In a nutshell, "China's WTO compliance record falls short of the mark," according to Deputy Assistant U.S. Trade Representative (USTR) Charles W. Freeman III.

Freeman, speaking at a February 5 hearing of the U.S.-China Economic and Security Review Commission, noted that "while U.S. exports to the world have decreased by 9 percent" over the past three years, "exports to China have increased by 62 percent."

"But neither volume of trade statistics nor anecdotal evidence of U.S. business successes in China are the yardsticks by which the Administration measures China's compliance with its trade agreements," he continued.

Freeman said the true measure of China's compliance with its WTO commitments is "the extent to which China has institutionalized market mechanisms and curtailed direct governmental actions or complicity with nongovernmental actions to intervene in the marketplace."

"China has made important headway since its WTO accession two years ago, and has completed much of the nuts and bolts work of WTO implementation," he said.

He pointed out that the Chinese government has reviewed thousands of laws and regulations and made changes necessary to effect many of its WTO commitments; established new transparency procedures in many national and sub-national ministries and agencies; reduced tariffs to their committed levels; taken steps to correct systemic problems in its administration of the tariff-rate quota (TRQ) system for bulk agricultural commodities; relaxed certain constraints in soybeans trade; reduced capitalization requirements in some financial services sectors; and opened up the motor vehicle financing sector, among other things.

Despite these improvements, Freeman said, "China's market for U.S. goods and services is not as open as it should be, our engagement with China in the WTO has not been as useful as it should be, and China's record of WTO implementation is more inconsistent than it should be."

Freeman noted that China's WTO implementation efforts "have taken place against a challenging political and social backdrop" that has included a major leadership change and a national epidemic of severe acute respiratory syndrome (SARS) in 2003.

"These factors may have presented challenges, but they are not grounds for foot-dragging in implementing WTO commitments," he said.

Freeman said the Bush administration believes that, for China to be in compliance with its WTO commitments, the Chinese government must meet obligations to fully open its agricultural market; refrain from the use of arbitrary limitations on agricultural market access; better enforce intellectual property rights (IPR) through mechanisms such as the use of deterrent-level criminal penalties and restriction of exports of counterfeit or other IPR infringing goods; provide for full liberalization of trading rights and distribution services; use fair and transparent standards and technical regulations; establish procedures that ensure the public's right to comment on proposed measures; and fully institute national treatment -- including non-discriminatory taxation -- and market access for U.S. goods and services.

Freeman concluded his prepared testimony before the commission by saying that the Bush administration is "fully prepared to assert the United States' rights through multilateral means, including dispute resolution at the WTO" if cooperative or bilateral efforts with the Chinese government "are not productive, or if it becomes clear that engagement on any given issue has reached stasis."

The U.S.-China Economic and Security Review Commission monitors, investigates, and reports to Congress on the national security implications of the bilateral trade and economic relationship between the United States and the People's Republic of China. The commission is composed of 12 members, all of whom are appointed by members of Congress.

PREPARED TESTIMONY OF
DEPUTY ASSISTANT U.S. TRADE REPRESENTATIVE
CHARLES W. FREEMAN III
BEFORE THE
U.S.-CHINA COMMISSION
February 5, 2004

Overview

Chairman Robinson, Vice Chairman D'Amato, Hearing Co-Chairmen Reinsch and Mulloy and Members of the Commission, I appreciate the opportunity to testify today on China's compliance with its obligations to the World Trade Organization (WTO) and on the process of monitoring and enforcing China's adherence to these obligations. This is a subject of considerable importance to the President and Ambassador Zoellick, and a matter of great priority to the Administration and to USTR in particular, in our capacity as the lead agency with responsibility for trade policy.

China has now been a member of the WTO for more than two years, having acceded to the WTO on December 1l, 2001, after 15 years of negotiations with the United States and other WTO members. Under the terms of its accession, China committed to a set of sweeping reforms: implementation of the WTO's market access, national treatment and transparency standards; protection and enforcement of intellectual property rights; disciplines on the use of trade-distorting subsidies; and other changes to bring its legal and regulatory system in line with those of other WTO members. China viewed joining the WTO as a means to preserve and expand China's access to export markets abroad, particularly the United States. In turn, other WTO members envisioned that faithful WTO implementation by China would reduce the ability of the government to intervene in the market to direct or restrain trade flows.

While statistical information for 2003 is not yet fully available, total U.S.-China trade last year is believed to have topped $170 billion, with imports from China exceeding U.S. exports by more than $120 billion. China has become the United States' third largest trading partner, passing Mexico as our second largest source of imports in 2003 and becoming the sixth largest market for U.S. exports. Imports from China are not only growing rapidly, but are increasingly displacing those from other economies -- including in Asia and Latin America. While in real terms import numbers are outpacing exports to China, the growth rate of exports to China is in line with, or even outpacing, that of imports. Over the last three years, while U.S. exports to the world have decreased by 9 percent, exports to China have increased by 62 percent. China has become a major consumer of U.S. manufactured exports, such as electrical machinery and numerous types of components, among other goods. China is a major importer of agricultural products from the United States, and U.S. service providers have been increasing their share of China's market in many sectors as well.

But neither volume of trade statistics nor anecdotal evidence of U.S. business successes in China are the yardsticks by which the Administration measures China's compliance with its trade agreements. China's accession to the WTO was conditioned on China's commitment to establish an open, transparent trade regime and to play by the rules of international trade. In that sense, the true measure of China's compliance with its WTO commitments is the extent to which China has institutionalized market mechanisms and curtailed direct governmental actions or complicity with nongovernmental actions to intervene in the marketplace. By that score, China's WTO compliance record falls short of the mark.

As discussed in USTR's second annual Report to Congress on China's Compliance with its WTO Commitments, China has made important headway since its WTO accession two years ago, and has completed much of the nuts and bolts work of WTO implementation. It has reviewed thousands of laws and regulations and made changes necessary to effect many of its WTO commitments; established new transparency procedures in many national and sub-national ministries and agencies; and reduced tariffs to their committed levels, among other things.

Despite these gains, China's compliance with its WTO commitments has, over the past two years, been uneven. The Administration has engaged the Chinese government at every opportunity, whether through discussions in Washington or Beijing or at the WTO in Geneva, to address perceived shortcomings. In some cases, USTR and other agencies were able to resolve U.S. concerns. For example, China has taken steps to correct systemic problems in its administration of the tariff-rate quota (TRQ) system for bulk agricultural commodities. It relaxed certain constraints in soybeans trade that allowed U.S. exporters to achieve record sales. It reduced capitalization requirements in some financial services sectors. It opened up the motor vehicle financing sector. It solved outstanding concerns that had prevented China's membership in the WTO's Committee of Participants in the Expansion of Trade in Information Technology Products.

In the first year following WTO accession, China's incomplete implementation of WTO commitments could, in some cases, be attributed to start-up problems or incomplete understanding of WTO rules and practices. These rationales are less meaningful two years into WTO membership. In fact, while China made significant initial strides in its first year, China's WTO efforts seemed to have lost a fair amount of momentum last year. Institutionalized market mechanisms remain elusive, and intervention by China's government officials in the market is not uncommon.

China's WTO implementation efforts, it should be noted, have taken place against a challenging political and social backdrop. In 2003, China underwent a major leadership change, passed through a harrowing national SARS epidemic, undertook a sizeable restructuring of the government's economic and trade functions, and confronted a host of dislocations inherent in its transition from a planned economy to a more market-oriented economy. These factors may have presented challenges, but they are not grounds for foot-dragging in implementing WTO commitments.

The Administration is determined to continue to address market access problems that contribute to our trade deficit with China and to ensure that China operates with fair, transparent and predictable rules. That means, most importantly, that China must live up to the commitments that it made upon joining the WTO. We also need to ensure that China engages in fair trade when it comes to its exports to the United States. Our companies want, and are entitled to, a level playing field. Some key areas that will require more work from China in order to achieve WTO compliance, in the view of the Administration, include:

-- Obligations to fully open its agricultural market and to refrain from the use of arbitrary limitations on market access, including sanitary and phytosanitary measures not based on science;

-- Enforcement of intellectual property rights, including through the use of deterrent-level criminal penalties as appropriate, and restriction on exports of counterfeit or other IPR infringing goods;

-- Commitment to provide for full liberalization of trading rights and distribution services;

-- Use of fair and transparent standards and technical regulations, including the establishment of procedures that ensure the public's right to comment on proposed measures; and

-- National treatment (including non-discriminatory taxation) and market access for U.S. goods and services.

U.S. Management of WTO Implementation Concerns

The Administration has stepped up its efforts to engage China's senior leaders on trade issues. Over the past year, as China's WTO implementation progress has slowed, President Bush met with his counterpart, Hu Jintao, and emphasized the importance of China's WTO obligations. United States Trade Representative Zoellick made two separate visits to China for talks on WTO implementation matters with China's Premier, Wen Jiabao, and Vice Premier Wu Yi. The Secretaries of Commerce and Treasury made similar trips to China, again carrying the message that China's WTO implementation was a matter of the highest priority. Sub-cabinet officials from various U.S. economic and trade agencies also met with their Chinese counterparts in China, Washington and Geneva to work through areas of concern, including WTO implementation issues, on numerous other occasions.

USTR's monitoring of China's WTO implementation is managed by the Office of North Asian Affairs. Our China team, while small, works closely with experts from the sectoral offices at USTR, as well as the Office of the General Counsel. In addition, USTR's role as chair of the Trade Policy Staff Committee's subcommittee on China's WTO Compliance allows us to manage trade concerns in close consultation with relevant agencies throughout the Administration.

In 2003, the Administration also utilized the newly established sub-cabinet dialogue on WTO compliance and other trade matters (the Trade Dialogue), which brings together U.S. economic and trade agencies and various Chinese ministries and agencies with a role in China's WTO implementation. Trade Dialogue meetings were convened twice in 2003, once in February, led by then Deputy United States Trade Representative Huntsman, and later in November, led by Deputy United States Trade Representative Josette Sheeran Shiner. The Trade Dialogue meetings have proven to be effective in communicating specific trade concerns and in serving as an early warning mechanism for emerging trade disputes.

In December 2003, President Bush and Chinese Premier Wen Jiabao agreed that the meetings of the annual U.S.-China Joint Commission on Commerce and Trade (JCCT) should be used to resolve issues that contribute to imbalances in the economic relationship. To that end, in April 2004, the JCCT will be convened with Secretary Evans and Ambassador Zoellick as co-chairs on the U.S. side, and Vice Premier Wu Yi on the Chinese side. The elevation of the JCCT dialogue in this way should prove a useful opportunity to heighten attention of U.S. and Chinese authorities to concerns with China's WTO implementation, and make further progress on these concerns.

Of course, there are forces in China, as elsewhere, that are resistant to the changes wrought by WTO implementation. Despite the best of intentions by many Chinese officials, these forces have not been unsuccessful in limiting China's progress toward the goals the United States and other WTO members set for China's WTO accession. As a result, China's market for U.S. goods and services is not as open as it should be, our engagement with China in the WTO has not been as useful as it should be, and China's record of WTO implementation is more inconsistent than it should be.

Enforcement of Trade Remedies Laws

The rapid expansion of trade between our two countries has inevitably led in some cases to competition between our domestically produced goods and Chinese imports. When our industries face injurious trade with China, the Administration is fully committed to enforcing U.S. trade remedy laws and to exercising the important rights that the United States has under China's WTO accession agreement, including our ability to continue to apply special methodologies to China under the antidumping laws.

China also agreed to two separate China-specific safeguard mechanisms to allow WTO members to cope with market disruptions caused by increasing economic integration with China. One such mechanism, the product-specific safeguard, was codified as Section 421 of the Trade Act of 1974, as amended, and is available until December 11, 2013. Since the implementation of Section 421, four petitions have been brought requesting import relief. In one case, the International Trade Commission found that our domestic producers' market had not been disrupted by imports from China. In two other cases, while the ITC found market disruption, the President determined that the adverse impact on the U.S. economy was clearly greater than the benefits from providing import relief. On December 4, 2003 the ITC found market disruption in the fourth case, and the President will make a determination on import relief in early March this year. While to date no import relief has been granted under Section 421, the President, in his most recent determination, reiterated his commitment to using the safeguard when the circumstances of a particular case warrant.

The second safeguard agreed to by China as part of its WTO accession package is specific to textiles, and allows WTO members under certain circumstances to invoke limited import relief -- specifically a 7.5 percent cap on growth in imports of a given textile category for up to one year (6 percent for wool products) -- until December 31, 2008. In December last year, the Committee for Implementation of Textile Agreements (CITA) found for petitioners in all three of the initial investigations it agreed to review and import relief is currently in place.

Transitional Review Mechanism

China was admitted to the WTO on somewhat unique terms with some limited transition periods, given that its transition to becoming a market-oriented economy is still in process. Accordingly, the WTO conducts an annual review of China's implementation progress, known as the Transitional Review Mechanism (TRM). This review, which took place in each of the last two years and will take place in seven of the next eight years in 16 subsidiary bodies as a lead-up to the year-end meeting of the WTO's General Council, is an opportunity for other WTO members to engage China on the extent to which it has complied with its commitments and to clarify China's trade practices.

The first year of the TRM was marked by some misunderstanding between China and other WTO members as to expectations of China at the TRM, but communication improved as the process unfolded. The second year was marked by significantly less conflict between members and China over China's TRM responsibilities, and overall China did provide more information about its WTO implementation efforts last year as compared to the previous year, but the process still fell short of being a thorough, meaningful review of China's implementation efforts. Indeed, while China devoted extensive energy and resources to fulfill the requirements of the TRM, it also spent considerable time and energy challenging fundamental procedural processes that acted to frustrate the essential intent of the TRM. This may in part be due to a contention that the TRM, as it applies uniquely to China, is a discriminatory process. However, given the special circumstances under which China entered the WTO, there is little justification for China's apparent position that China should not be required to provide members concrete evidence that it is implementing its post-accession commitments. USTR will continue to press for China's full cooperation in the TRM, working closely with other members with common interests.

Conclusion

While the U.S.-China economic and trade relationship is growing rapidly, there are a number of structural impediments that remain, making further improvements in that relationship problematic. The Administration is committed to resolving the United States' concerns through all available mechanisms. If cooperative or bilateral efforts are not productive, or if it becomes clear that engagement on any given issue has reached stasis, the Administration is fully prepared to assert the United States' rights through multilateral means, including dispute resolution at the WTO.