USTR 2019 Report to Congress

China in the WTO – The U.S. View of China’s Compliance With Its Obligations

China became a member of the WTO on December 11, 2001. Because of the enormous differences in economic systems and the distance of needed reforms in China to make it a market economy, the Protocol of Accession and Working Party Report are exceptional in terms of topics covered, areas where China had significant work before being WTO compliant and the inclusion of special provisions to protect the interests of other WTO Members while China continued on its path of reform.

Because of China’s size and importance globally, the U.S. Congress passed legislation which includes a requirement for the U.S. Trade Representative to provide an annual report on the U.S. view of China’s Compliance with its WTO obligations. On March 6, 2020, USTR released its 18th report on China’s WTO compliance, a one hundred and ninety-two page document. The report consists of a executive summary, a section reviewing the U.S. assessment of China’s WTO membership, a section reviewing prior U.S. efforts to address trade distortions caused by China’s policies, a section on the new U.S. strategy to address China’s trade distortions, a section reviewing the mechanisms used to engage China, a section reviewing U.S. ongoing concerns and a lengthy appendix that provides greater detail on many issues. See 2019 Report to Congress on China’s WTO Compliance, https://ustr.gov/sites/default/files/2019_Report_on_China%E2%80%99s_WTO_Compliance.pdf.

The report provides a very good overview of the wide range of issues on which the United States has ongoing concerns about China’s actions and compliance with WTO obligations. While some of the concerns are supposed to be addressed in the Phase 1 Agreement the United States and China have entered into, many of the concerns are not yet addressed by China. Some of these remaining issues will be subject to upcoming negotiations on a Phase 2 Agreement. Others may be addressed through bilateral consultations, through specific dispute settlement cases , or through possible modifications to WTO rules or by other actions by the United States.

Executive Summary

The U.S. Administration views China as having a poor record on compliance with many parts of its WTO obligations. The Administration views such non-compliance and the continued nonmarket economic system in China as posing major distortions for China’s trading partners. The Executive Summary of this year’s report (pages 4-5) provides an overview of the concerns and actions being taken by the United States:

“In our 2017 and 2018 reports, we provided the Administration’s assessment of China’s WTO membership, the unique and very serious challenges that China’s trade policies and practices pose for the multilateral trading system and the effectiveness of the strategies that had been pursued to address the China problem in prior years. We also identified the critical need for new and more effective strategies – including taking actions outside the WTO where necessary – to address the challenges presented by China’s non-market economic system. In this year’s report, we focus on the positive outcomes to date of the Administration’s new and more effective strategy for engaging China, which has led to the signing of an historic trade agreement with China. We also highlight the important issues that remain to be addressed in our trade relationship with China.

“As we previously documented, China’s record of compliance with WTO rules has been poor. China has continued to embrace a state-led, mercantilist approach to the economy and trade, despite WTO members’ expectations – and China’s own representations – that China would transform its economy and pursue the open, market-oriented policies endorsed by the WTO. At the same time, China’s non-market approach has imposed, and continues to impose, substantial costs on WTO members.

“Over the past nearly two decades, a variety of bilateral and multilateral efforts were pursued by the United States and other WTO members to address the unique challenges presented by China’s WTO membership. However, even though these efforts were persistent, they did not result in meaningful changes in China’s approach to the economy and trade.

“In our past reports, we identified and explained the numerous policies and practices pursued by China that harm and disadvantage U.S. companies and workers, often severely. We also catalogued the United States’ persistent yet unsuccessful efforts to resolve the many concerns that have arisen in our trade relationship with China. We found that a consistent pattern existed where the United States raised a particular concern, China specifically promised to address that concern, and China’s promise was not fulfilled.

“The costs associated with China’s unfair and distortive policies and practices have been substantial. For example, China’s non-market economic system and the industrial policies that flow from it have systematically distorted critical sectors of the global economy such as steel and aluminum, devastating markets in the United States and other industrialized countries. China also continues to block valuable sectors of its economy from foreign competition, particularly services sectors. At the same time, China’s industrial policies are increasingly responsible for displacing companies in new, emerging sectors of the global economy, as the Chinese government and the Chinese Communist Party powerfully intervene on behalf of China’s domestic industries. Companies in economies disciplined by the market cannot effectively compete with both Chinese companies and the Chinese state.

“Faced with these realities, this Administration announced two years ago that it would be pursuing a new, more aggressive approach to the United States’ engagement of China. We explained that the Administration would defend U.S. companies and workers from China’s unfair trading practices and would seek to restore balance to the trade relationship between the United States and China. As part of these efforts, the United States would take all appropriate actions to ensure that the costs of China’s non-market economic system are borne by China, not by the United States. The United States also would continue to encourage China to make fundamental structural changes to its approach to the economy and trade consistent with the open, market-oriented approach pursued by other WTO members, which is rooted in the principles of non-discrimination, market access, reciprocity, fairness, and transparency. As we explained, if undertaken by China, these changes would do more than simply ease the growing trade tensions with its trading partners. These changes would also benefit China, by placing its economy on a more sustainable path, and would contribute to the growth of the U.S. economy and the global economy.

“The Administration based this new approach on the following assessments: (1) WTO membership comes with expectations that an acceding member not only will strictly adhere to WTO rules, but also will support and pursue open, market-oriented policies; (2) China has failed to comply with these expectations; (3) in recent years, China has moved further away from open, market-oriented policies and has more fully embraced a state-led, mercantilist approach to the economy and trade; and (4) China’s market-distorting policies and practices harm and disadvantage its fellow WTO members, even as China reaps enormous benefits from its WTO membership.

“Consistent with this more aggressive approach to China, the Administration is now using all available tools – including domestic trade remedies, bilateral negotiations, WTO litigation, and strategic engagement with like-minded trading partners – to respond to the unique and very serious challenges presented by China. But, the goal for the United States remains the same. The United States seeks a trade relationship with China that is fair, reciprocal, and balanced.

“Over the past year, the United States’ new approach to China began to demonstrate key progress with the signing of a “Phase One” economic and trade agreement in January 2020. This historic agreement requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. The agreement also includes a commitment by China that it will make substantial additional purchases of U.S. goods and services in the coming years. Importantly, the agreement establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement.

“Because the Phase One agreement does not cover all of the United States’ concerns, the United States will turn to Phase Two of its trade negotiations with China in order to secure resolutions to important outstanding issues. These discussions will focus on intellectual property, technology transfer, and services market access issues that were not addressed in the Phase One agreement as well as critical issues in areas such as excess capacity, subsidies, state-owned enterprises, cybersecurity, data localization and cross-border data transfers, pharmaceuticals and medical devices, competition law enforcement, regulatory transparency, and standards.”

Key U.S. Concerns

The bulk of the report lays out key U.S. concerns on a wide range of topics where China’s laws, regulations, policies and actions either deviate from WTO requirements or create significant market distortions. A list of the topics covered follows (pages 30-54 of the report) broken into six main topics and subtopics:

Industrial Policies including (1) Made In China 2025 Industrial Plan; (2) Subsidies; (3) Excess Capaciy; (4) Technology Transfer; (5) Indigenous Innovation; (6) Investment Restrictions; (7) Export Restraints; (8) Value-added Tax Rebates and Related Policies: (9) Import Ban on Remanufactured Products; (10) Import Ban on Recyclable Materials; (11) Standards; (12)
Secure and Controllable Policies; (13) Encryption; (14) Government Procurement; (15) Trade Remedies.

Intellectual Property Rights including (1) Trade Secrets; (2) Bad Faith Trademark Registration; (3) Pharmaceuticals; (4) Online Infringement; (5) Counterfeit Goods.

Agriculture including (1) Agricultural Domestic Support; (2) Tariff-rate Quota Administration; (3) Agricultural Biotechnology Approvals; (4) Food Safety Law; (5) Poultry; (6) Beef; (7) Pork; (8) Horticultural Products; (9)
Value-added Tax Rebates and Related Policies.

Services including (1) Banking Services; (2) Securities, Asset Management, and Future Services; (3) Insurance Services; (4) Electronic Payment Services; (5) Internet-enabled Payment Services; (6) Telecommunications Services; (7) Internet Regulatory Regime; (8) Voice-over-Internet Protocol Services; (9) Cloud Computing Services; (10) Theatrical Films; (11) Audio-visual and Related Services; (12) Online Video and Entertainment Software Services; (13) Express Delivery Services; (14) Legal Services; (15) Cross-border Data Transfers and Data Localization.

Transparency including (1) Publication of Trade-related Measures; (2)
Notice-and-comment Procedures; (3) Translations.

Legal Framework including (1) Administrative Licensing; (2) Competition Policy.

Most of the topics are longstanding areas of concern for U.S. businesses and the current and prior Administrations. Some are being addressed at least in part in the Phase 1 Agreement.

The mere fact that so many issues remain on the U.S. agenda with China despite years of high level meetings, WTO disputes and other engagements is a reflection of the challenges the U.S. and many other WTO Members have had with China honoring commitments it has made as a Member of the WTO.

Consider the electronic payment services topic as just one example of the areas of interest for the U.S. China made commitments to open this sector by 2006. Yet, despite consultations, a dispute at the WTO, a subsequent commitment by China to comply in 2013, the market remains closed to foreign service suppliers to the present time. China has new commitments to open the market as part of Phase 1 Agreement. Below is the USTR write-up in this year’s report (pages 48-49):

“In 2019, China continued to place unwarranted restrictions on foreign companies, including major U.S. credit and debit card processing companies, which have been seeking to supply electronic payment services to banks and other businesses that issue or accept credit and debit cards in China. In a WTO case that it launched in 2010, the United States argued that China had committed in its WTO accession agreement to open up this sector in 2006, and a WTO panel agreed with the United States in a decision issued in 2012. China subsequently agreed to comply with the WTO panel’s rulings in 2013, but China did not take needed steps even to allow foreign suppliers to apply for licenses until June 2017, when China’s regulator – the PBOC – finalized the establishment of a two-step licensing process in which a supplier must first complete one year of preparatory work before even being able to apply for an actual license.

“Currently, as of January 2020, over six years after China had promised to comply with the WTO’s rulings, no U.S. supplier of electronic payment services has been able to secure the license needed to operate in China’s market due largely to delays caused by PBOC. Indeed, at times, PBOC refused even to accept applications to begin preparatory work from U.S. suppliers, the first of two required steps in the licensing process.

“Throughout the time that China has actively delayed opening up its market to foreign suppliers, China’s national champion, China Union Pay, has used its exclusive access to domestic currency transactions in the China market, and the revenues that come with it, to support its efforts to build out its electronic payment services network abroad, including in the United States. This history shows how China has been able to maintain market-distorting practices that benefit its own companies, even in the face of adverse rulings at the WTO.

“In the U.S.-China Phase One agreement, China committed to ensure that PBOC operates an improved and timely licensing process for U.S. suppliers of electronic payment services so as to facilitate their access to China’s market. The United States will closely monitor PBOC’s licensing process going forward to ensure China’s compliance with its commitments in the Phase One agreement.”

Conclusion

The largest bilateral trade deficit (goods or goods and services) in the world is the U.S. deficit with China. For many years, the U.S. government has catalogued a large number of areas where the deficit is driven or exacerbated by distortions created by Chinese policies. Eighteen years after China’s becoming a WTO Member, the scope of the problems experienced by U.S. businesses attempting to export to China or participate in the Chinese market remains breathtaking.

China has a long history of promising reform that hasn’t occurred as documented in the 2019 and prior USTR reports to Congress on China’s WTO Compliance.

The current Administration has a lot of hope that the Phase 1 Agreement will address specific distortions in a wide range of areas and expand U.S. exports to China. The Administration believes that the enforcement provisions in the agreement will help avoid the lack of implementation by China that has characterized prior efforts.

A great deal more needs to be pursued to achieve true reciprocity with China. Some of the issues that need to be addressed are teed up for the Phase 2 negotiations but will be challenging to achieve agreement on as was reflected in China’s change of position on those same topics in 2019 which resulted in a partial agreement (Phase 1) being pursued instead of a comprehensive one.

The U.S. is actively pursuing WTO reform, working with other trading partners on certain items or going solo in raising major topics for discussion and reform. Unfortunately, China has shown little or no interest in addressing some of the core issues of concern to the U.S. with China’s economic system and policies at the WTO. For example, the U.S. is concerned about distortions created by non-market economies to the functioning of global trade for market economies. The U.S., EU and Japan are addressing the need for new rules to address distortions created by such economies (massive subsidies, state-owned or state-invested enterprises, creation of excess capacity, etc.). The U.S. has flagged the need to change how special and differential treatment works to reflect the changed market situation for countries like China and many others.

The coronavirus global challenge complicates the ability of the WTO or its major Members to pursue reform of the WTO or to achieve completion of negotiations on pending topics (e.g., fisheries subsidies). Concerns about the spread of the virus has led to the postponement of the 12th WTO Ministerial Conference which had been scheduled for early June in Kazakhstan. Restrictions on meetings in Geneva and travel from capitals will presumably slow down progress at the WTO.

One should expect the United States to continue to push major reforms at the WTO in 2020. Progress is unlikely to be meaningful in 2020 and some have estimated a reform timeline measured in years (e.g., 2025). Where the WTO is unable to address reform expeditiously, the United States, like other Members will pursue other avenues to address trade concerns. The United States will also pursue bilateral negotiations with China aggressively, seek timely enforcement of existing commitments and use U.S. laws to obtain movement where the other approaches are not delivering results.

As stated in the Executive Summary to this year’s report, “The United States seeks a trade relationship with China that is fair, reciprocal, and balanced.” The current relationship with China meets none of those characteristics in the view of the U.S. Administration. If such a relationship cannot be accomplished through the WTO, this Administration will pursue changes bilaterally or unilaterally if needed.