(By Julia Ya Qin)

E. Domestic governance

Domestic governance through the rule of law is essential for sustained economic development. In the past decade, China’s rule of law conditions have improved in some important aspects, and WTO accession has played a positive role in that process. Specifically, the accession protocol prescribes a number of special obligations regarding the transparency, uniformity and impartiality of China’s trade, investment and IP regimes. The need for implementing these obligations has stimulated significant changes in domestic governance.

1. Transparency

Transparency is one of the basic values of the WTO system, given that the proper function of open markets requires transparent rules and procedures. Major WTO obligations on transparency include: publication of all laws, regulations, and other government measures of general application affecting trade before their implementation and enforcement; and notifications to the WTO of any change in such laws, regulations, and government measures. In light of the historical lack of transparency in the Chinese system, the WTO has imposed on China specific obligations that are more stringent than its general requirements on transparency. China is required, for instance, to designate an official journal dedicated to publication of all laws, regulations and measures affecting trade and make all issues of such journal available to individuals and enterprises; to establish enquiry points where traders may obtain all information on measures subject to publication; to respond to requests for information by traders within 30 days upon their receipt; to provide a reasonable period for comment on all laws, regulations and measures affecting trade after their publication but before their implementation (with certain exceptions); and to translate all such laws, regulations and measures into one of the official languages of the WTO and make such translation available to WTO members within 90 days of their implementation or enforcement.

Since its accession, China has taken concrete steps to implement its transparency commitments. Important legislation has been put into place to regulate government rulemaking process. For instance, the Law on Legislation, enacted in 2000, requires that the government agency in charge of drafting administrative regulations or rules solicit public comments, through meetings, hearings or other means. Effective 1 January 2002, administrative regulations shall not take effect until 30 days after promulgation, except for those involving national security, the setting of foreign exchange rates, monetary policy, and matters the delayed implementation of which would impede their enforcement. The Law on Administrative Permissions, enacted in 2003, standardizes the procedures for granting administrative permissions or licenses.108 Under this law, unpublished documents can no longer be used as the basis for granting administrative permissions; and outcomes of all administrative permissions must be published, except for those involving state or business secrets or individual privacy.109 In recent years, the government has utilized the Internet to promote transparency and public participation in the rulemaking process. Most central government agencies and local governments have launched their own websites, and many of them allow the public to provide input directly. Laws, regulations, administrative rulings, judicial interpretations and decisions have become generally available on the official websites.

In sum, transparency in the Chinese regulatory system has improved markedly in connection with the WTO accession. To be sure, the government has yet to fully implement its WTO commitments on transparency,112 and the lack of transparency still ranks among the top concerns for foreign businesses operating in China.113 However, the present condition is a far cry from the days when ‘internal documents’ ruled government administration, and there is reason to expect further improvement as the Chinese public embraces transparency as a norm for good governance.

2. Judicial review of administrative actions

To ensure that government measures affecting trade are administered in a reasonable, objective and impartial manner, the WTO requires its members to maintain independent tribunals (judicial or administrative) and procedures for the review of administrative decisions relating to trade. The accession protocol of China specifies that such tribunals ‘shall be impartial and independent of the agency entrusted with administrative enforcement and shall not have any substantial interest in the outcome of the matter.’ Further, the protocol requires that China provide private parties affected by administrative action the opportunity for appeal to a judicial body ‘in all cases’ – a standard exceeding the general requirements of the WTO - and that the reasons for the decision on appeal must be provided in writing.

Previously under Chinese law, administrative decisions on certain trade-related matters were excluded from judicial review, including decisions concerning the validity of patents and trademarks, and determinations in antidumping and countervailing cases. To implement its WTO commitments, China has amended relevant legislation so as to provide the right to appeal to courts in all such WTO-related matters. In addition, the Supreme People’s Court has issued three judicial interpretations to clarify the scope and standards for judicial review of WTO-related administrative decisions. Among other things, the SPC designated intermediate courts or high courts as the first instance trial courts for international trade, antidumping and countervailing cases, a move aimed to ensure impartiality and quality of judgment in the adjudication of WTO-related cases given that judges in upper level courts tend to be less vulnerable to external interference and are generally better qualified than judges in the basic courts. It is, however, still too early to assess the condition of judicial review in WTO-related cases since few such cases have been reported.

On a broader scale, the WTO requirements on impartial review of administrative actions by an independent tribunal provided a fresh impetus to the development of administrative law and judicial reform in China. A series of legislation has been enacted in the past decade to regulate administrative rulemaking, administrative review, and administrative licensing. These new laws set limits and boundaries for the exercise of government powers, and provide the legal basis for judicial review of specific administrative actions. WTO accession has also inspired intensified efforts of the Chinese judiciary to improve the competency level of its judges and to strive for judicial independence. Although substantive judicial independence in China cannot be achieved without political reform, the WTO requirements on impartiality and independence of tribunals have lent legitimacy and support to the call of the Chinese judiciary for freedom from local and departmental interferences.

3. Uniform administration

In its accession agreement, China undertook to apply and administer all its laws, regulations, and measures, including those issued at the sub-national level, in a uniform, impartial and reasonable manner. Specifically, China promised to annul in a timely manner all local regulations and measures that are inconsistent with China’s WTO obligations. It also agreed to establish a complaint mechanism under which private parties can bring to the attention of national authorities cases of non-uniform application of the trade regime, and that the authorities must promptly address and remedy such situations. These special commitments targeted at local protectionism, which has become a major trade and investment barrier in China.

It is unclear to which extent China has implemented these commitments following its accession. It is evident, however, that many of the problems China faces today are associated with entrenched localism. As a core reform strategy adopted by the Chinese leaders early on, local governments have been given much flexibility to adopt measures necessary to boost local GDP growth and are allowed to benefit directly from such growth. As a result, local governments have been heavily involved in the investment and operations of local enterprises. To promote their economic interests, local governments may provide subsidies to local firms or otherwise protect them against outside competition. They may have little incentive to enforce IP laws if local enterprises profit from violations of IP rights. Their control over local courts means that it may be impossible to obtain independent and impartial judicial review of matters involving local economic interests. Moreover, the close ties between local officials and firms make it extremely difficult to combat official corruption, which has been plaguing the Chinese system and undermining the legitimacy of the regime.

As a matter of principle, WTO rules apply to the entire territory of each WTO member, and a member is responsible for violations of WTO rules by its political subdivisions. The WTO Agreement specially permits a member to bring to the WTO tribunal complaints arising from measures taken by the local authorities of another member. China’s specific commitments have only added to its obligation to ensure uniform administration of laws throughout its territory. Hence, if the Chinese government lacks the political will to rein in local protectionism, other members do have the means available at the WTO to compel it to take action.

4. Normative impact

Potentially more significant than the legislative and institutional improvements are the normative changes brought about by the WTO accession. During the years leading up to and following the accession, the government and academia engaged in an unprecedented scale of public education on the WTO, portraying the WTO as mostly a progressive force for China. As a result, WTO principles and concepts, such as nondiscrimination, transparency, due process and judicial review, have gained wide acceptance in China as the norms for good governance in a modern society. The public’s appeal to WTO norms often goes beyond the technical scope of their application – a notable example of which was the popular demand for ‘national treatment’ of domestic enterprises under the WTO principle of nondiscrimination. There is also a tendency among the academics to construe WTO concepts liberally and expansively so as to give them meanings in a larger political and constitutional context.131 As WTO principles and concepts acquire a normative force in China, their overall impact on the construction of rule of law may well be more profound in the long run than the WTO-conforming changes at the legislative and institutional level.

III. Enforcing China’s WTO Obligations

All of China’s commitments under its accession agreement are binding treaty obligations, enforceable through the WTO dispute settlement mechanism. Furthermore, a unique transitional review mechanism (TRM) was set up to monitor China’s implementation of its accession commitments. Thus far, WTO members have utilized both mechanisms to ensure China’s compliance with its obligations.

A. Transitional Reviews

Pursuant to the TRM, China is subject to annual review by the WTO in the first eight years after its accession, followed by a final review before the end of the tenth year. Each review is conducted at two levels: first by the sixteen subsidiary bodies of the WTO that have a mandate covering China’s commitments, and then by the General Council of the WTO. In each review, China is to provide the information regarding each area of China’s commitments under its accession agreement, and answer questions posed by individual members in each of the subsidiary bodies. The review results of the subsidiary bodies are reported to the General Council, which may make recommendations to China.

To date, the WTO has conducted five reviews under the TRM. Despite its resentment to the TRM, China has accepted this annual exercise that puts its practices under the constant scrutiny of other members. The reviews have provided the opportunity for members to raise many of their concerns with China in a timely manner. The questions raised during the fifth review in 2006, for example, ranged from import and export duties, market access in services, technical standards, to investment measures, domestic subsidies, industrial policies and privatization plans. Among other things, members requested clarification and explanation from the Chinese government on WTO consistency of the new automobile policy, the new regulation on mergers and acquisitions, the temporary ban on approval of brokerage houses, and the new banking regulations. As the Chinese government was compelled to address these concerns, the process added to transparency in the Chinese regulatory regime. With its comprehensive coverage and multilateral procedures, the TRM has been playing an effective role in monitoring China’s implementation of its accession commitments.

B. Dispute Settlement

Since its accession, China has encountered eight WTO complaints, of which five were initiated by the United States, and one each by the EU, Canada and Mexico. The eight complaints involve five sets of disputes. The first, China – Value Added Tax, was brought by the United States in March 2004, alleging that China’s policy of refunding value-added taxes to domestically-produced integrated circuits (IC) discriminated against imported IC in violation of WTO rules. China settled the case through consultations and withdrew the measures in question by April 2005. The other four disputes are currently pending. The second, China – Auto Parts, involves three complaints brought by the EU, the United States, and Canada respectively in 2006.At issue are Chinese regulations that impose a surcharge on imported automobile parts used in manufacturing vehicles for sale in China, effectively raising the tariff on auto parts from 10% to 25%, the same rate for imports of complete vehicles. The third dispute, China – Subsidies, was initiated by the United States in February 2007 and later joined by Mexico. The complaints charge that China has been subsidizing domestic firms (including FIEs) through various tax breaks that are WTO-illegal. The fourth and fifth disputes were brought by the United States on the same day in April 2007. The fourth, China – Intellectual Property Rights, claims inter alia that China’s criminal law does not provide sufficient punishment for IP violations, and that the denial by China’s copyright law of protection for works under censorship reviews is inconsistent with TRIPS requirements. The fifth, China – Trading Rights, raises issue with China’s implementation of its commitments on trading rights and distribution services for publications and audiovisual products. The complaint charges that, contrary to its commitment to fully liberalize trading rights, China has continued to reserve the right to import foreign cultural products to designated SOEs.

These pending disputes challenge important aspects of China’s industrial policy and legal regime. The auto-parts case and the subsidy case target tax incentives and local content requirements which China has used for decades as part of its development strategy. Although in its accession China agreed to comply with all WTO rules and even accepted more stringent obligations on subsidies than any other member, the government has not fundamentally changed its practice. In fact, the government continues to use financial incentives to encourage and promote the development of particular industries and geographic areas, despite possible WTO challenges to such measures. The outcome of these two WTO cases, therefore, is likely to have a real impact on China’s industrial policy.

The IP case is potentially most significant for the Chinese legal system because it contests two major pieces of Chinese legislation – the Criminal Law and the Copyright Law. The case is the first of this kind in WTO history in that it challenges the substantive criminal law of a member state, an area traditionally reserved for national jurisdiction, and raises sensitive issues of government censorship. The trading rights case involves the politically delicate matter of government control over importation and distribution of foreign cultural products. If China loses these cases, it will be compelled to alter important aspects of its legal regime to comply with WTO rulings.

The number of WTO cases brought against China during the first several years of its membership is still small, compared to the number of WTO cases initiated against other major trading nations during the same period.143 Part of the reason for the small number might be that China’s trading partners were willing to give it some leeway to comply with WTO requirements in light of its recent accession. Part of the reason is China’s willingness to compromise in potential disputes. For example, in 2004 China imposed export restrictions on coking coal, which is used in steel production, in order to meet the rising domestic demand and also to reduce pollution caused by excessive coke production. When the EU protested and threatened to bring a WTO complaint, China soon backed down and agreed to maintain the same level of coke supply to the EU as the previous year. In late 2005, when the United States threatened to initiate a WTO case against China over its antidumping decision regarding linerboard, China quickly repealed that decision.

That situation, however, is changing. Both the United States and the EU have indicated their intention to initiate more WTO cases against China. Indeed, the United States, under the pressure of record trade deficit with China, initiated three new WTO disputes with China within the first four months of 2007. And, judging from the numerous concerns raised during the TRM annual reviews, there is no shortage of issues that could evolve into formal complaints against China at the WTO dispute forum. Meanwhile, China’s attitude towards WTO dispute settlement is also changing. The government apparently adopted a hard line in 2006 when it refused to settle the auto parts case through consultations. If the case proceeds as expected, it will result in the first WTO judgment on the legality of the Chinese trade regulations under WTO law. To be sure, relying on WTO litigation to enforce China’s WTO obligations has its limits. The dispute settlement process is time-consuming and resource-intensive. And the complaint can only target specific government measures, rather than a member’s general trade and investment policies. Nonetheless, the WTO dispute settlement mechanism has its teeth – noncompliance with its decisions may lead to WTO-authorized trade sanctions. Given that the Chinese economy is so heavily reliant on foreign trade and that China is bound by more WTO commitments than any other member, it is reasonable to expect that WTO dispute settlement will be relatively effective in enforcing China’s obligations.

IV. Future Prospects

China’s accession to the WTO has led to extensive changes to its foreign trade and investment regime. They range from substantially lowered barriers for trade and investment to considerably improved domestic governance. As a result of these changes, the Chinese system has become far more open and in accord with WTO standards than a decade ago.

But what does WTO membership hold for China over the next decade? The reason why WTO accession had such a major impact on China was because it served the domestic agenda of economic liberalization set by the leadership in the 1990’s. Now that China has substantially implemented its market access commitments and that the government has achieved the main objectives of the accession, will China continue to liberalize its economy beyond what was called for by the WTO? The answer will of course depend on the vision of the leadership and its future agenda. Given the widening gap between the rich and poor and the severe environmental degradation in the country, the Chinese government is compelled to adjust its development strategy to pursue a more balanced and sustainable growth. This adjustment, however, may slow the process of further economic liberalization. Indeed, China has taken the position that, as a recent acceding member of the WTO, it should not be required to make substantial new concessions in the ongoing Doha Round.

In the next few years, the impact of the market access commitments made in the accession will wane as the domestic economy adapts to the new level of foreign competition. The impact of the rule obligations of the WTO, by contrast, may be felt more acutely. With its competitiveness growing in the global market, China will likely find itself a frequent target of WTO complaints. When China loses a case at the WTO forum, the government will feel the external constraints imposed by the WTO directly as China must change its offending law and practice or face possible trade sanctions. The Chinese public may then develop a different image of the WTO from the largely positive one promoted by the leadership during the accession era. The issue of sovereignty and domestic regulatory space will be raised. Other issues that have long generated strong controversies about the WTO and globalization in other parts of the world, such as the relationship between trade and environment, trade and labor rights, and trade and other social policies and values, are likely to attract greater attention in China as well.

In short, when the dust settles from the accession commitments, the impact of the WTO on China will become comparable to that on other major trading nations. That, however, will not change the historic significance of the accession. WTO membership has integrated China into a multilateral system which, through its extensive rules and enforcement mechanisms, will impose meaningful disciplines on China in charting its future course of economic development.

(Edited by: China West Lawyer)