China Trade: WTO Membership and Most-Favored-Nation Status
(Statement/Record, 06/17/98, GAO/T-NSIAD-98-209).
Pursuant to a congressional request, GAO discussed the relationship
between China's most-favored nation (MFN) status and World Trade
Organization (WTO) membership, focusing on the: (1) WTO accession
process; and (2) legal framework affecting China's MFN status, its
implications for WTO membership, and the role Congress plays in the
process.
GAO noted that: (1) China has the largest economy worldwide that is not
covered by the WTO; (2) the WTO seeks to promote open and fair
international trade through increased transparency, rules, and
commitments to reduce barriers on foreign goods and services, and
provide a binding system for resolving disputes; (3) China would like to
join the WTO and is currently in the negotiation phase, which is the
second of the four-stage process for becoming a member; (4) joining the
WTO will require China to make substantial changes to its economy; (5)
although Congress does not vote on China's WTO membership, the United
States Trade Representative is required to consult with Congress before
a WTO vote is taken; (6) the Administration plans to ask Congress to
enact legislation to resolve a potential conflict between the
conditional MFN afforded China under U.S. legislation and the
unconditional MFN provided by the WTO agreements; (7) if China becomes a
member and Congress has not enacted this legislation, the Administration
intends to invoke a WTO provision that would permit the United States
not to apply the WTO Agreements to China; (8) an important consequence
of taking this exception is that China and the United States would not
be obligated to provide each other all the WTO trade commitments that
they would give to other WTO member states; and (9) in such a situation,
U.S. business may not be able to benefit fully from the commitments
China will make to open its markets to other WTO members.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-NSIAD-98-209
TITLE: China Trade: WTO Membership and Most-Favored-Nation Status
DATE: 06/17/98
SUBJECT: International trade
Foreign governments
Foreign trade policies
Foreign trade agreements
International economic relations
International organizations
IDENTIFIER: China
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Cover
================================================================ COVER
Before the Subcommittee on Trade, Committee on Ways and Means, House
of Representatives
For Release on Delivery
Expected at
1:00 p.m., EDT
Wednesday
June 17, 1998
CHINA TRADE - WTO MEMBERSHIP AND
MOST-FAVORED-NATION STATUS
Statement for the Record by JayEtta Z. Hecker, Associate Director,
International Relations and Trade Issues, National Security and
International Affairs Division
GAO/T-NSIAD-98-209
GAO/NSIAD-98-209T
(711271)
Abbreviations
=============================================================== ABBREV
MFN - x
WTO - x
USTR - x
OECD - x
IPR - x
LEO - x
GPD - x
GATT - x
============================================================ Chapter 0
Mr. Chairman and Members of the Subcommittee:
I am pleased to have this opportunity to provide this statement for
the record for your hearing on June 17, 1998. I would like to offer
some observations on the People's Republic of China's negotiations to
join (accede to) the World Trade Organization (WTO). Today's hearing
is about the President's recent decision to extend China's waiver and
continue to grant most-favored-nation (MFN)\1 status to China. You
requested that we explain the relationship between China's MFN status
and WTO membership. My statement will explain (1) the WTO accession
process and (2) the legal framework affecting China's MFN status, its
implications for WTO membership, and the role Congress plays in the
process.
My observations are based on our past and ongoing work;\2 our review
of WTO and executive branch documents; U.S. law; and related
literature; the economic literature; and our discussions with U.S.
government, WTO, and foreign government officials. Before getting
into the specifics of these topics, let me provide a brief summary of
my statement.
--------------------
\1 Most-favored-nation treatment generally refers to the practice of
extending to a country the best trade privileges granted to any other
nation. For example, imports from countries receiving MFN treatment
are provided the lowest tariff rates and other charges imposed on
imported products.
\2 See attached list of some related GAO products.
SUMMARY
---------------------------------------------------------- Chapter 0:1
China has the largest economy worldwide that is not covered by the
WTO. The WTO seeks to promote open and fair international trade
through increased transparency (public openness), rules, and
commitments to reduce barriers on foreign goods and services, and
provide a binding system for resolving disputes. China would like to
join the WTO and is currently in the negotiation phase, which is the
second of the four-stage process for becoming a member. Joining the
WTO will require China to make substantial changes to its economy.
Although Congress does not vote on China's WTO membership, the United
States Trade Representative (USTR) is required to consult with
Congress before a WTO vote is taken. The Administration plans to ask
Congress to enact legislation to resolve a potential conflict between
the conditional MFN afforded China under U.S. legislation and the
unconditional MFN provided by the WTO Agreements. If China becomes a
member and Congress has not enacted this legislation, the
Administration intends to invoke a WTO provision that would permit
the United States not to apply the WTO Agreements to China. An
important consequence of taking this exception is that China and the
United States would not be obligated to provide each other all the
WTO trade commitments that they would give to other WTO member
states. In such a situation, U.S. business may not be able to
benefit fully from the commitments China will make to open its
markets to other WTO members.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
Since the late 1970s, China has introduced a variety of market
reforms to liberalize its centrally planned economy. Today China is
much more developed, open, and market oriented, such that now almost
all sectors of its economy have elements of both free markets and
state planning. However, China still lacks considerable transparency
in its trade regime and intervenes in its economy in ways that can
distort trade. For example, China restricts its imports by applying
high tariffs to specific sectors, using import quotas, requiring
import licenses, imposing other import barriers, and promoting and
supporting its exports. In combination with macroeconomic forces,
these trade practices have fostered a Chinese balance of trade
surplus with the world and a rapid buildup in foreign reserves.
In addition to these factors, the U.S. trade deficit with China has
recently grown because U.S. demand for goods from China has grown
more rapidly than Chinese demand for U.S. goods. Over the past 4
years this bilateral U.S. trade deficit has risen from $30 billion
to $50 billion.\3 Top U.S. exports to China tend to consist of
high-technology goods, such as aircraft, while the top U.S. imports
from China include many low-technology products such as toys and
apparel. U.S. imports from China also include products such as
electrical machinery. The United States has negotiated with China to
open its markets through numerous bilateral trade agreements,
including a 1979 agreement that approved reciprocal MFN status
between the two countries\4 (for more information on U.S.-China
bilateral trade agreements, see app. I).
Since 1986, China has been negotiating to join the WTO and its
predecessor, the General Agreement on Tariffs and Trade (GATT).
China will have to make significant changes to its economy to be able
to meet WTO commitments (for a brief discussion of China's economy,
see app. II). Existing WTO members and countries that agree to join
the WTO\5
must abide by a set of rules and obligations that promote trade and
increase transparency and fairness in the world trading system.
Nondiscrimination toward other WTO members is a fundamental principle
in the WTO agreements\6 and is embodied in the granting of MFN status
and providing national treatment. Generally WTO members are
obligated under the MFN principle to grant each other trade
privileges as favorable as they give to any other foreign country.
National treatment requires that they treat other member's products
no less favorably than they treat their own, once foreign goods have
crossed their borders.
China, like other WTO members, will also have to commit to reduce
tariffs for industrial and agricultural products and to follow rules
designed to limit the use of trade-distorting nontariff barriers
(such as subsidies and import licensing requirements). Additional
WTO rules cover financial and other services, trade-related
investment measures, market access, and trade-related intellectual
property rights. WTO members have access to dispute settlement
procedures designed to help them more quickly address other members'
trade practices that appear to violate WTO rules.\7
China has sought to join the WTO as a developing country, which would
allow it to benefit from longer transition periods given these
countries to implement WTO obligations. However, the United States
and other countries have maintained that China should be treated as a
developed country because of its size and status as a major world
exporter. While there is debate about the true size and growth rate
of China's economy, there is no doubt that it is very large and has
grown rapidly. The Organization for Economic Cooperation and
Development (OECD) estimates that China's gross domestic product
(GDP) was the second largest in the world in 1997. Despite its size,
however, China's economy still is considered "developing" by World
Bank estimates. According to U.S. and foreign government officials,
negotiations on transition periods and other special treatment for
China will be considered on a case-by-case basis since China does not
fit neatly into either of these categories of development.
Overall, a major objective of the Administration has been to
negotiate a WTO accession agreement that is "commercially meaningful
to U.S. business."\8
--------------------
\3 There is sometimes a discrepancy between the trade statistics of
the United States and China, mainly because of the differences in how
they calculate bilateral trade through Hong Kong.
\4 The Agreement on Trade Relations was signed on July 7, 1979, under
section 405 of the Trade Act of 1974, as amended. Section 405
authorizes the United States to enter into bilateral commercial
agreements that provide MFN status to other countries if the
President determines that such agreements promote the purposes of the
act and are in the national interest. The agreement is subject to
renewal at 3-year periods, but all or part of the agreement may be
suspended if a party lacks the domestic legal authority to implement
it. The agreement was recently renewed on February 1, 1998.
\5 There are currently 132 WTO members, and an additional 31 have
applied for membership. Another 32 countries worldwide are not
members of the WTO nor have they applied to join, according to our
analysis.
\6 As used in this testimony, the WTO agreements refer to the
agreement establishing the WTO and the binding Multilateral Trade
Agreements set forth in annexes 1, 2, and 3 of that agreement, as
well as subsequent revisions and additions to those agreements. This
includes the Dispute Settlement Understanding.
\7 Various WTO agreements establish a national security exception to
otherwise agreed to commitments. Under this exception, WTO members
can take certain generally described actions they consider necessary
for protection of their essential security interests.
\8 USTR 1998 Trade Policy Agenda and 1997 Annual Report, p. 11.
WTO'S ACCESSION PROCESS
---------------------------------------------------------- Chapter 0:3
China is currently negotiating with WTO members, including the United
States, to join, that is, to "accede" to, the WTO. After joining,
China will be bound by the commitments it makes both in the accession
negotiations and in the underlying WTO agreements. A successful
accession requires the applicant to make the necessary concessions to
meet the commercial and trade requirements of the WTO agreements.
Thus, the outcome of this process is, to some degree, already
determined by the existing agreements, in contrast to traditional
trade negotiations; the primary issue for debate is agreeing to what
measures a country like China needs to take to assure WTO members
that it can meet the requirements. Also, the applicant must
negotiate the levels at which it will bind its tariffs\9
with WTO members. Any special provisions granted to the applicant
are counterbalanced by greater obligations that the applicant must
fulfill. For instance, although members might allow the applicant
time to phase in tariff reductions, the applicant might be required
to meet additional reporting and transparency commitments during the
phase-in process.
The accession process begins when the applicant submits a letter of
application to the WTO Director-General. China began this process in
1986 when it applied to the GATT, and renewed its application in 1995
upon the creation of the WTO. This process, diagrammed in figure 1,
is comprised of four phases:\10 (1) fact-finding, (2) negotiation,
(3) WTO decision, and (4) implementation. China is currently in the
negotiation phase of the accession process.
Figure 1: WTO Accession
Process
(See figure in printed
edition.)
Legend
WP = Working Party
(See figure in printed
edition.)
Source: GAO analysis, based on
WTO document, "Accession to the
World Trade
(See figure in printed
edition.)
Organization: Procedures for
Negotiations under Article
XII."
(See figure in printed
edition.)
-- Fact-finding: As figure 1 illustrates, in the first phase of
fact-finding the WTO working party,\11 assisted by the
Secretariat,\12 collects and synthesizes information on the
applicant's trade regime. The applicant submits a detailed
outline of its trade policies and practices and answers
questions until the working party has sufficient information to
begin negotiations.
-- Negotiation: Figure 1 shows that the second phase of the
process follows a two-track approach, involving both bilateral
and multilateral negotiations. On a bilateral basis, each
working party member negotiates with the applicant on its
specific commitments on goods and services under the WTO
agreements. The applicant submits an overall market access
offer as the starting point for the negotiations, detailing how
the country will lower barriers to trade. Although these
negotiations are conducted bilaterally, any agreement reached
between two countries will apply to all WTO members, as the
principle of MFN requires. In the multilateral negotiations,
the working party and the applicant negotiate terms for how the
applicant will adhere to WTO's principles and technical
guidelines, so that the applicant will meet the normal
obligations and responsibilities of membership. For example, a
country might be asked where and when it would publish new laws,
in order to comply with a WTO transparency requirement.
The negotiation phase results in four documents, which detail the
results of the negotiations and make up the applicant's final
accession package:
(1) The Consolidated Schedules: These detail the applicant's
specific market access commitments under various WTO agreements,
primarily covering individual tariff lines for goods and services.
They are annexed to the protocol as an integral part of the
agreement.
(2) The Protocol: This is usually a brief document\13 containing the
terms of accession and affirming the applicant's adherence to WTO
guidelines and principles.
(3) The Working Party Report: This provides a narrative on the
results of the negotiations. Frequently, the report includes
specific commitments made by the applicant regarding how it will meet
WTO requirements. Commitments detailed in either the report or the
protocol carry the same legal weight for the applicant, according to
WTO and USTR officials.
(4) The Draft Decision: Written by the working party, this document
affirms the working party's consensus decision on the applicant's bid
for accession.
After the working party members conclude all the negotiations and
reach consensus on language detailing the terms and conditions for
the applicant's membership, they will forward the package to the
General Council.
-- -- WTO Decision: The third phase in figure 1 is the formal
decision process, in which the General Council (comprised of all
WTO members)\14 approves (or rejects) the terms and conditions
of the applicant's package. Traditionally, the General Council
reaches decisions by consensus. However, if consensus cannot be
reached, the draft decision can be approved by a two-thirds
majority. Any country that decides to forgo normal WTO
obligations and benefits ("non-application"), including MFN,
must notify the Council before the Council approves the
accession package.
-- Implementation: Finally, the last phase in figure 1 is
implementation of the applicant's WTO commitments. The
applicant's WTO obligations enter into force 30 days after the
General Council's approval and the applicant subsequently files
its acceptance of membership. The accession package is part of
the applicant's WTO agreement, and the acceding country is
equally bound by the provisions of the WTO agreements and the
commitments in the accession package. In some cases, the
applicant's parliament or other legislative body must pass
legislation to allow for accession before the applicant submits
its acceptance. Applicants must also make the necessary
internal adjustments as required by the accession package before
the 30-day period begins. The General Council approves the
draft decision, and then the applicant becomes a member. The
most recent countries to join--Ecuador, Mongolia, Bulgaria, and
Panama--were required to eliminate or begin to phase out most
trade practices incompatible with WTO rules immediately upon
accession.
--------------------
\9 In international trade, the concept of "binding" is defined as a
legal obligation not to raise tariffs on particular products above
the rate specified in a country's schedule of concessions. Binding
tariffs provide greater commercial certainty by creating a ceiling on
tariffs that can be applied by a country.
\10 The first two phases often overlap at times, as parties request
more information from the applicant before proceeding with the
negotiations.
\11 The working party is created to oversee the negotiations and is
open to all interested members of the WTO.
\12 The WTO Secretariat provides administrative and technical
support. For example, the Secretariat ensures that parties meet
documentation requirements.
\13 China's draft protocol and supporting documents are much more
lengthy and detailed than those of most WTO applicants.
\14 The General Council has the authority to carry out the
responsibilities of the Ministerial Conference, which must approve
membership, so in this sense they are one and the same (and are often
used interchangeably).
LEGAL FRAMEWORK AFFECTING
CHINA'S WTO ACCESSION
---------------------------------------------------------- Chapter 0:4
At this point, my statement will discuss (1) USTR's requirement to
consult with Congress before a U.S. vote on China's WTO membership,
(2) presidential determinations on China's state trading enterprises,
(3) provisions in U.S. law affecting China's MFN status, (4) the
potential use of WTO's non-application provision if China joins the
WTO, and (5) implications for the United States if non-application is
invoked.
CONSULTATION REQUIREMENT
-------------------------------------------------------- Chapter 0:4.1
Under U.S. law, USTR is required to report to and consult with
appropriate Congressional committees before any WTO General Council
vote on an applicant's membership when a vote would either
substantially affect U.S. rights or obligations under the WTO
agreement or potentially entail a change in federal law.\15 In view
of China's importance to U.S. foreign trade and the MFN issue
described in our later comments, it is clear that this consultation
requirement would apply to a vote on China's membership in the WTO.
--------------------
\15 The Uruguay Round Agreements Act (P.L. 103-465, 108 Stat. 4828,
codified at 19 U.S.C. �� 3531-32). The term "appropriate
congressional committees" means the House Committee on Ways and
Means, the Senate Committee on Finance, and any other congressional
Committees that have jurisdiction over the matter with respect to
which consultations are to be held.
PRESIDENTIAL DETERMINATIONS
ON STATE TRADING ENTERPRISES
-------------------------------------------------------- Chapter 0:4.2
Before China joins the WTO, another United States law\16 requires the
President to make certain determinations about China's state trading
enterprises.\17 Specifically, the President must decide (1) whether
China's state trading enterprises account for a significant share
either of China's exports, or China's goods that are subject to
competition from goods imported into China; and (2) whether these
enterprises adversely affect U.S. foreign trade or the U.S.
economy. If both determinations are affirmative, the WTO agreement
cannot apply between the United States and China until either China
enters into an agreement that addresses the operations of state
trading enterprises, or legislation is enacted approving application
of the WTO agreements to China.
--------------------
\16 The Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418,
102 Stat. 1133, codified at 19 U.S.C. 2905).
\17 For purposes of this provision, state trading enterprises are
defined as government entities or businesses that are owned,
controlled, or supported by the government and that purchase goods or
services in international trade for purposes other than government
use.
CHINA AND U.S. MFN LAW
-------------------------------------------------------- Chapter 0:4.3
A key legislative action Congress will face before China becomes a
WTO member is whether to remove China from coverage under title IV of
the Trade Act of 1974. Specifically, Section 401 generally requires
the President to deny MFN to products from a number of countries,
including China.\18 Section 402, better known as the "Jackson-Vanik
Amendment,"\19 permits a 1-year exception when the President
determines that a country, such as China, substantially complies with
certain freedom of emigration objectives.\20
The President can recommend renewal of these waivers for successive
12-month periods if he determines that further extensions will
substantially promote these objectives. These recommendations must
be made 30 days before the end of the previous year's waiver period,
that is, by June 3. Congress has up to 60 days from the end of the
waiver period to pass a joint resolution disapproving the waiver. If
necessary, Congress has an additional 15 days to override any
presidential veto of such a resolution. China first received a
waiver in 1980, and U.S. presidents have renewed the waiver from
1981 to most recently, on June 3, 1998.
Since the Jackson-Vanik amendment provision only allows a 1-year
waiver of title IV restrictions and Congress can disapprove the
waiver, the Administration plans to ask Congress to enact legislation
that would remove China from title IV's coverage. The Administration
believes that temporary, that is, conditional MFN under Jackson-Vanik
conflicts with the WTO obligation to provide unconditional MFN to WTO
members.
In the past, Congress has passed legislation removing certain
WTO/GATT members from title IV's coverage and granting them permanent
MFN. For example, in 1996 the Congress enacted legislation\21
providing the President with discretionary authority to grant
permanent MFN to Bulgaria, which the President did on September 27,
1996.\22 This approach appears to increase the administration's
leverage to obtain final commitments. At least one bill, S. 737,
currently pending in Congress takes the same approach for China.
Other pending bills, S. 1303 and H. R. 1712, for example, do not
provide the President this kind of discretionary authority. Instead,
they provide that on the day China becomes a WTO member title IV
shall no longer apply, and China's products shall receive MFN.
--------------------
\18 Like China, Albania, Armenia, Belarus, Georgia, Kazakhstan,
Kyrgystan, Laos, Moldova, Russia, Ukraine, Uzbekistan, and Vietnam,
which also wish to join the WTO, receive conditional MFN from the
United States. Estonia, Latvia, Lithuania, and Cambodia have also
applied for WTO membership and have been provided permanent MFN under
U.S. law.
\19 Section 409 of title IV, which deals with certain other sanctions
against countries with emigration restrictions, is also part of the
Jackson-Vanik amendment.
\20 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.
\21 Public Law 104-162, sec. 2.
\22 Proclamation 6922, 61 Fed. Reg. 51205 (Sept. 27, 1996).
NON-APPLICATION CLAUSE
-------------------------------------------------------- Chapter 0:4.4
If China becomes a WTO member and Congress has not passed legislation
removing China from title IV's coverage, the Administration plans to
invoke the "non-application clause" of article XIII of the WTO
agreement. The "non-application clause" permits either a WTO member
or an incoming member to refuse to apply WTO commitments to each
other. In the past, the United States has invoked non-application
when countries have joined the WTO (or GATT) and Congress had not
repealed title IV of the Trade Act for the incoming member. Table 1
lists these instances.
Table 1
Countries Lacking Unconditional MFN
Status Upon Joining WTO/GATT
Date unconditional MFN
Accession date to WTO/ granted by United
Country GATT States
---------------------- ---------------------- ----------------------
Romania Nov. 14, 1971 Nov. 7, 1996
Hungary Sept. 9, 1973 April 10, 1992
Mongolia Jan. 29, 1997 Pending\a
----------------------------------------------------------------------
Legend
NA = not Applicable
\a There is pending legislation before Congress that would grant
Mongolia this status.
I would like to point out four important characteristics of the WTO
non-application clause. A member (and, when appropriate, an incoming
member):
(1) must notify the WTO of its intent to invoke non-application
before the new member's terms of accession are approved by the
General Council;
(2) may invoke non-application and still vote to have the new member
admitted to the WTO; the United States did this for Mongolia's
accession in 1997;
(3) cannot invoke non-application selectively, because the clause
covers all WTO obligations. For example, the United States cannot
choose to withhold its WTO MFN obligation and then apply other WTO
provisions to China such as dispute settlement procedures; and
(4) may later rescind non-application, resulting in both parties
applying all WTO rights and obligations to each other. For example,
the United States did this for Romania and Hungary.
IMPLICATIONS OF
NON-APPLICATION FOR THE
UNITED STATES
-------------------------------------------------------- Chapter 0:4.5
If China joins the WTO and the United States invokes non-application,
any MFN rights between the United States and China will come from the
1979 U.S.-China Bilateral Agreement on Trade Relations. Although
neither we nor USTR have compared in detail the scope of MFN under
the 1979 agreement and that provided in the WTO agreements, the
coverage under the former does not appear to be as comprehensive.
For example, the 1979 agreement does not establish clear MFN
obligations for services and service suppliers,\23 nor does it
provide for compulsory dispute settlement procedures. For instance,
if the United States believes that China has violated its WTO
commitments, the United States would be unable to bring China to
WTO's dispute settlement body.
An important consequence of the United States invoking WTO
non-application is that if China becomes a member, it does not have
to grant the United States all the trade commitments it makes to
other WTO members, both in the negotiated accession package or in the
underlying WTO agreements. Because U.S. businesses compete with
business from other WTO members for China's markets, this could
potentially put U.S. business interests at a considerable
competitive disadvantage. For example, the United States may not
benefit from Chinese concessions regarding services, such as the
right to establish distribution channels in China. While the United
States would continue to benefit from Chinese commitments made in
bilateral agreements concluded with the United States, the
commitments are not as extensive as those in the WTO agreements.\24
In summary, the size of the Chinese economy and the extent of its
reform efforts create challenges for negotiators and policymakers
trying to integrate China into the WTO. As part of any congressional
deliberation to remove China from coverage of title IV of the Trade
Act, it will be important to evaluate China's accession package, and
the advantages and disadvantages of providing China permanent MFN.
This would include determining if the accession package has met the
Administration's objective of producing a "commercially meaningful"
agreement. Congress will be evaluating an agreement that covers a
wider array of issues than those of other new WTO members with MFN
restrictions. As requested, we will be working with your staff to
help evaluate this agreement when it is finalized.
--------------------
\23 When the United States invoked non-application for Romania and
Hungary, trade relations with those countries were established
through bilateral agreements, which were fairly extensive in
comparison to GATT/WTO commitments, according to an International
Trade Commission official.
\24 Nevertheless, the United States might still benefit indirectly
from China's WTO commitments for increased transparency and certain
changes in standards and regulations.
-------------------------------------------------------- Chapter 0:4.6
This concludes my statement for the record. Thank you for permitting
me to provide you with this information.
--------------------
\1The information contained in this appendix is drawn from USTR and
International Trade
U.S.-CHINA BILATERAL TRADE
AGREEMENTS
=========================================================== Appendix I
The framework for current U.S. trade relations with China is based
upon the Agreement on Trade Relations that was signed on July 7,
1979. The agreement established reciprocal Most-Favored-Nation (MFN)
status between the two countries and committed both parties to
protect intellectual property. Since then, the United States has
attempted to increase market access and reduce trade barriers and
other trade distorting policies and practices by entering into
numerous bilateral trade agreements with China (see table I.1).
Nevertheless, China's implementation of these agreements has been
uneven, according to the U.S. Trade Representative (USTR). China
still restricts imports, subsidizes Chinese exports, and maintains
significant barriers to foreign business penetration, according to
USTR.
For example, the United States has entered into a series of
agreements with China regarding China's protection of intellectual
property rights (IPR). Under the Memorandum of Understanding on the
Protection of Intellectual Property Rights signed in 1992, China
amended its patent law, issued copyright regulations, joined
international copyright conventions, and enacted protection for trade
secrets. However, U.S. officials subsequently determined that China
did not establish an adequate and effective mechanism for IPR
enforcement. As a result of a Special 301\26 investigation, the two
parties signed an additional IPR agreement in 1995 in which China
committed to (1) provide improved protection for copyrights, (2)
strengthen border controls, (3) institute trademark law
modernization, and (4) intensify a "Special Enforcement Period" aimed
at cracking down on piracy. However, China's continued insufficient
implementation of the 1995 IPR agreement led the United States to
threaten to impose sanctions in May 1996; the two parties avoided
sanctions with the signing of an agreement in June 1996, which
confirmed China's most recent attempts to enforce the 1995 agreement.
In addition, the United States and China have signed a series of
bilateral trade agreements to improve the regulation and pricing of
satellite launch services. In 1995 the United States and China
renewed the Bilateral Agreement on International Trade in Commercial
Space Launch Services for the period between 1995 and 2001. To
further clarify the Agreement's provisions on low earth orbit
satellites (LEO), the two countries signed an annex containing
specific LEO pricing guidelines in 1997.
Table I.1
U.S.-Chinese Bilateral Trade Agreements,
1984-1997
Agreement Date signed Issue
------------------------- ------------------------- --------------------------
Accord on Industrial and 1/12/84 Committed the United
Technological States and China to
Cooperation promote and facilitate
technology transfer and
trade in technology
products
Memorandum of 1/17/92 Committed China to provide
Understanding on the significantly improved
Protection of protection for U.S.
Intellectual Property inventions and
Rights copyrighted works
Memorandum of 6/18/92 Permitted U.S. embassy
Understanding on officials to visit
Prohibiting Import and Chinese prisons suspected
Export in Prison Labor of producing goods for
Products export to the United
States
Memorandum of 10/10/92 Committed China to changes
Understanding Concerning in its import regime,
Market Access including gradual
elimination of most
nontariff barriers such
as quotas and licenses,
elimination of import
substitution policies,
publication of all trade
laws and regulations and
ban on the use of
sanitary and
phytosanitary standards
as trade barriers
Memorandum of Agreement 3/13/95 Specified limits on
to Renew the Bilateral China's geosynchronous
Agreement on earth orbit (GEO)
International Trade in launches and improved GEO
Commercial Space Launch pricing practices
Services
Agreement on Providing 2/26/95 Committed China to take
Intellectual Property specific actions to
Rights Protection provide protection of IPR
for U.S. companies and
provide market access for
U.S. intellectual
property-based products
Agreement on Intellectual 6/17/96 Outlined the steps China
Property Rights took to implement the
1995 IPR agreement and
provided more detailed
market access guidelines
concerning IPR
Agreement on Trade in 2/1/97\a Opened the Chinese market
Textiles and Textile to textile and apparel
Products exports from the United
States by reducing
tariffs and binding
tariffs at applied rates
Interim Agreement on 10/24/97 Secured market access
Market Access for terms for foreign
Foreign Financial financial information
Information Companies companies operating in
China
Agreement to Strengthen 10/27/97 Placed guidelines on the
Space Launch Trade Terms Chinese pricing of LEO
launches
--------------------------------------------------------------------------------
\a Final exchange of diplomatic notes has not yet occurred. The
agreement is being applied provisionally in the interim.
Sources: USTR 1998 Trade Policy Agenda and 1997 Annual Report;
United States International Trade Commission (USITC) The Year in
Trade (1992, 1995, 1996); Statement of Ambassador Michael H.Moskow,
Deputy USTR, on the Preservation of MFN Status for China, Before the
Subcommittee on Trade, House Ways and Means Committee (June 29,
1992); 1998 National Trade Estimate Report on Foreign Trade Barriers.
--------------------
\26 Under "Special 301" of the 1974 Trade Act, as amended, 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. 19 U.S.C. �� 2242,
2412.
OVERVIEW OF CHINA'S ECONOMY
========================================================== Appendix II
China is undergoing a historic transformation, as market reforms and
integration with the world economy create growth and increased trade
and investment. In 1997, China's second largest export market after
Hong Kong was the United States; China's bilateral trade surplus with
the United States has more than doubled since 1993 to about $50
billion in 1997. However, substantial trade and investment
impediments remain. According to U.S. government and foreign
officials, the size of the Chinese economy and the extent of its
reform efforts create challenges to negotiators and policymakers
trying to integrate China into the WTO. At the end of this appendix,
we provide a table with some statistics on the Chinese economy.
CHINA'S ECONOMY
-------------------------------------------------------- Appendix II:1
According to our review of the economic literature, China, for almost
30 years prior to 1979, had a rural, developing economy with
relatively few connections to the rest of the world. The Chinese
communists ruled over a centrally planned economy in which prices
were set by the state. In late 1978, China's leaders introduced
market reforms into the agricultural sector, where 71 percent of
China's labor force worked. As agriculture yield increased, market
reforms were introduced into other specific sectors and locales and
then gradually expanded to other regions and sectors of the economy.
Today, almost all sectors of the economy are a mix of market-oriented
reforms and state planning. Experts generally credit these reforms
and China's high rates of investment and saving as principal reasons
for China's high growth rates during the last 20 years. They also
credit these reforms for making China's economy much more developed,
open to international trade and investment, and market-oriented.
China's economy appears to be very large and growing quite quickly,
although not as fast as indicated by the widely publicized Chinese
official figures. According to official Chinese figures, in 1997 GDP
was $900 billion, per capita gross domestic product (GDP) was $724,
and growth since 1986 averaged almost 10 percent per year.\27 The
most recent data from the Organization for Economic Cooperation and
Development (OECD) suggest that China is the second-largest economy
worldwide.
In 1997, China was the world's 10th largest exporter, 12th largest
importer, and the largest trading nation that is not a WTO member.
According to the economic literature, China has become increasingly
open to international trade and investment since 1978, although it
retains significant trade and investment barriers.
--------------------
\27 All dollar data are current/nominal dollars.
SUBSTANTIAL CHINESE TRADE AND
INVESTMENT IMPEDIMENTS REMAIN
-------------------------------------------------------- Appendix II:2
China has been negotiating to join the WTO and its predecessor, the
General Agreement on Tariffs and Trade (GATT), since 1986. Despite
substantial reforms, China will have to make significant changes to
its economy to meet WTO rules and obligations.
Today, China still restricts imports, promotes and supports Chinese
exports, and maintains significant barriers to foreign business
penetration, according to U.S. Trade Representative (USTR) and
Commerce Department reports. They report that China's import
restrictions include high tariffs for specific sectors and other
taxes on imports; nontariff barriers such as import licenses, import
quotas, limitations on which enterprises can import, and limitations
on access to foreign exchange. They also report that China promotes
exports by providing exporters with access to funds, freight
services, and inputs on noncommercial terms. China also provides
exporters with income tax reductions and imposes foreign exchange
earning and export requirements on foreign corporations in China.
According to these reports, significant barriers or impediments to
foreign business operating in China include guiding foreign
investment to certain sectors; protecting state-owned enterprises
from competition by law, regulation, and/or custom; restricting the
opening of branches of foreign banks, insurance companies,
accounting, and law firms to selected companies and particular
locales; and prohibiting representative offices of foreign firms from
signing sales contracts or billing customers. They also report on
problems from excessive bureaucracy and corruption in China,
especially regarding government procurement practices. The
corruption problem is confirmed by private studies; one ranked China
as the fifth most corrupt among 54 countries surveyed in 1996.
BALANCE OF PAYMENTS ACCOUNTS
------------------------------------------------------ Appendix II:2.1
From 1980 until 1994, China's trade and current account balance (its
goods, services, income, and current transfers) were more often in
deficit than surplus. Current account deficits generally were
financed by capital inflows, particularly foreign direct investment,
which grew relatively slowly until 1992, and by borrowing from the
World Bank. The Chinese government's holding of foreign exchange,
the main component of its international reserves, fluctuated
moderately.
Beginning in 1993, China has had large capital inflows, due to
substantial and growing levels of foreign direct investment. China's
goods surplus grew to $7.3 billion in 1994 from a $10.7 billion
deficit in 1993. It then grew to $18 billion in 1995, and then
jumped to $46.2 billion in 1997. Goods exports rose steadily from
$102.6 billion in 1994 to $182.7 billion in 1997. China's goods
imports increased more slowly from $95.3 billion in 1994 to $136.5
billion in 1997. China's goods and services balance grew steadily
from $7.6 billion in 1994 to $17.6 billion in 1996, then rose to
$40.5 billion in 1997 (see fig. II.1).
Figure II.1: China's Surplus
in Goods Trade with the World
(See figure in printed
edition.)
Source: International Monetary Fund, International Financial
Statistics; China's State Statistical Bureau; U.S. Commerce Dept.
At the beginning of 1994, China devalued its official exchange rate
to that on the private market, and then rapidly gained foreign
exchange under a managed float system at the rate of $22-$35 billion
per year. At the end of 1997, China's foreign currency reserves were
second only to Japan's, at $139.9 billion.
CHINA'S BILATERAL TRADE WITH
THE UNITED STATES
-------------------------------------------------------- Appendix II:3
China's surplus in goods trade with the United States has continued
to increase for more than a decade. The bilateral surplus rose from
$2.8 billion in 1987, to $29.5 billion in 1994 (the year China last
devalued its currency), to $49.8 billion in 1997, according to U.S.
Commerce Department figures. U.S. goods imports from China have
rapidly grown from $6.3 billion in 1987, to $38.8 billion in 1994, to
$62.6 billion in 1997. U.S. goods exports to China grew more slowly
from $3.5 billion in 1987, to $9.3 billion in 1994, to $12.8 billion
in 1997. By 1997, the U.S. goods deficit with China was second to
that of Japan for the third straight year. In 1997, goods imports
from China were 7.2 percent of all U.S. goods imports, with leading
imports of electrical machinery and equipment; toys, games, and
sports equipment; footwear; boilers and machinery; and clothing
accessories and apparel, much of which tend to be labor-intensive.
In 1997, U.S. goods exports to China were 1.9 percent of all U.S.
goods exports, with leading U.S. exports to China consisting of
Customs categories of nuclear reactors, boilers, and machinery;
aircraft and spacecraft; electrical machinery and equipment; and
fertilizers. In 1997, the United States was China's second-largest
goods export market after Hong Kong, and third-largest source of
goods imports after Japan and Taiwan.
Table II.1
Economic Data of China: 1987-97
(Billions of current U.S. dollars,
unless otherwise noted)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Goods trade $(1. $(5. $(5. $9.2 $8.7 $5.2 $(10 $7.3 $18. $19. $46.
balance 7) 3) 6) .7) 0 5 2
exports 34.7 41.1 43.2 51.5 58.9 69.6 75.7 102. 128. 151. 182.
6 1 1 7
imports (36. (46. (48. (42. (50. (64. (86. (95. (110 (131 (136
4) 4) 8) 4) 2) 4) 3) 3) .1) .5) .5)
Goods and 0.3 (4.1 (4.9 10.7 11.6 5.0 (11. 7.6 12.0 17.6 40.5
services ) ) 5)
balance
exports 39.2 45.9 47.8 57.4 65.9 78.8 86.9 119. 147. 171. 207.
2 2 7 2
imports (38. (50. (52. (46. (54. (73. (98. (111 (135 (154 (166
9) 0) 8) 7) 3) 8) 3) .6) .3) .1) .8)
Current 0.3 (3.8 (4.3 12.0 13.3 6.4 (11. 6.9 1.6 7.2 30.0
account ) ) 6)
balance
Financial 6.0 7.1 3.7 3.3 8.0 (0.2 23.5 32.6 38.7 40.0 23.0
account )
balance
inward foreign 2.3 3.2 3.4 3.5 4.4 11.2 27.5 33.8 35.8 40.2 44.2
direct invest
Overall 4.8 2.4 (0.5 12.0 14.5 (2.1 1.8 30.5 22.5 31.7 35.7
balance of ) )
payments
Foreign 15.2 17.5 17.0 28.6 42.7 19.4 21.2 51.6 73.6 105. 139.
exchange (yr. 0 9
end)
Yuan/U.S. 3.72 3.72 3.97 4.84 5.34 5.54 5.76 8.58 8.34 8.31 8.28
dollar (yr. 2 2 2 7 7 5 7 4 1 4 8
end)
Yuan/U.S. 3.72 3.72 3.76 4.78 5.32 5.51 5.76 8.61 8.35 8.31 8.29
dollar (avg.) 2 2 5 3 3 5 2 9 1 4 0
China's trade $2.8 $3.5 $6.2 $10. $12. $18. $22. $29. $33. $39. $49.
balance. with 4 7 2 8 5 9 5 8
U.S.
exports 6.3 8.5 12.0 15.2 19.0 25.7 31.5 38.8 45.6 51.5 62.6
imports (3.5 (5.0 (5.8 (4.8 (6.3 (7.5 (8.8 (9.3 (11. (12. (12.
(F.A.S.) ) ) ) ) ) ) ) ) 7) 0) 8)
GDP official 321 401 449 388 406 483 601 543 698 825 902
--------------------------------------------------------------------------------
Legend
F.A.S. = free-alongside-ship (a method of export and import
valuation whereby the seller's price includes charges for delivery of
goods up to the port of departure).
Note: Items in parenthesis indicate a deficit.
Source: International Monetary Fund; International Financial
Statistics; China's State Statistical Bureau; U.S. Commerce Dept.
RELATED GAO PRODUCTS
China: U.S. European Union Arms Sales Since the 1989 Embargoes
(GAO/T-NSIAD-98-171, Apr. 28, 1998).
Agricultural Exports: U.S. Needs a More Integrated Approach to
Address Sanitary/Phytosanitary Issues (GAO/NSIAD-98-32, Dec. 11,
1997).
Hong Kong's Reversion to China: Effective Monitoring Critical to
Assess U.S. Nonproliferation Risks (GAO/NSIAD-97-149, May 22, 1997).
Export Controls: Sensitive Machine Tool Exports to China
(GAO/NSIAD-97-4, Nov. 19, 1996).
Export Controls: Sale of Telecommunications Equipment to China
(GAO/NSIAD-97-5, Nov. 13, 1996).
International Trade: Challenges and Opportunities for U.S.
Businesses in China (GAO/T-NSIAD-96-214, July 29, 1996).
National Security: Impact of China's Military Modernization in the
Pacific Region (GAO/NSIAD-95-84, June 6, 1995).
Export Controls: Some Controls Over Missile-Related Technology
Exports to China Are Weak (GAO/NSIAD-95-82, Apr. 17, 1995).
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).
*** End of document. ***