(By Julia Ya Qin)

The foreign trade and investment regime in China has undergone profound change over the past decade. Compared to ten years ago, the Chinese system today is far more liberalized, open and transparent. Much of the progress occurred as a result of China’s accession to the World Trade Organization (WTO), which, after fifteen years in the making, finally took place on December 11, 2001. In its accession agreement, China made extensive commitments to lower its trade and investment barriers, further economic reforms, and improve its domestic governance, many of which exceeded the requirements of the WTO Agreement. To implement its WTO obligations, the Chinese government has conducted a major legislative overhaul. Thousands of laws, regulations, rules, and judicial interpretations relating to WTO matters have been scrutinized and a large number of them have been revised or repealed. Over this period, trade and investment barriers have been reduced across the board. The central government has largely shifted its role in the economy from exerting direct control to being a regulator in the marketplace. More significantly, WTO norms, such as market economy, nondiscrimination, and transparency, have gained wide acceptance in the Chinese public. The regulatory, institutional and normative changes brought about by the WTO accession have transformed the landscape of trade and investment in China.

Corresponding to these changes, China’s foreign trade and investment has grown tremendously following its WTO accession. From 1996 to 2005, foreign trade increased nearly five folds, of which more than three-fourths took place after the accession. During the same period, China became one of the top destinations for foreign direct investment (FDI). The FDI inflow since 2001 accounted for more than one-third of the total amount of the actually utilized foreign investment since 1979. The expansion of foreign investment in turn has fueled China’s external trade. As of 2005, nearly 60% of China’s imports and exports were conducted by foreign-invested companies, as compared to approximately 50% in the year before the WTO accession.

In the meantime, accelerated globalization of the Chinese economy as a result of the WTO accession has given rise to new issues. The rapid economic growth powered by foreign trade and investment has been at the cost of severe environmental degradation and widening wealth disparity. As the central government readjusts its development strategy towards a more balanced and sustainable growth, however, it has also increased state intervention in the economy. With more foreign competitors entering the Chinese market, protectionism and economic nationalism is on the rise.6 There are signs that government is tightening control over foreign businesses and has dragged its feet in implementing some of the more difficult WTO commitments. Hence, it seems not at all certain that China’s foreign trade and investment regime will continue to develop in the same direction in the post-accession era.

To be sure, China pursued WTO membership because it was consistent with the objectives of its domestic reform. For more than two decades prior to its WTO accession, China had engaged in economic liberalization unilaterally. The decision of the Chinese leaders to accept the many onerous obligations of its WTO membership was motivated primarily by their desire to introduce external pressures to overcome internal obstacles in the reform process. In the grand scheme of China’s development strategy, therefore, WTO accession was only one step, albeit a critical one, in the direction of the ongoing reform. And the Chinese reform agenda is much broader than what is called for by its WTO commitments.

Nonetheless, WTO accession marks the formal integration of China into the global trading system. The accession has institutionalized China’s systemic reforms through the force of international legal obligations. Upon joining the WTO, whether China stays on the course of reform and how it chooses to pursue its economic development is no longer purely a matter of its domestic policy; instead, it has become a matter subject to the scrutiny of the WTO. While in theory China can always break away from the WTO or in practice find ways to evade its WTO commitments, it cannot do so without incurring considerable political and economic costs. It is in this sense that WTO membership performs a constitutional function for its members. This article seeks to assess the impact of WTO accession on the Chinese legal system pertaining to foreign trade and investment. Following a brief introduction on the nature and scope of China’s WTO commitments, the article will examine their constitutional implications and survey the major changes they have brought about in the regulation of foreign trade, foreign direct investment, intellectual property rights, and domestic governance. It will then examine how China’s compliance has been monitored and enforced at the WTO. The article will conclude with some thoughts on the future prospects of China and the WTO.

I. Nature and Scope of China’s WTO Commitments

The WTO represents a liberal trading system that aims to increase the welfare of trading nations by reducing government restrictions on trade. WTO jurisdiction extends to trade in goods and services, and trade-related investment and intellectual property. It prescribes two types of obligations for its members: (a) market access obligations, which are commitments by each member to open up domestic markets to specific goods and services produced by other members; and (b) rule obligations, which are WTO rules of conduct for international trade. Market access commitments vary from member to member and can be renegotiated periodically. WTO rules of conduct, on the other hand, are uniform and cannot be changed easily. WTO rules are extensive, covering not only border measures, such as customs tariffs and import restrictions, but also internal measures affecting trade, such as domestic taxation and regulation, health and technical standards, government subsidies, investment requirements, and intellectual property protection. All WTO obligations are enforceable through the WTO dispute settlement mechanism, which features compulsory jurisdiction and binding decisions. Failure to implement WTO dispute settlement rulings on the part of a losing party may lead to trade sanctions authorized by the WTO. The WTO also monitors trade practices of all members through various notification requirements and regularly conducted trade policy reviews.

As an acceding member, China was obliged to make its own market access commitments and to abide by WTO rules. The scope and depth of China’s market access commitments is unprecedented in WTO history. For trade in goods, China agreed to bind all tariffs at low statutory rates, a commitment few countries have made. For trade in services, China’s commitments are much more extensive than the commitments offered in the Uruguay Round by any other group of countries, including high income ones. This level of trade liberalization is particularly remarkable considering that China is still a developing country. Even more remarkable, however, is the whole set of special rule commitments China made with its accession. These China-specific rules fall into two categories. The first category prescribes obligations that exceed the requirements of generally applicable WTO rules. These ‘WTO-plus’ obligations address matters concerning market economy conditions, foreign investment, and domestic governance. The second category concerns treatment of Chinese exports by other countries. These provisions essentially permit an importing member to deviate from standard WTO disciplines to use trade remedies (antidumping, anti-subsidy and safeguard measures) against Chinese products on a discriminatory basis. While some of these China-specific rules have built-in expirations, others are permanent in duration. Furthermore, China has agreed to forgo some of the special and differential treatment available to developing country members under the WTO agreements.

All of the market access and rule obligations undertaken by China are enforceable through the WTO dispute settlement mechanism. Moreover, to ensure China’s implementation of its extensive commitments, a special transitional review mechanism was set up to monitor its compliance. Under this mechanism, China’s practice is subject to annual review by other members during the first eight years after its accession, followed by a final review before the end of the tenth year. This transitional review mechanism is separate from the trade policy reviews regularly conducted by the WTO on its members.

In sum, China has undertaken extraordinary obligations exceeding those of any other member of the WTO. In fact, the WTO accession protocol is the first treaty of the People’s Republic that contains explicit discriminatory terms. But why was the Chinese government willing to take on such onerous burdens? The question seems even more puzzling considering that, under the most-favored-nation treatment (MFN) clause contained in its bilateral trade agreements, China was already enjoying WTO MFN tariff rates in trade with all of its major trading partners, and WTO membership would not necessarily offer much additional market access to Chinese exports. While the motives of the Chinese leaders may never be fully known, one thing has become clear: the government intended to utilize external forces - the increased foreign competition inherent in its market access commitments and the multilateral disciplines imposed by the WTO - to transform the ailing state sector in the economy. In order to achieve this strategic objective, the government was willing to accept certain discriminatory and unfair treatment as part of the cost. In other words, WTO accession was, first and foremost, a strategic decision on the part of the leadership to further liberalize China’s economy. The tremendous growth in trade and investment following the accession is the direct result of such liberalization. This essential character of China’s WTO accession is not always well understood.

II. Impact of WTO Accession on the Chinese Legal System

The WTO is the first international organization joined by China that is vested with the authority to police a wide range of domestic policies of its members. The WTO is also the first international organization joined by China that is equipped with a mandatory dispute settlement mechanism with compulsory jurisdiction over all of its members. The WTO accession, therefore, presents many new challenges to the Chinese system.

One of the first issues encountered by the Chinese system is the domestic legal effect of the WTO Agreement. The PRC Constitution is silent about the status of treaties under Chinese law and whether a treaty can be directly applied in China without domestic legislation. This issue had not commanded wide attention prior to WTO accession since few treaties previously entered by China prescribe such a large number of obligations requiring domestic implementation as the WTO Agreement. After much debate, a consensus has emerged that the WTO Agreement does not have direct legal effect under Chinese law and instead must be applied through enabling domestic legislation. In other words, the obligations of the Chinese government under the WTO Agreement can only be enforced in Chinese courts through the enforcement of domestic enabling legislation. Irrespective of the legal effect of the WTO Agreement under Chinese law, however, China is bound by all of its WTO obligations as a matter of international law. Failure on the part of China to implement such obligations, therefore, will subject it to possible sanctions under WTO rules, regardless of the status of WTO obligations under its domestic law.

A. Constitutional Implications

Among the ‘WTO-plus’ obligations undertaken by China, several directly bear upon the fundamental aspects of its economic system and therefore are constitutionally significant. These include the commitments of the Chinese government: (a) to let market forces determine prices of all goods and services except for a few specified categories; (b) to allow, within three years of the accession, all enterprises, including all foreign individuals and entities, whether invested or registered in China, to engage in imports and exports of all goods, and to limit state trading to a list of specified products;25 and (c) not to influence, directly or indirectly, commercial decisions of state-owned enterprises (SOEs) except in a manner consistent with the WTO Agreement.26 Each of these commitments requires the Chinese government to maintain a condition that is necessary for the development of a market-based economy.

These market economy commitments have gone beyond the requirements of the then-existing domestic legislation. For instance, the Price Law of 1997 merely declares that the State should gradually move to a market-based pricing system. While in practice most price controls had been removed before WTO accession, the government is not required by domestic law to refrain from price-setting. Similarly, although the PRC Constitution recognizes the right of SOEs to autonomous management, it does not impose any obligation on the government to refrain from interfering with SOE operations. As for trading rights, under the Foreign Trade Law of 1994, the government still controlled the allocation of all rights to conduct imports and exports. It was the WTO commitment that has finally rid China of this legacy of centrally-planned economy.

More significantly, these market economy commitments cannot be altered by China unilaterally, whereas domestic legislation defining the Chinese economic system, including the Constitution, can be, and has been, revised from time to time. As long as China remains a member of the WTO, it may not negate these commitments without incurring the consequences of breaching WTO obligations. In effect, therefore, China has committed itself to a particular economic system – a matter of constitutional importance - through the force of WTO multilateral legal proceedings. No other country has undertaken the same under the WTO Agreement.

B. Foreign Trade Law

The main theme in the development of foreign trade law in the past decade has been liberalization of the foreign trade regime and bringing that regime into conformity with WTO requirements. Commercially, China has reduced its tariff and non-tariff barriers across the board in trade in goods, and opened up some of its most important service sectors to foreign competition. Institutionally, the government has gradually moved away from direct control over trade and increasingly assumed the role of a regulator. On the legislative front, major laws governing foreign trade, including the Foreign Trade Law, the Customs Law,33 and laws and regulations on technical and health standards, intellectual property and administrative procedures, have all been revised to ensure WTO consistency. As a result, China today has a foreign trade regime that is considerably more liberal than other major developing countries. Meanwhile, a relatively minor theme has emerged in recent years indicating a rise in protectionism. This trend is reflected in China’s extensive use of trade remedies against imports and other non-tariff measures in trade.

The following sections highlight the major developments in foreign trade law concerning trade in goods. Trade in services and technologies is closely related to foreign investment and will be discussed in the context of foreign investment law.

1. Liberalization of trading rights

One of the most important developments in China’s foreign trade law following WTO accession is the 2004 revision of the Foreign Trade Law of 1994. As noted above, China undertook to allow all domestic and foreign enterprises to engage in foreign trade in all goods, except for a list of specified products reserved for state trading, within three years of its accession. This commitment was implemented by an amendment to the Foreign Trade Law, which took effect on 1 July 2004, six months ahead of the schedule. The amendment replaces the previous approval system with a registration system for operating foreign trade businesses in China. Under this new system, any person (legal or natural, domestic or foreign) wishing to engage in imports and exports of goods or technologies may do so by completing certain registration procedures with the Ministry of Commerce (MOFCOM). Documents required for registration are mostly for identification purposes; and MOFCOM must complete the registration within five days of receipt of the required documents. This new system is a primary example of the fundamental shift in government’s role in the Chinese economy – the government has finally relinquished direct control over foreign trade operations and assumed the functions of a regulator in a market-based trading regime. The liberalization of trading rights works hand-in-hand with the opening of domestic distribution sectors to foreign investment, which will be discussed below.

2. Tariffs, quotas and state trading

Pursuant to its market access commitments to the WTO, China has bound all its tariffs at newly lowered statutory rates. As of 2005, the average MFN rate for imports as applied was 9.7%, down from 39.5% in 1994. As for exports, China has committed to eliminate all export taxes except for a number of specific products.

Non-tariff barriers have also been reduced. Before WTO accession, China had maintained extensive quantitative restrictions on trade, mainly through the use of quotas, licenses, and state trading operations. Following the accession, China has abolished import quotas and has cut the tariff lines subject to licenses by half. While the level of state trading activities remains relatively unchanged, their operations have become much more transparent. Specific goods subject to state trading are listed in the accession protocol, and the adjustments of the list and the enterprises authorized to trade in such goods are published by MOFCOM and notified to the WTO.

3. Technical and health standards

One area where non-tariff barriers may have risen in China, however, is the use of technical and health standards in regulating imports and exports. Technical standards aimed to ensure the quality and safety of products, or protection of human, animal and plant life or health or of environment, can constitute trade barriers when applied arbitrarily or discriminatorily to restrict imports or exports. For this reason the WTO requires that domestic technical and health regulations shall not be more trade-restrictive than necessary to fulfill a legitimate objective and shall not be applied in a manner that would result in arbitrary or unjustifiable discrimination between countries. To that end, WTO members are obliged to use relevant and available international standards as the basis for their national standards. Detailed rules on standards are set out in the WTO agreements on Technical Barriers to Trade (TBT) and on the Application of Sanitary and Phytosanitary Measures (SPS).

Following its accession, China has amended its relevant laws and regulations to ensure WTO consistency and has reorganized its government agencies in charge of the administration and enforcement of technical and health regulations. Yet, China’s practice in setting and applying standards has become an increasing concern for its trading partners. At present, a majority of the Chinese standards are not based on international standards. And complaints have been made about a variety of unnecessary, burdensome, excessive and costly procedures for product registration, licensing, and certification that effectively hinder imports and exports. Moreover, China has attempted in recent years to develop its own unique standards in areas where internationally recognized standards already exist, a well-known example of which is the Chinese WAPI security standard for wireless LAN. Such attempts raise the issue of consistency with the TBT Agreement and are viewed as a strategy to benefit Chinese domestic industries at the expense of their foreign competitors.

4. Trade remedies

Another significant development in the past decade is the establishment of a trade remedy regime that enables China to use antidumping, anti-subsidy and safeguard  measures to protect domestic industries from foreign competition. Dumping (i.e., selling products abroad at less than their normal value47) and certain government subsidies are considered ‘unfair’ trade practices, and the WTO permits a member to levy antidumping and countervailing duties on dumped and subsidized imports if they are found to cause or threaten material injury to a domestic industry. In addition, the WTO allows a member to take safeguard measures (tariffs and quotas) against imports when there is a sudden surge in imports that causes or threatens serious injury to domestic producers, even when no ‘unfair’ trade practices are involved. Because these remedies raise trade barriers and can easily be abused by protectionist forces, the WTO imposes strict disciplines on their use. WTO rules on antidumping, anti-subsidy and safeguard measures are extremely complex, and a large number of WTO disputes have involved trade remedy complaints. China enacted its first antidumping and anti-subsidy regulation in 1997, which was superseded by two separate regulations on antidumping and countervailing measures in 2001, and its first safeguard regulation in 2001. These regulations generally follow WTO standards, but contain much less detailed provisions than the relevant WTO agreements. Under these regulations, MOFCOM is designated as the chief regulatory authority responsible for conducting all relevant investigations and making determinations on trade remedy measures.

Since the initiation of its first antidumping investigation in 1997,5 China has quickly risen to become one of the top users of antidumping measures in the world. During the first four years of its accession, China initiated 103 antidumping investigations and took final measures in 68 cases, which made it the third largest antidumping user after India and the United States. Most of the investigations targeted firms from Japan, South Korea, the United States and EU, followed by Russia, Taiwan, India and a number of other countries. It is notable, however, that foreign respondents won a partial or complete victory in more than 40 percent of the concluded cases. To date, China has used its safeguard mechanism only once, which was invoked in response to the US adoption of safeguard tariffs on foreign steel in 2002. Thus far China has not initiated any countervailing investigation.

In addition to antidumping, countervailing and safeguard measures, the Foreign Trade Law also authorizes the government to take unspecified trade remedy measures based on the results of trade investigations. The types of trade investigations authorized include investigations regarding trade barriers in other countries; discriminatory trade restrictions imposed by other countries against China; protection of intellectual property rights of the PRC persons in other countries; unfair competition practice damaging the foreign trade order; and trade matters affecting national security interests. The protectionist trend in China’s trade remedy law and practice is not surprising. Typically, when tariff and non-tariff barriers are significantly lowered, domestic industries will seek protection through more aggressive use of trade remedies. Besides, China’s own experience as the ‘victim’ of trade remedy measures has unavoidably affected its position. For years, China has been by far the most frequently targeted country in antidumping actions. The designation of China as a ‘non-market economy’ (NME) by the United States, the European Union and other major trading partners has made China particularly vulnerable to antidumping actions, because the NME status allows the importing country to discard Chinese domestic prices and instead use third country prices as the basis for determining the normal value of the Chinese products, which typically leads to the finding of dumping by Chinese producers and imposition of higher antidumping duties on Chinese goods. To China’s great disappointment, its WTO accession did not end such practice. Instead, the China accession protocol allows WTO members to continue to treat China as an NME for as long as 15 years in antidumping actions, and for an indefinite period in countervailing actions. Furthermore, contrary to the explicit WTO requirement that safeguard measures be applied on a non-discriminatory basis, the accession protocol allows an importing member to single out Chinese products for import restrictions. The China-only safeguards can be used against any Chinese products for 12 years and against Chinese textile products till the end of 2008. Both types of discriminatory safeguards have been utilized in practice. Politically, the discriminatory treatment China has received in other countries may well have motivated it to aggressively pursue its own trade remedies.

C. Foreign Investment Law

WTO accession provided a spur to foreign investment in China. As noted above, the FDI inflow between 2001 and 2005 accounted for more than one third of the total amount of the actually utilized foreign investment in China. This major expansion in foreign investment in turn has contributed to a tremendous growth in foreign trade. Since joining the WTO, China’s foreign trade has more than doubled in value, of which nearly 60% are attributable to imports and exports by foreign invested enterprises (FIEs). Given that the WTO agreements provide only limited disciplines on foreign investment, the impact of WTO accession on foreign investment in China is largely the result of its accession commitments. These include China’s extensive market access commitments in service sectors and unique rule commitments concerning treatment of FIEs. Furthermore, its pledges on market economy practice and domestic governance work to boost investors’ confidence in the overall investment environment in China.

Against this backdrop, however, emerges signs of a new trend of government tightening controls over foreign investment while protecting domestic industries. Some of the new regulations and measures taken by the government call into question China’s compliance with its WTO commitments, while others raise issues that cannot be easily addressed by existing WTO rules. This section will highlight the major developments in China’s foreign investment law in the post-WTO era.

(Edited by: China West Lawyer)