, USTR
must invoke such dispute settlement provisions.  Under GATT 1994, the
overall dispute settlement process has five main stages:  (1)
consultation and conciliation, (2) establishment of panels, (3)
deliberation of panels, (4) consideration of panel findings and
recommendations, and (5) follow-up and implementation. 

With certain exceptions,\3 if the case does not involve a violation
of an international agreement that has a dispute settlement
mechanism, such as the GATT code, the dispute must be resolved
through bilateral consultations.  Depending on the type of practices
alleged, USTR must submit its recommendations to the President within
6 to 18 months.  Each aspect of the investigation is subject to an
interagency review process overseen by the Section 301 Committee,
whose responsibility includes defining issues, marshaling evidence,
pursuing international consultations and dispute settlement, and
making formal recommendations to the President. 

If the determination at the end of the investigation is affirmative
and involves a trade agreement or an alleged unjustifiable practice
that burdens or restricts U.S.  commerce, USTR must take action.  If
the determination is affirmative but involves an unreasonable or
discriminatory practice that burdens or restricts U.S.  commerce,
USTR may decide which actions, if any, are appropriate.  USTR may
delay implementation of any action for up to 30 days after making a
decision and for an additional 180 days in certain circumstances. 

Possible actions USTR may take against the country under
investigation include (1) suspension of trade agreement concessions,
(2) imposition of duties or other import restrictions, (3) imposition
of fees or restrictions concerning services, (4) entry into
agreements with the subject country to eliminate the offending
practice or to provide compensatory benefits for the United States,
and (5) restriction of service sector access authorizations.  The
action taken should be commensurate with the damage caused to the
United States by the practices investigated.  Action may be taken
against any goods or economic sectors, without regard to whether the
goods or economic sectors were the subject of the investigation. 
However, USTR must give preference to the imposition of duties over
taking other types of action. 

In accordance with Section 306 of the 1974 Trade Act, USTR is to
monitor the implementation of any measure or agreement that results
from a Section 301 investigation.  If a foreign government is not
satisfactorily implementing an action or agreement, USTR may
determine what further action should be taken.  One option could be
the reopening of a Section 301 investigation. 


--------------------
\2 If USTR declines to initiate an investigation, the petitioner must
be informed of the specific reasons behind the decision, which is
published in the Federal Register. 

\3 Exceptions include cases in which the foreign country is taking
satisfactory measures to grant the rights of the United States under
the trade agreement or cases in which sanctions would have an adverse
economic impact on the United States substantially out of proportion
to the benefits of the sanctions, and cases in which sanctions would
cause serious harm to the national security of the United States. 


   SPECIAL 301
------------------------------------------------------- Appendix III:2


      LEGISLATIVE HISTORY
----------------------------------------------------- Appendix III:2.1

As an outgrowth of the Section 301 process, certain legal procedures
were created to combat the lack of intellectual property rights
protection in foreign countries.  For example, the Trade and Tariff
Act of 1984 (P.L.  98-573, 1984) contained amendments to the Trade
Act of 1974 that emphasized congressional intent for Section 301 to
be used in dealing with a variety of "new" trade issues, such as
investment barriers and inadequate protection of IPR.  Subsequently,
the Omnibus Trade and Competitiveness Act of 1988 (P.L.  100-418,
1988) amended the Trade Act of 1974 to include what has been commonly
called the "Special 301" process.\4 Under this process, USTR must
identify on an annual basis foreign countries that lack adequate and
effective protection of IPR or that deny fair and equitable market
access to U.S.  persons and firms relying on IPR protection.  From
this group, USTR must also identify as "priority foreign countries"
those countries that "have the most onerous or egregious acts,
policies, or practices" and whose acts, policies, or practices have
the "greatest adverse impact (actual or potential) on the relevant
U.S.  products." Countries named priority foreign countries must not
be negotiating in good faith or making progress in negotiations to
provide adequate and effective protection.  Under the Special 301
provisions, USTR has discretion in deciding whether to retaliate
against countries identified as having inadequate protection of
intellectual property rights. 


--------------------
\4 19 U.S.C.  2242. 


      PROCEDURES
----------------------------------------------------- Appendix III:2.2

USTR decides whether to identify countries each year within 30 days
after issuance of the National Trade Estimate report.\5

USTR, however, may identify a trading partner as a priority foreign
country or remove such identification whenever warranted.  Section
302(b) of the amended Trade Act of 1974 directs USTR to initiate a
Section 301 investigation within 30 days after identification of a
priority foreign country "with respect to any act, policy, or
practice of that country that was the basis of an identification."
However, USTR is not required to initiate an investigation if it
determines that such an investigation would be detrimental to U.S. 
economic interests or if the country is already the subject of
another Section 301 investigation.  After a priority foreign country
investigation is initiated, the procedural and other requirements of
Section 301 authority generally apply, except that the investigation
and resulting determinations must be concluded on an accelerated time
frame.  USTR is required to determine within 6 months if there are
unfair trade practices and if any retaliatory measures will be taken. 
Investigations may be extended for up to an additional 3 months if
complex or complicated issues are involved, if substantial progress
is being made, or if effective measures are being undertaken. 

As a means of increasing the effectiveness of the Special 301
provision, USTR has divided into two categories--the "priority watch
list" and the "watch list"--those countries perceived to deny
adequate and effective intellectual property protection or market
access, but whose problems are not as severe as priority foreign
countries.  Countries placed on the priority watch list are those
that USTR considers to have made less progress in strengthening
protection of intellectual property than those on the watch list, or
whose practices cause the greater economic harm to U.S.  interests. 


--------------------
\5 The National Trade Estimate Report on Foreign Trade Barriers (NTE)
is an inventory of the most important foreign barriers affecting U.S. 
exports of goods and services, foreign direct investment by U.S. 
persons, and protection of intellectual property rights.  USTR is
required by statute to submit this report annually to the President,
the Senate Finance Committee, and appropriate committees in the House
of Representatives. 


U.S.  COMPANIES INTERVIEWED
========================================================== Appendix IV

American Cyanamid Company
AT&T
Campbell Soup Company
Cambrex/Nepera Hong Kong Ltd.
Caterpillar China Limited
Chrysler Corporation
Continental Grain Company
Cooper Energy Services International
Digital Equipment Corporation
Dow Chemical Pacific Limited
Hewlett-Packard Company
Honeywell China Inc.
Hughes Aircraft Company
International Business Machines Corp.
Johnson & Johnson
Joseph E.  Seagram & Sons, Inc.
KFC International, Asia/Pacific Region
Lotus Development Corporation
Med-Tech International
Merck & Co., Inc.
Monsanto Company
Motorola, Inc.
Sun Microsystems, Inc.
Syntex Corporation
Texas Instruments Incorporated
The Procter & Gamble Company
The Walt Disney Company
Unisys (China) Company, Ltd.
U.S.  China Investment Corp. 

Note:  This appendix includes only those companies that agreed to be
listed. 




(See figure in printed edition.)Appendix V
STRUCTURED INTERVIEWS OF U.S. 
COMPANIES DOING BUSINESS IN CHINA
========================================================== Appendix IV



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix VI

In light of China's efforts to liberalize its economy and join the
international trading system, Senator Hank Brown asked us to provide
information on (1) China's compliance with the provisions of the
market access MOU and related progress on meeting the eligibility
requirements to join GATT and (2) China's implementation of the MOU
on the protection of intellectual property rights.  In addition, as
requested, we provided information on the legal procedures involved
in addressing U.S.  concerns about foreign market access and
intellectual property rights protection under Section 301 of the 1974
U.S.  Trade Act, as amended. 

To assess China's compliance with the specific provisions of the
market access and intellectual property rights MOUs, we obtained
information primarily from three broad sources:  (1) U.S.  government
agencies involved in negotiating and monitoring the implementation of
the MOUs, (2) Chinese government officials responsible for trade and
protection of intellectual property rights, and (3) U.S.  companies
or business associations with interest in China's import regime or
intellectual property protection system. 

As the U.S.  government leader in negotiating and monitoring the
market access and intellectual property rights agreements, USTR was
our primary source of information on the MOUs, as well as on
negotiations on China's accession to the General Agreement on Tariffs
and Trade.  USTR provided us with materials documenting China's
progress in implementing the provisions of the MOUs and with updates
on USTR actions to promote U.S.  interests.  We supplemented this
information with perspectives from other U.S.  government agencies,
including the Departments of Agriculture, Commerce, and State and the
U.S.  Customs Service. 

We visited China and Hong Kong in March 1994, where we met with U.S. 
and Chinese government officials, as well as private sector
representatives.  In Beijing, Guangzhou, and Hong Kong, we met with
U.S.  embassy and consulate officials to obtain their perspectives on
the business and trade environment in China and to discuss their
views on China's implementation of the specific provisions of the
MOUs.  These discussions included meetings with officials in the U.S. 
economics, commercial, and political sections, as well as with
agricultural attachï¿½s and U.S.  Customs Service officers. 

In Beijing, we met with Chinese government officials in positions of
responsibility for foreign trade and intellectual property rights
protection to obtain their views on China's implementation of the
MOUs.  Our meetings included Chinese officials from MOFTEC; the SETC;
the Customs Administration; the State Administration for Industry and
Commerce; the National Copyright Administration; and the ministries
overseeing key importing industries, such as chemicals, electronics,
and radio and film. 

To obtain information on U.S.  companies' experiences in gaining
access to the Chinese market and in protecting and enforcing their
intellectual property rights in China, we conducted structured
interviews with representatives of 41 U.S.-based companies, including
17 companies we met with in China and/or Hong Kong.  This group of
companies was selected judgmentally to reflect a variety of industry
sectors, including the pharmaceutical, computer, automotive, and
consumer product industries.  However, it was not necessarily
representative of all U.S.  companies doing business in China. 

Not all of the company representatives we interviewed were able to
fully answer our questions on both market access and intellectual
property rights issues.  Thus, although we interviewed a total of 41
companies, we tabulated responses from 33 companies on market access
issues and 33 companies on intellectual property rights issues (these
groups were not identical).  It should also be noted that only 29 of
the companies we contacted agreed to have their company names listed
in appendix IV. 

In addition to our structured interviews with U.S.  companies, we
obtained information from business associations with interest in
market access and intellectual property protection issues.  These
associations included the American Association of Exporters and
Importers, the American Chamber of Commerce in Beijing and Hong Kong,
the American Soybean Association, BSA, the Electronics Industry
Association, IIPA, the International Trademark Association, the
National Association of Manufacturers, the Pharmaceutical
Manufacturers Association, the U.S.-China Business Council, the U.S. 
Feed Grains Council, and the U.S.  Wheat Associates. 

To outline the Section 301 and Special 301 processes, we reviewed
U.S.  trade laws as well as USTR documents and previous GAO reports. 
We also consulted with USTR's Office of General Counsel, who verified
the information.  The information presented in this report on Chinese
law does not reflect GAO's independent analysis but is based on
secondary sources and interviews. 

We performed our review from October 1993 to November 1994 in
accordance with generally accepted government auditing standards. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Virginia C.  Hughes, Assistant Director
Elizabeth J.  Sirois, Assistant Director
Sara B.  Denman, Evaluator-in-Charge
Mary M.  Park, Evaluator
Susan S.  Westin, Senior Economist
Rona H.  Mendelsohn, Evaluator (Communications Analyst)

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Richard R.  Perruso, Attorney-Adviser

FAR EAST OFFICE

Kathleen M.  Monahan, Site Senior
Joyce L.  Akins, Evaluator
Karen L.  Seymour, Evaluator


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