World Trade Organization: China's Membership Status and Normal Trade
Relations Issues (Letter Report, 03/17/2000, GAO/NSIAD-00-94).

GAO provided information on efforts to grant China membership in the
World Trade Organization (WTO), focusing on: (1) the status of
negotiations for China to join WTO; (2) the results of the negotiations
as compared to U.S. objectives for these negotiations; and (3) trade and
legal considerations about granting China permanent normal trade
relations status.

GAO noted that: (1) although the United States and China have reached
agreement on many issues, the negotiations with China about its
membership in WTO are not complete; (2) while the President announced a
bilateral agreement covering market access issues with China in November
1999, some U.S. negotiating objectives have yet to be achieved, and many
of those tentatively achieved must still be finalized in a WTO agreement
that outlines the terms of China's membership; (3) China must also
conclude similar bilateral negotiations with some other WTO members,
notably the European Union; (4) China must finish the multilateral
negotiations with WTO members; (5) then, all participants must complete
several important tasks, including verifying the text of the agreement,
before the approval and implementation phases of the accession process
can begin; (6) it could take several months after all these negotiations
conclude before China can become a WTO member; (7) based on GAO's review
of the negotiating record as of November 1999, U.S. and Chinese
negotiators have reached tentative agreement or have only minor
differences in eight broad areas where the United States is seeking to
change China's trade practices; (8) however, the negotiators still have
major differences to resolve in some other areas; (9) the actions that
China has committed to take to address the minor differences are
generally consistent with what U.S. negotiators originally sought; (10)
the result of the agreed-upon actions would be a Chinese market more
open to foreign goods, services, and investment, enhanced protection
against import surges of Chinese products, and a Chinese commitment to
comply with many WTO requirements; (11) the administration plans to ask
Congress to agree to grant China permanent normal trade relations before
China joins WTO; (12) if Congress does not do this, the administration
plans to invoke a WTO provision, called the nonapplication clause, which
would permit the United States and China, as an incoming member, to not
apply WTO trade liberalizing commitments and obligations to each other;
(13) the administration believes this is necessary to avoid a conflict
between U.S. law, which requires annual approval of China's normal trade
relations status, and the U.S.' obligation as a WTO member to provide
unconditional most-favored-nation status to other members; and (14)
should the U.S. invoke the nonapplication clause, the U.S.' trade
relations with China would continue to be based on a 1979 U.S.-China
trade agreement and other bilateral agreements.

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

 REPORTNUM:  NSIAD-00-94
     TITLE:  World Trade Organization: China's Membership Status and
	     Normal Trade Relations Issues
      DATE:  03/17/2000
   SUBJECT:  International organizations
	     International economic relations
	     Foreign trade policies
	     Foreign governments
	     Foreign trade agreements
	     International trade
IDENTIFIER:  China
	     Estonia
	     Latvia
	     Lithuania
	     Yugoslavia
	     European Union

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GAO/NSIAD-00-94

A
Report to Congressional Committees
March 2000 WORLD TRADE ORGANIZATION
China's Membership Status and Normal Trade Relations Issues

GAO/NSIAD-00-94

Letter 3 Related GAO Products 21 Figures Figure 1: Steps Remaining in China's WTO Accession Process 11
Abbreviations
WTO World Trade Organization GATT General Agreement on Tariffs and Trade USTR U. S. Trade Representative
National Security and International Affairs Division
Lett er
B- 284686 March 17, 2000 The Honorable William V. Roth, Jr. Chairman The Honorable Daniel Patrick Moynihan Ranking Minority Member Committee on Finance United States Senate The Honorable Bill Archer
Chairman The Honorable Charles B. Rangel Ranking Minority Member Committee on Ways and Means House of Representatives
China is the world's largest economy that is not subject to the World Trade Organization's (WTO) trade liberalizing requirements. Since 1986, China has been in negotiations to join, or accede to, the World Trade Organization and its predecessor, the General Agreement on Tariffs and Trade. The United States has taken a leading role in these negotiations, which have been taking place on two tracks bilateral and multilateral negotiations over these 14 years. The bilateral negotiations are designed
to secure China's commitment to remove specific market access barriers and open China's domestic market to more foreign goods and services. The focus of the multilateral negotiations is to ensure that China will adopt all the rules, practices, and obligations required by WTO agreements to
improve its general trade regime.
A fundamental principle in the WTO agreements is that members, including the United States, must grant each other most- favored- nation status, meaning that they must grant each other trade privileges as favorable as they give to any other WTO member. 1 China currently does not have
permanent normal trade relations status because title IV of the Trade Act of 1974 2 requires the President to deny it to certain designated countries, including China. However, China has been granted normal trade relations status since 1980 on an annual basis. As China moves closer to becoming a member of the World Trade Organization, Congress will need to consider whether to grant China permanent normal trading status. Because of your continued interest in these issues, we are providing an update on our past work on (1) the status of the negotiations for China to join the World Trade Organization, (2) the results of the negotiations as compared to U. S. objectives for these negotiations, and (3) trade and legal
considerations about granting China permanent normal trade relations status.
Results in Brief Although the United States and China have reached agreement on many issues, the negotiations with China about its membership in the World Trade Organization are not complete. While the President announced a bilateral agreement covering market access issues with China in November 1999, some U. S. negotiating objectives have yet to be achieved, and many of those tentatively achieved must still be finalized in a WTO agreement that outlines the terms of China's membership. China must also conclude
similar bilateral negotiations with some other WTO members, notably the European Union. In addition, China must finish the multilateral negotiations with WTO members. Then, all participants must complete several important tasks, including verifying the text of the agreement,
before the approval and implementation phases of the accession process can begin. It could take several months after all these negotiations conclude before China can become a WTO member.
1 In July 1998, the term normal trade relations replaced the term most- favored- nation in U. S. law; however, the term most- favored- nation continues to be used in the WTO agreements and other trade agreements.
2 19 U. S. C. sections 2431 through 2439.
Based on our review of the negotiating record as of November 1999, U. S. and Chinese negotiators have reached tentative agreement or have only minor differences in eight broad areas where the United States is seeking to
change China's trade practices. However, the negotiators still have major differences to resolve in some other areas. The eight areas of agreement and/ or minor differences are tariffs, nontariff barriers, services, trade framework, intellectual property rights, standards and regulatory practices, agriculture, and monitoring and compliance mechanisms. The actions that China has committed to take in these areas are generally consistent with
what U. S. negotiators originally sought. Most of these commitments will be phased in from 1 to 6 years, after China becomes a member of the World Trade Organization. The result of the agreed- upon actions would be a Chinese market more open to foreign goods, services, and investment;
enhanced protection against import surges of Chinese products; and a Chinese commitment to comply with many WTO requirements. However, U. S. and Chinese negotiators still have major differences to resolve in some
other areas, a number of which are significant in terms of the concerns they cover. The details of remaining U. S. objectives and issues to be negotiated are deemed national security information and have been classified by the Office of the U. S. Trade Representative.
China's prospective WTO membership will raise a critical issue about how the United States should handle China's normal trade relations status under U. S. law. For both legal and policy reasons, the administration plans to ask Congress to agree to grant China permanent normal trade relations before China joins the World Trade Organization. If Congress does not do this, the
administration plans to invoke a WTO provision, called the nonapplication clause, which would permit the United States and China, as an incoming member, to not apply WTO trade liberalizing commitments and obligations to each other. The administration believes this is necessary to avoid a
conflict between current U. S. law, which requires annual approval of China's normal trade relations status, and the U. S. obligation as a WTO member to provide unconditional most- favored- nation status to other
members. Should the United States invoke the nonapplication clause, U. S. trade relations with China would continue to be based on a 1979 U. S.- China trade agreement and other bilateral agreements. 3 These agreements obligate China to provide a number of benefits to U. S. products. The
consequence of this situation is that China would be obligated to extend some benefits to the United States that it would give to other WTO
3 Nonapplication may be rescinded later.
members, including tariff rates as low as those given any other country's products. However, the obligations in these bilateral agreements would not give the United States many other benefits, such as the general right to provide services and to engage in importing and exporting goods in China.
Background The WTO was established on January 1, 1995, as a result of the Uruguay Round of international trade negotiations. The WTO provides the
institutional framework for the multilateral trading system. It administers rules for international trade, provides a mechanism for settling disputes, and offers a forum for conducting trade negotiations, as set forth in the WTO agreements. 4 It currently has 135 members, and another 31 have applied for membership. The process for joining, or acceding to, the WTO
consists of four phases: (1) fact- finding, 5 (2) negotiation, (3) WTO decision, and (4) implementation. China is currently in the second phase of this process and is negotiating with a working party comprised of all interested WTO members, including the United States, 6 to join the WTO. 7
4 The WTO agreements refer to a number of international trade agreements, including the WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), that are enumerated in the 1994 Marrakesh Agreement Establishing the World Trade Organization. 5 The first two phases often overlap, as parties request more information from the applicant before proceeding with the negotiations. 6 There are 43 other members of the WTO working party for China's accession.
7 For a more detailed explanation of the WTO accession process, see China Trade: WTO Membership and Most- Favored- Nation Status (GAO/ T- NSIAD- 98- 209, June 17, 1998).
As previously mentioned, China currently does not have permanent normal trade relations status because title IV of the Trade Act of 1974 requires the President to deny it to products from certain designated countries, including China. 8 Section 402 of the act, better known as the
Jackson- Vanik amendment, has permitted 1- year waivers when the President determines that China substantially complies with certain freedom of emigration objectives. 9 China first received a waiver in 1979, and U. S. presidents have renewed the waiver annually from 1980, to most recently, June 3, 1999. The framework for current U. S. trade relations with China is based upon the 1979 Agreement on Trade Relations, which
established reciprocal most- favored- nation status between the two countries in some areas. Since 1979, the United States has attempted to increase market access and reduce trade barriers and other trade- distorting policies and practices by entering into a number of other bilateral trade agreements with China, as well as by supporting China's membership in the
WTO. Trade negotiations between the United States and China have been affected by overall U. S.- China relations, including the May 1999 accidental bombing by the North Atlantic Treaty Organization of the Chinese embassy in Belgrade, Yugoslavia. Furthermore, U. S. concerns about Chinese actions regarding human rights, proliferation of weapons of mass destruction, espionage, and Taiwan, among others, have heightened the debate over whether to grant China permanent normal trade relations status as part of
China's WTO membership. In response, the administration has stated its belief that bringing China into the WTO will advance critical economic and national security goals by opening a growing market to American workers, farmers, and businesses and encourage domestic reform, human rights, the rule of law, and international cooperation. This report focuses only on
certain trade and legal issues in U. S.- China relations pertaining to China joining the WTO. 8 Most communist countries, which had nonmarket economies, were originally covered by this provision. Currently, Albania, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, Russia, Ukraine, Uzbekistan, and Vietnam also wish to join the World Trade Organization and receive temporary normal trade relations status from the United States.
9 The country cannot deny its citizens the right or opportunity to emigrate; impose more than a nominal tax on emigration or on documents required for emigration; or impose more than a nominal tax, fee, or any other charge on any citizen because of his or her desire to emigrate to any country.
WTO Negotiations Not The United States has sought Chinese membership in the WTO through an
Over; Some Procedural accession agreement that would address problems impeding U. S. firms from gaining access to the Chinese market and putting them at a Steps Remain disadvantage when competing in world markets against Chinese goods.
The WTO negotiations to achieve U. S. objectives are on two separate tracks-bilateral and multilateral. Both negotiating tracks are critical to U. S. objectives. U. S.- China Bilateral
China has been negotiating on a bilateral basis with each interested WTO Negotiations Are Completed member on its specific market access commitments under the WTO agreements. The United States and China reached tentative agreement on the bilateral track of the negotiations in November 1999 with the signing of the U. S.- China Market Access Agreement. China's market access
commitments cover China's tariffs; nontariff barriers, such as quotas and licensing requirements; and its agriculture and services sectors. Although these negotiations are conducted bilaterally, any agreement reached between the two countries will apply to all WTO members, as the mostfavored- nation principle requires. Because China's final commitments will reflect the best made to any country, the final commitments will probably improve on those made to the United States in November 1999 to some degree. China must still conclude bilateral negotiations with a number of other WTO members, most notably the European Union. Once all these
bilateral negotiations are completed, all of China's commitments must be consolidated and verified; this is no small task. It usually takes approximately 3 months, according to U. S. Trade Representative (USTR) officials, but they note that the process can be accelerated.
Multilateral Negotiations In the multilateral negotiations, China has been negotiating specific terms Have Not Been Completed
with a working party of WTO members, including the United States, for how it will adhere to the obligations and responsibilities of WTO membership. For example, China has made various commitments to make its trade practices more transparent; these commitments both meet and, in some respects, exceed WTO requirements. Whether or not China will be able to take advantage of longer phase- in or phase- out periods afforded developing countries to implement its obligations under certain WTO agreements will also be specified. These negotiations should conclude with the acceptance of two documents: (1) the protocol, which contains the terms of accession and commitments affirming China's adherence to WTO
guidelines and principles and (2) the working party report, which provides
a narrative on the results of the negotiations and specific commitments made by the applicant regarding how it will meet WTO requirements. Commitments detailed in either the protocol or the working party report carry the same legal weight for the applicant, according to WTO and U. S. officials.
There has been much progress in the multilateral track, and there is tentative agreement in many, but not all, areas, based on our review of the negotiating record. The United States and China reached bilateral agreement on a few additional multilateral subjects in November 1999, most notably on how members will be able to protect themselves from problems related to the growth or pattern of Chinese imports. Nevertheless, WTO working party members, who have not met since July 1998, must still reach agreement among themselves and with China on the final text of both the protocol and the working party report before the
accession process can move on. Although much of the draft protocol has tentatively been agreed upon, neither it nor the working party report has been revised since May 1997, in part because the negotiators have focused on the bilateral track since late 1997. There are a number of subject areas where the parties have yet to reach agreement, and even in those areas where they have reached tentative agreement, the protocol text must still be revised and finalized. Moreover, the draft working party report still requires much more text to be drafted to capture China's commitments on implementation and to document the history of the negotiations. USTR
officials have noted that China's working party report could end up being over 100 pages long, while the current draft is about 10 pages.
Procedural Steps Remain China's accession moves to the third decision- making phase after the
After the Negotiations documents detailing all the commitments made in the negotiations are Conclude
finalized and the working party reaches consensus to forward China's complete application package, which includes a draft decision. The WTO General Council (comprised of all WTO members) will then approve (or reject) the terms and conditions of China's package. 10 Traditionally, the General Council reaches decisions by consensus; however, if consensus cannot be reached, a two- thirds majority can approve membership. As we 10 The General Council has the authority to carry out the responsibilities of the Ministerial Conference-the highest body in the WTO-including approving membership. The General Council meets several times a year and is tentatively scheduled to meet in February, May, July, October, and December in the year 2000.
discuss later, any country that decides not to provide (or cannot provide) WTO benefits to China must notify the Council before the Council approves China's membership. Finally, in the last phase, China begins the process of implementing its commitments and becomes a WTO member. China's WTO obligations enter into force, and it becomes a member after the General Council's approval and 30 days after China subsequently files its acceptance. China may also
have to take some action domestically to ratify its accession package before submitting its notice of acceptance. China must also make the necessary changes to its trade practices as required by the accession package and the WTO agreements upon accepting membership. For example, China is expected to eliminate or begin to phase out most trade practices incompatible with WTO rules immediately upon accession.
Figure 1 shows the remaining procedural steps in China's accession.
Figure 1: Steps Remaining in China's WTO Accession Process
Source: GAO.
U. S. Negotiating We found that China has tentatively committed to take most of the specific
Objectives Generally actions originally considered necessary to achieve U. S. objectives in eight
broad areas, based on our review of the negotiating record, which covered Achieved in Eight
both bilateral and multilateral tracks. U. S. and other WTO negotiators Broad Areas, but
proposed specific actions that China should commit to take, including how Others Remain Under and when it would implement particular WTO obligations and make related reforms. U. S. negotiators also requested reductions in or elimination of
Negotiation specific Chinese trade barriers that restricted U. S. exports. Of these eight areas, tentative agreement has been reached on five, and minor differences
remain on three. Nevertheless, there are major differences to resolve in the other areas still under negotiation.
Tentative Agreement in Five The United States and China have tentatively agreed on the extent to which
Areas China will
 reduce or bind tariffs on its approximately 6,500 industrial and agricultural products to reach a final average of 10. 2 percent (from 16. 9 percent) by 2008;  eliminate nontariff restrictions, which will end quotas, licensing, and similar requirements on 361 products (which represent about 10 percent
of 1997 U. S. exports to China) by 2005; and  provide varying degrees of access to 9 of its 12 services sectors, including all those that were identified as U. S. priorities, with certain
limitations liberalized or phased out from 1 to 6 years after accession. WTO working party members, including the United States, and China have agreed on the extent to which China will
 change its trade framework to (1) ensure uniform and transparent administration of its trade regime subject to judicial review, (2) guarantee foreign enterprises the right to trade (import and export) after a 3- year phase- in period, 11 and (3) change some of the practices of its special economic areas, which are geographic zones within China
11 Negotiations will continue over China's granting trading rights for fertilizer, according to USTR officials. China has indicated that it would preclude foreigners from importing fertilizer themselves and require any foreigners who distribute or sell foreign fertilizer in China to purchase it from a state trading company. Fertilizer was the fourth largest U. S. export to China in 1998, accounting for $1 billion, or 8 percent of U. S. exports to China.
created partly to attract foreign capital and foster economic development and  expand intellectual property rights, which include patents, trademarks,
and copyrights. Minor Differences Remain U. S. and Chinese negotiators have reached agreement on most issues in Three Areas
involving standards and regulatory practices, agriculture, and compliance and monitoring mechanisms. China's commitments generally fulfill those originally sought by U. S. negotiators to achieve U. S. objectives in these three areas. However, there are still some outstanding differences in each of the three areas as to how China will implement particular WTO
commitments. U. S. negotiators generally anticipate being able to reach agreement on these issues.
With respect to standards and regulatory practices, the Chinese have made offers, which the United States has accepted, about how the Chinese will apply health and safety measures, license imports and exports, generally
value imports (for customs purposes) under WTO rules, and how they will make these practices transparent (open). In April 1999, the United States and China concluded a separate but related bilateral Agreement on U. S.- China Agricultural Cooperation, which addressed some health and food safety issues. 12 Nevertheless, differences need to be negotiated concerning how China will apply standards to imports and concerning Chinese restrictions on imports of plums, some varieties of apples, and tobacco.
With regard to agricultural issues, U. S. and Chinese negotiators have also reached tentative agreement on many commitments. China agreed to reduce tariffs on agricultural products to 16.8 percent, from 21. 4 percent,
by 2004. It also agreed to improve access for some bulk commodities like wheat, corn, rice, and cotton with a new, state- administered system that applies different tariffs based on quotas of these commodities. In addition, China agreed to prohibit export subsidies. Negotiators must still reach agreement on some other agricultural issues before U. S. objectives are fulfilled.
12 The agricultural cooperation agreement eliminated Chinese bans on importing certain U. S. agricultural commodities, including wheat and other grains, meat, and citrus, which the Chinese contended were a health risk. U. S. negotiators told the Chinese this agreement was important to demonstrate their willingness to abide by WTO requirements for sanitary and phytosanitary measures.
U. S. and Chinese negotiators also have agreed on most monitoring and compliance provisions. Importantly, China agreed to a 12- year, productspecific safeguard that would allow WTO members to take action against import surges of Chinese products that are causing market disruption. Similarly, China agreed to provide WTO members safeguard protection
against surges in Chinese textile imports until December 31, 2008, 4 years beyond what is permitted under WTO rules. On the other hand, China did not agree to a recent U. S. objective to allow U. S. quotas for Chinese textiles to extend to 2010, which would have been 5 years beyond when quotas will be eliminated for all other WTO members. The United States and China
reached agreement about provisions for mitigating the unfair trade practices of dumping (selling below market value) and subsidizing exports. China agreed to allow WTO members to use alternatives to China's
domestic prices and costs for calculating antidumping margins for 15 years from China's accession. They also agreed to a similar provision for identifying Chinese subsidies and calculating a countervailing duty, but this provision does not expire.
In the bilateral negotiations ending in November 1999, the United States and China did not discuss another proposed monitoring and compliance provision that would allow WTO members to review China's implementation of its WTO commitments and assess its overall progress in making economic and trade reforms. This transitional review mechanism
issue remains open and will be dealt with further in the working party. Also, in return for other commitments, notably the strong, product- specific safeguard, the United States dropped its objective to have China agree to a
general safeguard that would have allowed WTO members broader discretion to suspend some or all WTO benefits to China. This objective had little support among other WTO members, and China was strongly opposed to such a safeguard.
Major Differences Remain U. S. and Chinese negotiators still have major differences to resolve in other in Some Areas
areas under multilateral negotiation. These areas include significant issues, and addressing them is important for meeting the original U. S. negotiating objectives and responding to important concerns about China's practices. While negotiators have made progress, fundamental differences remain over a number of issues in these areas. Many of these issues have not been discussed with the Chinese in recent years, according to U. S. negotiators. The details of remaining U. S. objectives and what issues are still to be
negotiated are deemed national security information and have been classified by the Office of the U. S. Trade Representative. Nonetheless, the
U. S. Trade Representative has publicly stated that the participants must still negotiate commitments on a range of WTO rules including subsidies, technical standards, a mechanism to review implementation, and many other issues.
Trade and Legal China's prospective WTO membership raises a critical issue about how the Considerations for
United States will handle China's normal trade relations status under U. S. law. Resolution of this issue requires considering (1) options regarding the Granting China
timing for granting China permanent normal trade relations status; Permanent Normal
(2) different approaches for granting this status, (3) the potential use of a Trade Relations Status WTO provision allowing the United States and China to not apply WTO benefits and obligations to each other if China joins the WTO, and (4) the implications for the United States if this provision is invoked.
Options for When to Grant A key decision that Congress will consider before China becomes a WTO China Permanent Normal member is whether to enact legislation that provides China permanent Trade Relations
normal trade relations by removing China from coverage under title IV of the Trade Act of 1974. For both legal and policy reasons, the administration plans to ask Congress to enact such legislation. The administration believes that continuing to review China's normal trade relations status annually would conflict with U. S. obligations as a WTO member to provide unconditional most- favored- nation status to other WTO members. 13 To resolve the conflict in the past, Congress passed legislation that provided for removing countries from title IV's coverage and granting them
permanent normal trade relations because of their joining the WTO (or its predecessor, the GATT). The administration also believes that providing China with permanent normal trade relations will help ensure that the United States receives full WTO trade benefits from China.
13 At least one commentator believes that the current annual process is not inconsistent with the WTO requirement to provide most- favored- nation status to other WTO members so long as the United States continues to provide the grant every year and eliminates the condition that the President make annual emigration findings with regard to China. Although it is true that there have been no WTO rulings on this issue, one problem with this position is that even with the emigration condition eliminated, China would still be treated differently from other WTO members.
Congress has at least three options for deciding when to grant China permanent normal trade relations:  now, but the negotiations are not completed and terms and conditions
are not finalized;  after the negotiations are completed and all the terms and conditions
are known, but before China becomes a WTO member; or  some time after China is a WTO member.
Two Approaches for If and when Congress decides to enact permanent normal trade relations
Providing Permanent legislation for China, it could do so in one of two ways, based on previous
Normal Trade Relations congressional action. First, Congress could pass legislation directly granting permanent normal trade relations to China. Congress provided
permanent normal trade relations directly to Estonia, Latvia, and Lithuania in 1991, though this was before any of them became WTO (GATT) members. Several congressional bills have set forth a slightly different
variation of this approach for China. These bills provide that on the date China becomes a WTO member, title IV of the Trade Act of 1974 shall no longer apply, and China's products would receive normal trade relations status. 14
Under the second approach, Congress could authorize the President to make the permanent normal trade relations determination. Congress has used this approach more often. For example, the President was authorized to make this determination in 1996 for Bulgaria, which was not yet a WTO member, and, most recently, for Mongolia in 1999, which was. In addition,
Congress could impose conditions on the President as part of granting this authority-for example, Congress could require that the President make a positive finding that certain concerns about particular Chinese trade practices have been addressed before he grants permanent normal trade relations.
Use of the WTO If the United States has not given China permanent normal trade relations
Nonapplication Clause prior to China's becoming a WTO member, the administration plans to invoke the nonapplication clause of article XIII of the agreement
establishing the WTO. This clause permits either a WTO member or an 14 S. 1303 and H. R. 1712 in the 105th Congress and H. R. 577 in the current 106th Congress.
incoming member to refuse to apply WTO commitments to one another and does not require any reason for this action. Nonapplication covers all WTO provisions and cannot be selective. In the past, the United States has always invoked nonapplication when it had not given countries permanent normal trade relations prior to these countries joining the WTO (or the
GATT). There are a number of important characteristics of the WTO nonapplication clause that also apply to China. The United States, or other WTO members,  must notify the WTO of its intent to invoke nonapplication before the
terms and conditions for China's membership are approved by the General Council;  may invoke nonapplication and still vote to have China admitted to the
WTO; the United States did this for Mongolia's accession in 1997;  can have nonapplication invoked against it by China, which China may do for the United States if it does not receive permanent normal trade relations; and  may later rescind nonapplication, resulting in both parties applying all WTO rights and obligations to each other; the United States did this for
Romania and Hungary and most recently for Mongolia. Implications of
If China joins the WTO and either China or the United States invokes the Nonapplication for the
nonapplication clause, China would still be obligated to provide some trade United States benefits to the United States. Under nonapplication, trade relations between the two countries would continue under the 1979 U. S.- China bilateral trade agreement and other bilateral agreements. For example, under the 1979 agreement, China is obligated to provide the United States most- favored- nation treatment, that is, the best treatment given any other country, for products, including agricultural products, with regard to tariffs, customs duties, rights to have goods distributed and sold in China, and some aspects of issuing import and export licenses. Therefore, as a
result of its bilateral most- favored- nation commitment, in the areas mentioned, China would be obligated to give any benefits given other WTO members to the United States as well. The 1979 agreement also calls for some participation of both countries' financial institutions in banking services related to international trade and financial relations. Furthermore, under the 1992 U. S.- China Market Access Agreement, China made a number of commitments regarding transparency, uniform application of laws, judicial review, import restrictions, and sanitary and phytosanitary standards. Under other bilateral agreements, China has made important
intellectual property and some agricultural commitments.
Nevertheless, the commitments provided by these bilateral agreements would be substantially less than those anticipated to be provided by China in the accession agreement and in the underlying WTO agreements once China becomes a WTO member. For example, the 1979 agreement does not cover services, with limited exceptions. The agreement also does not provide the United States the general right to engage in importing and exporting within China and does not provide explicit national treatment for U. S. goods. 15 Moreover, according to USTR, WTO obligations regarding intellectual property rights are stronger than those provided by the
U. S.- China agreements covering patents, trademarks, and copyrights. Furthermore, none of the bilateral agreements provide for binding multilateral dispute settlement, as do the WTO agreements. Thus, in the event of nonapplication, the United States would continue to enforce trade violations under U. S. law.
Thus, an important consequence of either side's invoking the WTO nonapplication clause is that China, if it becomes a WTO member, will not have to grant the United States all the trade benefits it will give to other WTO members. Because U. S. businesses compete with business from other WTO members for China's markets, this situation could potentially put U. S. business interests at a considerable competitive disadvantage. While the
United States would continue to benefit from some Chinese commitments through existing bilateral agreements, as pointed out, those benefits are substantially less than all those expected from China's WTO membership.
Agency Comments and We obtained oral comments on a draft of this report from the Associate
Our Evaluation General Counsel at the Office of the U. S. Trade Representative. The Office
generally agreed with the contents of our report. U. S. Trade Representative officials noted that some of the statistics that appear in our report, such as average tariff rates, differ from the statistics issued by the executive branch. Although we used the same underlying data as the executive branch, our statistics are slightly different in some cases because we
categorized the data differently or because of other methodological differences. U. S. Trade Representative officials made several other technical comments on the report, which we incorporated as appropriate.
15 A fundamental principle in the WTO agreements is national treatment. National treatment requires that WTO members treat other members' products and service providers no less favorably than they treat their own, once foreign goods have crossed their borders.
Scope and This report is based on our past and ongoing work on China; 16 our review of Methodology
WTO and executive branch documents; U. S. law; related literature; economic literature; and our discussions with U. S. government, WTO, and foreign government officials. More specifically, to assist Congress in its oversight and upcoming debate on U. S.- China trade policy, we updated our
past work on (1) the status of the WTO accession negotiations, (2) the results of the negotiations when compared to U. S. objectives, and (3) the kind of considerations that may affect whether and when to grant China permanent normal trade relations status because of WTO membership. To report the current status of the negotiations, we elaborated on work we did
in 1998 that described the WTO accession process in general by describing what particular tasks and steps need to be completed in approving China's accession. To report on the results of the negotiations when compared to U. S. objectives, we extracted those sections of our September 30, 1999,
report that were subsequently declassified by USTR and updated them to reflect new developments in the negotiations based on the November 1999 agreement, other executive branch documents, and meetings with U. S. government officials. Our methods of analysis are described in more detail in our 1999 report. To report on issues related to granting China permanent
normal trade relations, we updated work we did in 1998 by reviewing subsequent legislation granting this status to other countries, reviewing the terms of the 1979 U. S.- China trade agreement and other bilateral agreements, and conducting discussions with U. S. government and
academic experts. We conducted our work from November 1999 through February 2000 in accordance with generally accepted government auditing standards.
We are sending copies of this report to the Honorable Charlene Barshefsky, the U. S. Trade Representative; the Honorable William M. Daley, Secretary of Commerce; the Honorable Dan Glickman, Secretary of Agriculture; the Honorable Lawrence F. Summers, Secretary of the Treasury; and interested congressional Committees. Copies will be made available to others on
request. 16 See the attached list of some related GAO products.
For future contacts regarding this report, please call me at (202) 512- 4128. Individuals making key contributions to this report were Adam Cowles, Richard Seldin, Elizabeth Sirois, and Timothy Wedding.
Susan S. Westin, Associate Director International Relations and Trade Issues
Related GAO Products World Trade Organization: Status of China's Membership Negotiations (GAO/ C- NSIAD- 99- 9, Sept. 30, 1999). 1 China Trade: WTO Membership and Most- Favored- Nation Status (GAO/ T- NSIAD- 98- 209, June 17, 1998). Agricultural Exports: U. S. Needs a More Integrated Approach to Address Sanitary/ Phytosanitary Issues (GAO/ NSIAD- 98- 32, Dec. 11, 1997).
International Trade: Challenges and Opportunities for U. S. Businesses in China (GAO/ T- NSIAD- 96- 214, July 29, 1996). U. S.- China Trade: Implementation of the 1992 Prison Labor Memorandum of Understanding (GAO/ GGD- 95- 106, Apr. 3, 1995).
U. S.- China Trade: Implementation of Agreements on Market Access and Intellectual Property (GAO/ GGD- 95- 61, Jan. 25, 1995).
International Trade: U. S. Government Policy Issues Affecting U. S. Business Activities in China (GAO/ GGD- 94- 94, May 4, 1994). 1 This report has a national security classification of CONFIDENTIAL and is not available to the general public but is available to Members of Congress and some U. S. government officials.
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Page 1 GAO/ NSIAD- 00- 94 China's WTO Membership
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Official Business Penalty for Private Use $300
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Postage & Fees Paid GAO Permit No. GI00
ns00094 A Report to Congressional Committees March 2000 WORLD
TRADE ORGANIZATION China's Membership Status and Normal Trade
Relations Issues   GAO/NSIAD-00-94  Letter 3 Related GAO Products
21 Figures Figure 1: Steps Remaining in China's WTO Accession
Process 11 Abbreviations WTO World Trade Organization GATT General
Agreement on Tariffs and Trade USTR U. S. Trade Representative
National Security and International Affairs Division Lett er B-
284686 March 17, 2000 The Honorable William V. Roth, Jr. Chairman
The Honorable Daniel Patrick Moynihan Ranking Minority Member
Committee on Finance United States Senate The Honorable Bill
Archer Chairman The Honorable Charles B. Rangel Ranking Minority
Member Committee on Ways and Means House of Representatives China
is the world's largest economy that is not subject to the World
Trade Organization's (WTO) trade liberalizing requirements. Since
1986, China has been in negotiations to join, or accede to, the
World Trade Organization and its predecessor, the General
Agreement on Tariffs and Trade. The United States has taken a
leading role in these negotiations, which have been taking place
on two tracks bilateral and multilateral negotiations over these
14 years. The bilateral negotiations are designed to secure
China's commitment to remove specific market access barriers and
open China's domestic market to more foreign goods and services.
The focus of the multilateral negotiations is to ensure that China
will adopt all the rules, practices, and obligations required by
WTO agreements to improve its general trade regime. A fundamental
principle in the WTO agreements is that members, including the
United States, must grant each other most- favored- nation status,
meaning that they must grant each other trade privileges as
favorable as they give to any other WTO member. 1 China currently
does not have permanent normal trade relations status because
title IV of the Trade Act of 1974 2 requires the President to deny
it to certain designated countries, including China. However,
China has been granted normal trade relations status since 1980 on
an annual basis. As China moves closer to becoming a member of the
World Trade Organization, Congress will need to consider whether
to grant China permanent normal trading status. Because of your
continued interest in these issues, we are providing an update on
our past work on (1) the status of the negotiations for China to
join the World Trade Organization, (2) the results of the
negotiations as compared to U. S. objectives for these
negotiations, and (3) trade and legal considerations about
granting China permanent normal trade relations status. Results in
Brief Although the United States and China have reached agreement
on many issues, the negotiations with China about its membership
in the World Trade Organization are not complete. While the
President announced a bilateral agreement covering market access
issues with China in November 1999, some U. S. negotiating
objectives have yet to be achieved, and many of those tentatively
achieved must still be finalized in a WTO agreement that outlines
the terms of China's membership. China must also conclude similar
bilateral negotiations with some other WTO members, notably the
European Union. In addition, China must finish the multilateral
negotiations with WTO members. Then, all participants must
complete several important tasks, including verifying the text of
the agreement, before the approval and implementation phases of
the accession process can begin. It could take several months
after all these negotiations conclude before China can become a
WTO member. 1 In July 1998, the term normal trade relations
replaced the term most- favored- nation in U. S. law; however, the
term most- favored- nation continues to be used in the WTO
agreements and other trade agreements. 2 19 U. S. C. sections 2431
through 2439. Based on our review of the negotiating record as of
November 1999, U. S. and Chinese negotiators have reached
tentative agreement or have only minor differences in eight broad
areas where the United States is seeking to change China's trade
practices. However, the negotiators still have major differences
to resolve in some other areas. The eight areas of agreement and/
or minor differences are tariffs, nontariff barriers, services,
trade framework, intellectual property rights, standards and
regulatory practices, agriculture, and monitoring and compliance
mechanisms. The actions that China has committed to take in these
areas are generally consistent with what U. S. negotiators
originally sought. Most of these commitments will be phased in
from 1 to 6 years, after China becomes a member of the World Trade
Organization. The result of the agreed- upon actions would be a
Chinese market more open to foreign goods, services, and
investment; enhanced protection against import surges of Chinese
products; and a Chinese commitment to comply with many WTO
requirements. However, U. S. and Chinese negotiators still have
major differences to resolve in some other areas, a number of
which are significant in terms of the concerns they cover. The
details of remaining U. S. objectives and issues to be negotiated
are deemed national security information and have been classified
by the Office of the U. S. Trade Representative. China's
prospective WTO membership will raise a critical issue about how
the United States should handle China's normal trade relations
status under U. S. law. For both legal and policy reasons, the
administration plans to ask Congress to agree to grant China
permanent normal trade relations before China joins the World
Trade Organization. If Congress does not do this, the
administration plans to invoke a WTO provision, called the
nonapplication clause, which would permit the United States and
China, as an incoming member, to not apply WTO trade liberalizing
commitments and obligations to each other. The administration
believes this is necessary to avoid a conflict between current U.
S. law, which requires annual approval of China's normal trade
relations status, and the U. S. obligation as a WTO member to
provide unconditional most- favored- nation status to other
members. Should the United States invoke the nonapplication
clause, U. S. trade relations with China would continue to be
based on a 1979 U. S.- China trade agreement and other bilateral
agreements. 3 These agreements obligate China to provide a number
of benefits to U. S. products. The consequence of this situation
is that China would be obligated to extend some benefits to the
United States that it would give to other WTO 3 Nonapplication may
be rescinded later. members, including tariff rates as low as
those given any other country's products. However, the obligations
in these bilateral agreements would not give the United States
many other benefits, such as the general right to provide services
and to engage in importing and exporting goods in China.
Background The WTO was established on January 1, 1995, as a result
of the Uruguay Round of international trade negotiations. The WTO
provides the institutional framework for the multilateral trading
system. It administers rules for international trade, provides a
mechanism for settling disputes, and offers a forum for conducting
trade negotiations, as set forth in the WTO agreements. 4 It
currently has 135 members, and another 31 have applied for
membership. The process for joining, or acceding to, the WTO
consists of four phases: (1) fact- finding, 5 (2) negotiation, (3)
WTO decision, and (4) implementation. China is currently in the
second phase of this process and is negotiating with a working
party comprised of all interested WTO members, including the
United States, 6 to join the WTO. 7 4 The WTO agreements refer to
a number of international trade agreements, including the WTO's
predecessor, the General Agreement on Tariffs and Trade (GATT),
that are enumerated in the 1994 Marrakesh Agreement Establishing
the World Trade Organization. 5 The first two phases often
overlap, as parties request more information from the applicant
before proceeding with the negotiations. 6 There are 43 other
members of the WTO working party for China's accession. 7 For a
more detailed explanation of the WTO accession process, see China
Trade: WTO Membership and Most- Favored- Nation Status (GAO/T-
NSIAD-98-209, June 17, 1998). As previously mentioned, China
currently does not have permanent normal trade relations status
because title IV of the Trade Act of 1974 requires the President
to deny it to products from certain designated countries,
including China. 8 Section 402 of the act, better known as the
Jackson- Vanik amendment, has permitted 1- year waivers when the
President determines that China substantially complies with
certain freedom of emigration objectives. 9 China first received a
waiver in 1979, and U. S. presidents have renewed the waiver
annually from 1980, to most recently, June 3, 1999. The framework
for current U. S. trade relations with China is based upon the
1979 Agreement on Trade Relations, which established reciprocal
most- favored- nation status between the two countries in some
areas. Since 1979, the United States has attempted to increase
market access and reduce trade barriers and other trade-
distorting policies and practices by entering into a number of
other bilateral trade agreements with China, as well as by
supporting China's membership in the WTO. Trade negotiations
between the United States and China have been affected by overall
U. S.- China relations, including the May 1999 accidental bombing
by the North Atlantic Treaty Organization of the Chinese embassy
in Belgrade, Yugoslavia. Furthermore, U. S. concerns about Chinese
actions regarding human rights, proliferation of weapons of mass
destruction, espionage, and Taiwan, among others, have heightened
the debate over whether to grant China permanent normal trade
relations status as part of China's WTO membership. In response,
the administration has stated its belief that bringing China into
the WTO will advance critical economic and national security goals
by opening a growing market to American workers, farmers, and
businesses and encourage domestic reform, human rights, the rule
of law, and international cooperation. This report focuses only on
certain trade and legal issues in U. S.- China relations
pertaining to China joining the WTO. 8 Most communist countries,
which had nonmarket economies, were originally covered by this
provision. Currently, Albania, Armenia, Azerbaijan, Belarus,
Georgia, Kazakhstan, Moldova, Russia, Ukraine, Uzbekistan, and
Vietnam also wish to join the World Trade Organization and receive
temporary normal trade relations status from the United States. 9
The country cannot deny its citizens the right or opportunity to
emigrate; impose more than a nominal tax on emigration or on
documents required for emigration; or impose more than a nominal
tax, fee, or any other charge on any citizen because of his or her
desire to emigrate to any country. WTO Negotiations Not The United
States has sought Chinese membership in the WTO through an Over;
Some Procedural accession agreement that would address problems
impeding U. S. firms from gaining access to the Chinese market and
putting them at a Steps Remain disadvantage when competing in
world markets against Chinese goods. The WTO negotiations to
achieve U. S. objectives are on two separate tracks-bilateral and
multilateral. Both negotiating tracks are critical to U. S.
objectives. U. S.- China Bilateral China has been negotiating on a
bilateral basis with each interested WTO Negotiations Are
Completed member on its specific market access commitments under
the WTO agreements. The United States and China reached tentative
agreement on the bilateral track of the negotiations in November
1999 with the signing of the U. S.- China Market Access Agreement.
China's market access commitments cover China's tariffs; nontariff
barriers, such as quotas and licensing requirements; and its
agriculture and services sectors. Although these negotiations are
conducted bilaterally, any agreement reached between the two
countries will apply to all WTO members, as the mostfavored-
nation principle requires. Because China's final commitments will
reflect the best made to any country, the final commitments will
probably improve on those made to the United States in November
1999 to some degree. China must still conclude bilateral
negotiations with a number of other WTO members, most notably the
European Union. Once all these bilateral negotiations are
completed, all of China's commitments must be consolidated and
verified; this is no small task. It usually takes approximately 3
months, according to U. S. Trade Representative (USTR) officials,
but they note that the process can be accelerated. Multilateral
Negotiations In the multilateral negotiations, China has been
negotiating specific terms Have Not Been Completed with a working
party of WTO members, including the United States, for how it will
adhere to the obligations and responsibilities of WTO membership.
For example, China has made various commitments to make its trade
practices more transparent; these commitments both meet and, in
some respects, exceed WTO requirements. Whether or not China will
be able to take advantage of longer phase- in or phase- out
periods afforded developing countries to implement its obligations
under certain WTO agreements will also be specified. These
negotiations should conclude with the acceptance of two documents:
(1) the protocol, which contains the terms of accession and
commitments affirming China's adherence to WTO guidelines and
principles and (2) the working party report, which provides a
narrative on the results of the negotiations and specific
commitments made by the applicant regarding how it will meet WTO
requirements. Commitments detailed in either the protocol or the
working party report carry the same legal weight for the
applicant, according to WTO and U. S. officials. There has been
much progress in the multilateral track, and there is tentative
agreement in many, but not all, areas, based on our review of the
negotiating record. The United States and China reached bilateral
agreement on a few additional multilateral subjects in November
1999, most notably on how members will be able to protect
themselves from problems related to the growth or pattern of
Chinese imports. Nevertheless, WTO working party members, who have
not met since July 1998, must still reach agreement among
themselves and with China on the final text of both the protocol
and the working party report before the accession process can move
on. Although much of the draft protocol has tentatively been
agreed upon, neither it nor the working party report has been
revised since May 1997, in part because the negotiators have
focused on the bilateral track since late 1997. There are a number
of subject areas where the parties have yet to reach agreement,
and even in those areas where they have reached tentative
agreement, the protocol text must still be revised and finalized.
Moreover, the draft working party report still requires much more
text to be drafted to capture China's commitments on
implementation and to document the history of the negotiations.
USTR officials have noted that China's working party report could
end up being over 100 pages long, while the current draft is about
10 pages. Procedural Steps Remain China's accession moves to the
third decision- making phase after the After the Negotiations
documents detailing all the commitments made in the negotiations
are Conclude finalized and the working party reaches consensus to
forward China's complete application package, which includes a
draft decision. The WTO General Council (comprised of all WTO
members) will then approve (or reject) the terms and conditions of
China's package. 10 Traditionally, the General Council reaches
decisions by consensus; however, if consensus cannot be reached, a
two- thirds majority can approve membership. As we 10 The General
Council has the authority to carry out the responsibilities of the
Ministerial Conference-the highest body in the WTO-including
approving membership. The General Council meets several times a
year and is tentatively scheduled to meet in February, May, July,
October, and December in the year 2000. discuss later, any country
that decides not to provide (or cannot provide) WTO benefits to
China must notify the Council before the Council approves China's
membership. Finally, in the last phase, China begins the process
of implementing its commitments and becomes a WTO member. China's
WTO obligations enter into force, and it becomes a member after
the General Council's approval and 30 days after China
subsequently files its acceptance. China may also have to take
some action domestically to ratify its accession package before
submitting its notice of acceptance. China must also make the
necessary changes to its trade practices as required by the
accession package and the WTO agreements upon accepting
membership. For example, China is expected to eliminate or begin
to phase out most trade practices incompatible with WTO rules
immediately upon accession. Figure 1 shows the remaining
procedural steps in China's accession. Figure 1: Steps Remaining
in China's WTO Accession Process Source: GAO. U. S. Negotiating We
found that China has tentatively committed to take most of the
specific Objectives Generally actions originally considered
necessary to achieve U. S. objectives in eight broad areas, based
on our review of the negotiating record, which covered Achieved in
Eight both bilateral and multilateral tracks. U. S. and other WTO
negotiators Broad Areas, but proposed specific actions that China
should commit to take, including how Others Remain Under and when
it would implement particular WTO obligations and make related
reforms. U. S. negotiators also requested reductions in or
elimination of Negotiation specific Chinese trade barriers that
restricted U. S. exports. Of these eight areas, tentative
agreement has been reached on five, and minor differences remain
on three. Nevertheless, there are major differences to resolve in
the other areas still under negotiation. Tentative Agreement in
Five The United States and China have tentatively agreed on the
extent to which Areas China will  reduce or bind tariffs on its
approximately 6,500 industrial and agricultural products to reach
a final average of 10. 2 percent (from 16. 9 percent) by 2008;
eliminate nontariff restrictions, which will end quotas,
licensing, and similar requirements on 361 products (which
represent about 10 percent of 1997 U. S. exports to China) by
2005; and  provide varying degrees of access to 9 of its 12
services sectors, including all those that were identified as U.
S. priorities, with certain limitations liberalized or phased out
from 1 to 6 years after accession. WTO working party members,
including the United States, and China have agreed on the extent
to which China will  change its trade framework to (1) ensure
uniform and transparent administration of its trade regime subject
to judicial review, (2) guarantee foreign enterprises the right to
trade (import and export) after a 3- year phase- in period, 11 and
(3) change some of the practices of its special economic areas,
which are geographic zones within China 11 Negotiations will
continue over China's granting trading rights for fertilizer,
according to USTR officials. China has indicated that it would
preclude foreigners from importing fertilizer themselves and
require any foreigners who distribute or sell foreign fertilizer
in China to purchase it from a state trading company. Fertilizer
was the fourth largest U. S. export to China in 1998, accounting
for $1 billion, or 8 percent of U. S. exports to China. created
partly to attract foreign capital and foster economic development
and  expand intellectual property rights, which include patents,
trademarks, and copyrights. Minor Differences Remain U. S. and
Chinese negotiators have reached agreement on most issues in Three
Areas involving standards and regulatory practices, agriculture,
and compliance and monitoring mechanisms. China's commitments
generally fulfill those originally sought by U. S. negotiators to
achieve U. S. objectives in these three areas. However, there are
still some outstanding differences in each of the three areas as
to how China will implement particular WTO commitments. U. S.
negotiators generally anticipate being able to reach agreement on
these issues. With respect to standards and regulatory practices,
the Chinese have made offers, which the United States has
accepted, about how the Chinese will apply health and safety
measures, license imports and exports, generally value imports
(for customs purposes) under WTO rules, and how they will make
these practices transparent (open). In April 1999, the United
States and China concluded a separate but related bilateral
Agreement on U. S.- China Agricultural Cooperation, which
addressed some health and food safety issues. 12 Nevertheless,
differences need to be negotiated concerning how China will apply
standards to imports and concerning Chinese restrictions on
imports of plums, some varieties of apples, and tobacco. With
regard to agricultural issues, U. S. and Chinese negotiators have
also reached tentative agreement on many commitments. China agreed
to reduce tariffs on agricultural products to 16.8 percent, from
21. 4 percent, by 2004. It also agreed to improve access for some
bulk commodities like wheat, corn, rice, and cotton with a new,
state- administered system that applies different tariffs based on
quotas of these commodities. In addition, China agreed to prohibit
export subsidies. Negotiators must still reach agreement on some
other agricultural issues before U. S. objectives are fulfilled.
12 The agricultural cooperation agreement eliminated Chinese bans
on importing certain U. S. agricultural commodities, including
wheat and other grains, meat, and citrus, which the Chinese
contended were a health risk. U. S. negotiators told the Chinese
this agreement was important to demonstrate their willingness to
abide by WTO requirements for sanitary and phytosanitary measures.
U. S. and Chinese negotiators also have agreed on most monitoring
and compliance provisions. Importantly, China agreed to a 12-
year, productspecific safeguard that would allow WTO members to
take action against import surges of Chinese products that are
causing market disruption. Similarly, China agreed to provide WTO
members safeguard protection against surges in Chinese textile
imports until December 31, 2008, 4 years beyond what is permitted
under WTO rules. On the other hand, China did not agree to a
recent U. S. objective to allow U. S. quotas for Chinese textiles
to extend to 2010, which would have been 5 years beyond when
quotas will be eliminated for all other WTO members. The United
States and China reached agreement about provisions for mitigating
the unfair trade practices of dumping (selling below market value)
and subsidizing exports. China agreed to allow WTO members to use
alternatives to China's domestic prices and costs for calculating
antidumping margins for 15 years from China's accession. They also
agreed to a similar provision for identifying Chinese subsidies
and calculating a countervailing duty, but this provision does not
expire. In the bilateral negotiations ending in November 1999, the
United States and China did not discuss another proposed
monitoring and compliance provision that would allow WTO members
to review China's implementation of its WTO commitments and assess
its overall progress in making economic and trade reforms. This
transitional review mechanism issue remains open and will be dealt
with further in the working party. Also, in return for other
commitments, notably the strong, product- specific safeguard, the
United States dropped its objective to have China agree to a
general safeguard that would have allowed WTO members broader
discretion to suspend some or all WTO benefits to China. This
objective had little support among other WTO members, and China
was strongly opposed to such a safeguard. Major Differences Remain
U. S. and Chinese negotiators still have major differences to
resolve in other in Some Areas areas under multilateral
negotiation. These areas include significant issues, and
addressing them is important for meeting the original U. S.
negotiating objectives and responding to important concerns about
China's practices. While negotiators have made progress,
fundamental differences remain over a number of issues in these
areas. Many of these issues have not been discussed with the
Chinese in recent years, according to U. S. negotiators. The
details of remaining U. S. objectives and what issues are still to
be negotiated are deemed national security information and have
been classified by the Office of the U. S. Trade Representative.
Nonetheless, the U. S. Trade Representative has publicly stated
that the participants must still negotiate commitments on a range
of WTO rules including subsidies, technical standards, a mechanism
to review implementation, and many other issues. Trade and Legal
China's prospective WTO membership raises a critical issue about
how the Considerations for United States will handle China's
normal trade relations status under U. S. law. Resolution of this
issue requires considering (1) options regarding the Granting
China timing for granting China permanent normal trade relations
status; Permanent Normal (2) different approaches for granting
this status, (3) the potential use of a Trade Relations Status WTO
provision allowing the United States and China to not apply WTO
benefits and obligations to each other if China joins the WTO, and
(4) the implications for the United States if this provision is
invoked. Options for When to Grant A key decision that Congress
will consider before China becomes a WTO China Permanent Normal
member is whether to enact legislation that provides China
permanent Trade Relations normal trade relations by removing China
from coverage under title IV of the Trade Act of 1974. For both
legal and policy reasons, the administration plans to ask Congress
to enact such legislation. The administration believes that
continuing to review China's normal trade relations status
annually would conflict with U. S. obligations as a WTO member to
provide unconditional most- favored- nation status to other WTO
members. 13 To resolve the conflict in the past, Congress passed
legislation that provided for removing countries from title IV's
coverage and granting them permanent normal trade relations
because of their joining the WTO (or its predecessor, the GATT).
The administration also believes that providing China with
permanent normal trade relations will help ensure that the United
States receives full WTO trade benefits from China. 13 At least
one commentator believes that the current annual process is not
inconsistent with the WTO requirement to provide most- favored-
nation status to other WTO members so long as the United States
continues to provide the grant every year and eliminates the
condition that the President make annual emigration findings with
regard to China. Although it is true that there have been no WTO
rulings on this issue, one problem with this position is that even
with the emigration condition eliminated, China would still be
treated differently from other WTO members. Congress has at least
three options for deciding when to grant China permanent normal
trade relations:  now, but the negotiations are not completed and
terms and conditions are not finalized;  after the negotiations
are completed and all the terms and conditions are known, but
before China becomes a WTO member; or  some time after China is a
WTO member. Two Approaches for If and when Congress decides to
enact permanent normal trade relations Providing Permanent
legislation for China, it could do so in one of two ways, based on
previous Normal Trade Relations congressional action. First,
Congress could pass legislation directly granting permanent normal
trade relations to China. Congress provided permanent normal trade
relations directly to Estonia, Latvia, and Lithuania in 1991,
though this was before any of them became WTO (GATT) members.
Several congressional bills have set forth a slightly different
variation of this approach for China. These bills provide that on
the date China becomes a WTO member, title IV of the Trade Act of
1974 shall no longer apply, and China's products would receive
normal trade relations status. 14 Under the second approach,
Congress could authorize the President to make the permanent
normal trade relations determination. Congress has used this
approach more often. For example, the President was authorized to
make this determination in 1996 for Bulgaria, which was not yet a
WTO member, and, most recently, for Mongolia in 1999, which was.
In addition, Congress could impose conditions on the President as
part of granting this authority-for example, Congress could
require that the President make a positive finding that certain
concerns about particular Chinese trade practices have been
addressed before he grants permanent normal trade relations. Use
of the WTO If the United States has not given China permanent
normal trade relations Nonapplication Clause prior to China's
becoming a WTO member, the administration plans to invoke the
nonapplication clause of article XIII of the agreement
establishing the WTO. This clause permits either a WTO member or
an 14 S. 1303 and H. R. 1712 in the 105th Congress and H. R. 577
in the current 106th Congress. incoming member to refuse to apply
WTO commitments to one another and does not require any reason for
this action. Nonapplication covers all WTO provisions and cannot
be selective. In the past, the United States has always invoked
nonapplication when it had not given countries permanent normal
trade relations prior to these countries joining the WTO (or the
GATT). There are a number of important characteristics of the WTO
nonapplication clause that also apply to China. The United States,
or other WTO members,  must notify the WTO of its intent to invoke
nonapplication before the terms and conditions for China's
membership are approved by the General Council;  may invoke
nonapplication and still vote to have China admitted to the WTO;
the United States did this for Mongolia's accession in 1997;  can
have nonapplication invoked against it by China, which China may
do for the United States if it does not receive permanent normal
trade relations; and  may later rescind nonapplication, resulting
in both parties applying all WTO rights and obligations to each
other; the United States did this for Romania and Hungary and most
recently for Mongolia. Implications of If China joins the WTO and
either China or the United States invokes the Nonapplication for
the nonapplication clause, China would still be obligated to
provide some trade United States benefits to the United States.
Under nonapplication, trade relations between the two countries
would continue under the 1979 U. S.- China bilateral trade
agreement and other bilateral agreements. For example, under the
1979 agreement, China is obligated to provide the United States
most- favored- nation treatment, that is, the best treatment given
any other country, for products, including agricultural products,
with regard to tariffs, customs duties, rights to have goods
distributed and sold in China, and some aspects of issuing import
and export licenses. Therefore, as a result of its bilateral most-
favored- nation commitment, in the areas mentioned, China would be
obligated to give any benefits given other WTO members to the
United States as well. The 1979 agreement also calls for some
participation of both countries' financial institutions in banking
services related to international trade and financial relations.
Furthermore, under the 1992 U. S.- China Market Access Agreement,
China made a number of commitments regarding transparency, uniform
application of laws, judicial review, import restrictions, and
sanitary and phytosanitary standards. Under other bilateral
agreements, China has made important intellectual property and
some agricultural commitments. Nevertheless, the commitments
provided by these bilateral agreements would be substantially less
than those anticipated to be provided by China in the accession
agreement and in the underlying WTO agreements once China becomes
a WTO member. For example, the 1979 agreement does not cover
services, with limited exceptions. The agreement also does not
provide the United States the general right to engage in importing
and exporting within China and does not provide explicit national
treatment for U. S. goods. 15 Moreover, according to USTR, WTO
obligations regarding intellectual property rights are stronger
than those provided by the U. S.- China agreements covering
patents, trademarks, and copyrights. Furthermore, none of the
bilateral agreements provide for binding multilateral dispute
settlement, as do the WTO agreements. Thus, in the event of
nonapplication, the United States would continue to enforce trade
violations under U. S. law. Thus, an important consequence of
either side's invoking the WTO nonapplication clause is that
China, if it becomes a WTO member, will not have to grant the
United States all the trade benefits it will give to other WTO
members. Because U. S. businesses compete with business from other
WTO members for China's markets, this situation could potentially
put U. S. business interests at a considerable competitive
disadvantage. While the United States would continue to benefit
from some Chinese commitments through existing bilateral
agreements, as pointed out, those benefits are substantially less
than all those expected from China's WTO membership. Agency
Comments and We obtained oral comments on a draft of this report
from the Associate Our Evaluation General Counsel at the Office of
the U. S. Trade Representative. The Office generally agreed with
the contents of our report. U. S. Trade Representative officials
noted that some of the statistics that appear in our report, such
as average tariff rates, differ from the statistics issued by the
executive branch. Although we used the same underlying data as the
executive branch, our statistics are slightly different in some
cases because we categorized the data differently or because of
other methodological differences. U. S. Trade Representative
officials made several other technical comments on the report,
which we incorporated as appropriate. 15 A fundamental principle
in the WTO agreements is national treatment. National treatment
requires that WTO members treat other members' products and
service providers no less favorably than they treat their own,
once foreign goods have crossed their borders. Scope and This
report is based on our past and ongoing work on China; 16 our
review of Methodology WTO and executive branch documents; U. S.
law; related literature; economic literature; and our discussions
with U. S. government, WTO, and foreign government officials. More
specifically, to assist Congress in its oversight and upcoming
debate on U. S.- China trade policy, we updated our past work on
(1) the status of the WTO accession negotiations, (2) the results
of the negotiations when compared to U. S. objectives, and (3) the
kind of considerations that may affect whether and when to grant
China permanent normal trade relations status because of WTO
membership. To report the current status of the negotiations, we
elaborated on work we did in 1998 that described the WTO accession
process in general by describing what particular tasks and steps
need to be completed in approving China's accession. To report on
the results of the negotiations when compared to U. S. objectives,
we extracted those sections of our September 30, 1999, report that
were subsequently declassified by USTR and updated them to reflect
new developments in the negotiations based on the November 1999
agreement, other executive branch documents, and meetings with U.
S. government officials. Our methods of analysis are described in
more detail in our 1999 report. To report on issues related to
granting China permanent normal trade relations, we updated work
we did in 1998 by reviewing subsequent legislation granting this
status to other countries, reviewing the terms of the 1979 U. S.-
China trade agreement and other bilateral agreements, and
conducting discussions with U. S. government and academic experts.
We conducted our work from November 1999 through February 2000 in
accordance with generally accepted government auditing standards.
We are sending copies of this report to the Honorable Charlene
Barshefsky, the U. S. Trade Representative; the Honorable William
M. Daley, Secretary of Commerce; the Honorable Dan Glickman,
Secretary of Agriculture; the Honorable Lawrence F. Summers,
Secretary of the Treasury; and interested congressional
Committees. Copies will be made available to others on request. 16
See the attached list of some related GAO products. For future
contacts regarding this report, please call me at (202) 512- 4128.
Individuals making key contributions to this report were Adam
Cowles, Richard Seldin, Elizabeth Sirois, and Timothy Wedding.
Susan S. Westin, Associate Director International Relations and
Trade Issues Related GAO Products World Trade Organization: Status
of China's Membership Negotiations (GAO/ C- NSIAD- 99- 9, Sept.
30, 1999). 1 China Trade: WTO Membership and Most- Favored- Nation
Status (GAO/T-NSIAD-98-209, June 17, 1998). Agricultural Exports:
U. S. Needs a More Integrated Approach to Address Sanitary/
Phytosanitary Issues (GAO/NSIAD-98-32, Dec. 11, 1997).
International Trade: Challenges and Opportunities for U. S.
Businesses in China (GAO/T-NSIAD-96-214, July 29, 1996). U. S.-
China Trade: Implementation of the 1992 Prison Labor Memorandum of
Understanding (GAO/GGD-95-106, Apr. 3, 1995). U. S.- China Trade:
Implementation of Agreements on Market Access and Intellectual
Property (GAO/GGD-95-61, Jan. 25, 1995). International Trade: U.
S. Government Policy Issues Affecting U. S. Business Activities in
China (GAO/GGD-94-94, May 4, 1994). 1 This report has a national
security classification of CONFIDENTIAL and is not available to
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