The EU-China WTO Deal Compared

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Daniel Arthur Laprès

July-August 2000
Issue:

Cover by Benjamin A. Hurd

The European Union hoped to improve the US-China terms, but still fell short in some areas--perhaps a case of diminishing marginal gains

Daniel Arthur Laprès, avocat (France), barrister and solicitor (Canada), is co-editor and co-author of Business Law in China: Trade, Investment and Finance, (ICC Publishing, 1997). The website of Laprès & Associates (www.gyoza.com/lapres)
features his other publications on business and law in China.

That the EU negotiators did not set as a priori ty the greater opening of the local market for movies and cultural products more generally is puzzling. Perhaps the French predilection for invoking "cultural exceptions" to justify local quotas on television content and public subsidies of local productions was felt to have crippled the European Union's negotiating position.

As the last major hurdle on China's route to the World Trade Organization (WTO), the negotiations with China afforded the European Union (EU) a historic opportunity to pry open the local PRC market. Since the PRC's accession will, in practice, be subject to unanimous consent of the WTO's 135 members, the scene was set for the European Union, China's second-largest trading partner, to tee off on the gains achieved in November by the United States in its market-access agreement with China (see The CBR, January-February 2000).

Instead, EU Trade Commissioner Pascal Lamy proclaimed from the outset his 80 percent satisfaction with the US agreement. After the completion of the negotiations, he concluded that more than 80 percent of the European Union's objectives for improvement had been obtained.

The non-discrimination (Most Favored Nation and national treatment) principles of the WTO-predecessor General Agreement on Tariffs and Trade (GATT) of 1947, as updated in 1994, require that any fresh concession obtain ed beyond those negotiated by the United States benefit all other WTO members to the same extent. In addition, under the terms of each agreement, some gains will enter into effect immediately, and both agreements reaffirm the grandfathering principle--that any benefits enjoyed by a WTO member's companies before China's accession shall be maintained after membership. In such circumstances, a comparison of the results of the two sets of negotiations may reveal opportunities for firms to gain competitive advantages in the lead-up to China's formal entry into the world trade body.

The achievements of the EU negotiators

Since the purpose of the negotiations was understood to be the achievement of advantages for home country enterprises, it is useful to inquire to what extent the EU negotiators satisfied European economic interest groups' desiderata. In fact, the European Union obtained significant duty concessions over and above the commitments given to the United States on some 150 specific industrial and agricultural products (see Table). For instance, the duty rate reduction the US negotiators won on wine imports, from the current 65 percent to 20 percent, was considerably improved by their EU counterparts (the duty rate will now fall to 14 percent).

Spokesmen for the European insurance industry have been especially vocal in their expression of satisf action with the results of the negotiations, which included the pledge that China would grant seven licenses immediately upon accession. And given the very specific niches covered by the EU-China agreement (for instance, dredging, NPK fertilizers, insurance company licenses in Foshan, Guangdong Province, and accelerated access for banks to the local currency market in Zhuhai), it is reasonable to suppose that the most active of the European Union's interest groups have been placated. Even in the field of telecommunications, where the EU negotiators brought back less than a full set of concessions, industry reactions have been positive.

Especially noteworthy are the EU negotiators' achievements beyond what certain interest groups had sought. For instance, the Council of the Bars and Law Societies of the European Union called upon China "to allow foreign law firms to advise on home country, any third country, and international law" as well as "to allow Chinese lawyers working for foreign law firms to advise on Chinese law" (emphasis added). Apparently, the EU negotiators also obtained the right of lawyers of WTO members who are not Chinese citizens to advise on Chinese law.

The disappointments

Perhaps the major disappointments of the US and EU agreements concern the failure to win more concessions from the Chinese in liberalization of the telecommunications and audiovisual sectors, including the Internet.

The EU negotiators had specifically identified telecommunications as a sector in which they intended to improve upon the Chinese commitments vis-a-vis the United States. Indeed, Lamy even declared publicly the EU goal of majority foreign ownership of telecommunications operations in China.

But in the end, even after full implementation of the terms negotiated by the United States and improved in particular by the European Union, China will be allowed to limit foreign investment in the telecommunications sector to 49-50 percent, depending on the sub-sector. Moreover, since the Ministry of Information Industry currently treats Internet service providers (ISPs) as well as Internet content providers (ICPs) as telecommunications businesses, one must conclude that foreign majority ownership or control in these nascent sectors will also be excluded for the foreseeable future.

That the EU negotiators did not set as a priority the greater opening of the local market for movies and cultural products more generally is puzzling. Perhaps the French predilection for invoking "cultural exceptions" to justify local quotas on television content and public subsidies of local productions was felt to have crippled the European Union's negotiating position.

Toward an overall assessment

The US and EU negotiators, and indeed most commentators, have tended to evaluate their achieveme nts by reference only to the present situation. Accordingly, since no investment whatsoever is today allowed, for example, in the telecommunications sector, even 50 percent limits on foreign ownership after accession represent a considerable achievement. But at least two other references would seem to apply to the negotiations.

First, on the assumption that the principal country investment and trade alternative to China is India, a comparison between these countries' WTO regimes will, in practice, likely influence the future decisions of international business. In this sense, were India's WTO regime to be far more favorable to foreign business, any victory today for China's protectionists might in the end prove to be Pyrrhic. While a comprehensive analysis of this question is beyond the scope of this comment, a few points are worth highlighting. Though India has been pursing a process of liberalization since 1991, and is indeed already a member of the WTO, China's terms of accession will cause it to leapfrog ahead of its South Asian rival in many aspects of opening and liberalization. For instance, while India's average rate of duty toward other WTO members has been reduced from an average of 71 percent in 1993 to a current average of 35 percent, this rate is 2-3 times higher than the comparable Chinese rate would be after accession, under the terms laid out in the US and EU agreements.

On the other hand, in at least one important respect, China will remain less open than India: Apparently, China will be maintain its excessively high requirements on the size of foreign investors' PRC businesses. For instance, the requirements applicable to foreign investors in the tourism business are quite steep. This is in addition to the many other financial requirements foreign investors face. The net result of these rules may be to disqualify a lot of small and medium-sized businesses from investing in China. This is a considerable disadvantage for China relative to India.

Second, insofar as the expectation of democratic countries in accepting the application to Hong Kong of the "one country, two systems" principle was, at least in part, that the liberal, capitalist regime in Hong Kong would spill over, if only by drips, into China, a comparison of Hong Kong's and China's WTO regimes governing the legal profession is especially significant (see Whither Hong Kong?, The CBR, July-August 2000). Because the Chinese legal profession is both understaffed and undereducated, its protection from foreign competition has long been an avowed goal of the authorities. For instance, the US negotiators failed to win the right for their professionals to advise on Chinese law, though this has since been obtained by the EU negotiators. The right, which the EU negotiators also won, for foreign lawyers to instruct members of Chinese firms directly will, in effect, allow foreign lawyers to offer services in Chinese law, including representation before the Chinese courts. The net result will surely be the more rapid improvement, and indeed the greater democratization, of the Chinese legal system.

The home stretch

While the European Union was the last major holdout in the accession negotiations, it will not be the last of the 37 WTO members that requested bilateral negotiations with China. As of early June, Costa Rica, Ecuador, Guatemala, Mexico, and Switzerland still had yet to finalize accession agreements with China.

Once all these bilateral agreements have been filed with the WTO Secretariat (which can take several months from their signature), the Working Party will prepare the Schedules of Concessions on Goods and the Schedule of Commitments on Services, which reconcile and consolidate the results of the bilateral negotiations and which comprise annexes to the final Protocol of Accession.

In parallel with the bilateral negotiations, China has been negotiating with the WTO Working Party the exact text of the Protocol, a process that remains unfinished, but that the Working Party has indicated it now intends to intensify. The Protocol of Accession and Annexes together with the Working Party's Report will then be presented to the WTO's General Council, the assembly of all WTO members. In principle, any member would be entit led to call a vote, whereupon a two-thirds majority would be required for China's accession to carry. But a call for a vote is unlikely, as all members have expressed their desire that the PRC should regain its seat in the WTO (China was an original signatory to the GATT but withdrew several years after its formation).

Once the internal WTO procedures are completed, it will be up to the Standing Committee of the PRC National People's Congress to ratifiy the agreements, and 30 days after filing of such ratification with the WTO in Geneva, China's accession would enter into effect.

Stacked deck

In the end, the 14-year EU-China WTO negotiation process proved to be loaded against the Chinese side. The WTO practice, in which members consent unanimously on the terms of an applicant's membership, encouraged China's negotiating partners to implement coordinated strategies.

The European Union appears not to have exploited its holdout position to the fullest extent possible to pressure China into further concessions. The hope nonetheless remains that the benefits of opening and liberalization will be so evident to the Chinese authorities and the Chinese people that they will, of their own initiative, eliminate the vestiges of protectionism remaining in the country's international trade regime even after accession to the WTO.

The US-China and EU-China Market-Access Agreements
	US-CHINA AGREEMENT	EU-CHINA AGREEMENT
*GOODS*
Tariff Concessions
Industrial Goods	China's industrial tariffs will fall from an overall average of 24.6% in 1997 to an overall average of 9.4% by 2005. On US priority industrial products, tariffs will fall to 7.1% with the majority of tariff cuts fully implemented by 2003.	Average tariff falls from current 18.6% to 10.6% on 150 specific goods. 52 types of machinery and appliances that account for 26% of total EU exports: 35% to 5-10% Cosmetics: 30% to 10% 13 products that account for 60% of EU exports of leather goods: 20-25% to 10% 5 products that account for 70% of EU exports of footwear: 25% to 10% 5 major categories of exports of marble/building stones: 25% to 10% 11 key product categories of ceramics: 24.5-35% to 10-15% 6 particular categories of glass products: 24.5% to 5%
Information Technology	China will eliminate tariffs on information-technology products such as computers, semiconductors, and all Internet-related equipment by 2005 (current average: 13.3%).
Autos and Auto Parts	China will cut auto tariffs from the current 80-100% to 25% by 2006. Auto parts tariffs will be cut to an average of 10% by 2006.
Textiles	Textile safeguard will be in effect until December 31, 2008, which is after the WTO Agreement on Textiles and Clothing expires.	China's current tariff is close to that of EU on China's exports
Agricultural Products	Tariffs will be reduced to an overall average of 17% by January 2004. On US priority agriculture products, tariffs will be reduced from an overall average of 31.5% to 14.5% by January 2004 at the latest. Wine: 65 to 20%	All spirits subject to same treatment: 65% to 10% Wine: 65% to 14% Butter: 30% to 10% Milk powder: 25% to 10% Mandarins: 40% to 12% Olives: 25% to 10% Pasta: 25% to 15% Rape oil: 85% to 9% Wheat gluten: 30% to 18%
Quotas	China has agreed to eliminate quotas and other quanti tative restrictions with phase-ins limited to 5 years. China will eliminate existing quotas upon accession for the top US priorities (e.g. fiber-optic cable). It will phase out remaining quotas, generally by 2002, but no later than 2005. Auto quotas will be phased out by 2005. In the interim, the base-level quota will be $6 billion (the level prior to China's industrial auto policy) and this will grow by 15% annually until elimination. China has agreed to import 20 films each year.	Fertilizer NPK: quota improved; immediate relaxation of existing restrictions Rape oil: quota improved
*SERVICES*
Market Access
Telecommunications	Key telecommunications services corridor in Beijing, Shanghai, and Guangzhou will open immediately on accession in all telecommunications sectors. China will phase out all geographic restrictions for paging. Mobile/cellular in 5 years; domestic wireline services in 6 years; and value-added services in 2 years.	Opening of the Beijing-Shanghai-Guangzhou inter-city market Liberalization of domestic-leased circuit services Increased competition in the provision of international corporate communications
Insurance	China will expand the scope of activities for foreign insurers to include group, health and pension lines of insurance, which represent about 85% of total premiums, phased in over 5 years. China will eliminate all geographic limitations in 3 years. China will permit foreign property and casualty firms to insure large-scale risks nationwide immediately upon accession. China agrees to award licenses solely on the basis of prudential criteria, with no economic needs tests or quantitative limits on the number of licenses issued.	Scope of business expanded within 2 years to allow: health, pension and group in life insurance and all non-life activities except for statutory insurance. Opening of Shenzhen and Foshan accelerated. Brokers allowed to undertake large-scale commercial risk and reinsurance.
Banking	China has committed to full market access for US banks within 5 years. Foreign banks will be able to conduct local-currency business with Chinese enterprises starting 2 years after accession; with Chinese individuals 5 years after accession. Both geographic and customer restrictions will be removed in 5 years. Foreign banks will enjoy national treatment within designated geographic areas.	Zhuhai banks to be allowed accelerated access to local-currency market. Distributors and other non-financial institutions will be able to provide credit for trucks, tractors, and motorcycles.
Tourism	Hotels: China will allow unrestricted access to the Chinese market Travel services: foreign travel operators can provide the full range of travel agency services. For travel agency services, China will allow access to government resorts as well as Beijing, Shanghai, Guangzhou, and Xi'an.	Open to foreign firms after accession Scope of travel agency services extended to allow corporate travel services.
Audiovisual	China will allow foreign enterprises to distribute video/sound recordings.
Legal	China will permit foreign majority control except for practicing Chinese law (an exception common to many WTO members).	Authorization to provide services in Chinese law Foreign lawyers will be allowed to instruct directly individual members of Chinese law firms. Reduction of experience requirement for local manager to 2 from 3 years; prior experience will no longer have to be consecutive. Solicitors (though not members of any Bar) will also be covered by the Agreement.
Accountancy	China has agreed to eliminate a mandatory localization requirement and follow transparent procedures.	No longer required to have local partner Capacity to provide accounting, taxation and management consultancy services
Architectural		Capacity to provide cross-border services through provision of scheme design services
Market Research		Relaxation of current controls on confidentiality of research
*INVESTMENT-RELATED MEASURES*
Market Access
Motor Vehicles	China upon accession will allow non-bank foreign financial institutions to provide auto financing and has made commitments regarding importation, distribution, sale, and maintenance and repair of automobiles.	Within 2 years, freedom to determine product range Reduction of red tape, as provincial authorities will be empowered to authorize investments in the sector worth up to $150 million (currently $30 million). Wholly foreign-owned enterprises allowed in engine manufacturing
Telecommunications	Value-added and paging services investment: China will allow 49% foreign ownership in the first year of accession; 50% in the second year Mobile services: 49% in 5 years International and domestic mobile services: 49% in 6 years	Foreign investment in local mobile operators: Upon accession: up to 25% Within 1 year of accession: up to 35% Within 3 years of accession: 49% Settlement of the UNICOM claims
Insurance	China agreed to allow 50% ownership for life insurance. For non-life, China will allow branching or 51% ownership on accession and formation of wholly foreign-owned subsidiaries in 2 years. Reinsurance will be completely open upon accession.	Possibility of effective control of 50-50 equity joint-venture insurers Grant of 7 new licenses (5 life, 2 non-life) Additional 2 companies will be allowed to open in a second city. Insurance brokers: Upon accession up to 50% equity (possibility of effective control) Within 3 years: majority control Within 5 years: all restrictions removed
Distribution and Auxiliary Services	Over 3 years, distribution rights will be provided for rental and leasing, air courier, freight forwarding, storage and restricted sectors such as wholesale, transportation, maintenance and repair. All restrictions on provision of services auxiliary to distribution such as warehousing, advertising, technical testing and analysis, and packaging services will be phased out over 3 to 4 years.	Large retailers (at least 20,000 m 2 or more than 30 outlets) will n o longer be limited to 50% equity participation.
Tourism	Hotel operators will be allowed to set up 100% foreign-owned hotels within 3 years; majority ownership possible upon accession.	Capital requirements gradually reduced to parity with local firms upon accession, minimum annual turnover required to qualify as foreign investor reduced by 20% to $40 million.
Construction		Foreign majority in equity joint ventures allowed upon accession. Wholly foreign-owned enterprises may carry out projects financed by foreigners and Chinese construction projects, where need is justified, within 3 years.
Audiovisual< /td>	China will allow 49% foreign participation in joint ventures engaged in the distribution of video and sound recordings. Foreigners will be allowed to invest in movie theaters.
*GENERAL WTO PRINCIPLES/AGREEMENTS*
National Treatment		Specific commitment to apply WTO national treatment principle to: Pharmaceuticals pricing After-sales service of imported goods Retail of imported cigarettes Retail of imported spirits
State Trading	Introduction of private trade in agriculture New rights to import and distribute	Silk: gradual opening of export sector to private traders Crude and processed oil: gradual opening export sector to private traders Fertilizers: gradual opening of export sector to private traders
Sanitary and Phytosanitary Measures	SPS agreement concluded China also agreed to the elimination of barriers that are not based on scientific evidence.	SPS agreement concluded
Export Subsidies	China has agreed to the elimination of subsidies on agricultural products.	Elimination of export subsidies on industrial goods, and on offset requirement in civil aircraft sector
SOURCE: Daniel Arthur Laprès

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