to a friend.
Iain K. McDaniels and Jeremie Waterman
Cover by John Yanson
Iain K. McDaniels,
based in Shanghai, is the deputy director of China Operations at the US-China Business Council.
Jeremie Waterman
is an associate in Business Advisory Services at the US-China Business Council in Washington, DC.
China has cleared many of the hurdles in the way of its WTO entry--particularly the negotiation of bilateral agreements with 37 WTO members. One key obstacle that threatened to block US companies from receiving the full benefits of China's membership has also been cleared: Congress's passage of permanent Normal Trade Relations for China upon the PRC's accession will enable US firms to benefit from all of China's market-opening commitments.
As The CBR goes to press, China's negotiations continue over its remaining bilateral agreement with Mexico and its Protocol of Accession (POA) package with the WTO working party. The POA package includes the final, legally binding terms and conditions of China's membership. China's leaders hope to wrap these negotiations up by year's end. Out of necessity, then, the country has begun to get its legislative and regulatory houses in order.
The research and consideration phase
China's WTO implementation efforts thus far have focused largely on the research and discussion of specific tasks the country must undertake to prepare for accession. The Ministry of Foreign Trade and Economic Cooperation (MOFTEC), the National People's Congress (NPC), the State Council, the State Economic and Trade Commission (SETC), the industrial ministries and bureaus, and academic institutions are among the organizations participating in this process. The activities they have undertaken fall into three categories: regulatory revision, education, and preparation for the new regime.
1. Regulatory revision
The POA package consists of three parts: the protocol itself, the working party report, and the market-access schedules for agricultural goods, manufactured goods, and services. The working party report contains so-called "commitment paragraphs" that provide both the roadmap for future implementation of the PRC's WTO commitments and benchmarks that can be enforced through the WTO dispute settlement mechanism. The report also includes statements from working party members regarding China's intentions to implement the protocol and the WTO Agreement.
The PRC must change its laws and regulations in accordance with its commitments in the working party report and protocol, as a requirement of WTO membership. One of the working party's tasks is to negotiate with China over which laws must change before accession. In the past, WTO members have insisted that the applicant pass new WTO-consistent legislation for obligations that take effect upon accession, which is then usually vetted by the WTO working party. But the large number of laws that the working party will probably require the PRC to change may challenge this tradition. The Chinese have already noted that the WTO-mandated revisions to their trademark and other IPR laws may not be in effect before China becomes a WTO member.
Both new and redrafted PRC laws must conform to the government's WTO commitments. Ultimately, however, PRC laws and administrative regulations, as well as the PRC courts that interpret them, will be controlling in future trade and investment disputes. Only if a WTO member elects to launch a dispute settlement proceeding in Geneva will the actual language of the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT) become legally relevant. The working party must ensure that the PRC's drafting of new laws and changing of existing laws and regulations to meet its WTO obligations do not sow the seeds of future protectionism--and in turn, future disputes.
< br> To assist working party members in assessing the scope of required legal changes, China must notify the working party about the areas and laws in which China's trade and investment regimes fail to conform to WTO rules. Thus far, China's notification has lacked detailed information on key areas such as non-tariff measures, quotas, subsidies, state trading, trading rights, and distribution. In some instances, information that has been provided is inconsistent with the commitments spelled out in China's bilateral agreements.
Though it has been slow to produce such details in Geneva, the PRC central leadership has, in fact, already launched a top-down review of all laws and regulations to determine their compatibility with WTO commitments. In total, the State Council is reviewing regulations from 35 different ministries or bureaus, including all relevant MOFTEC regulations--most of which relate directly to foreign investment and trade. The State Council will then categorize the regulations according to whether they will have to be abolished, modified, or will remain unchanged. The State Council will also list regulations that will have to be drafted from scratch to comply with WTO obligations.
According to government sources, 22 key laws at the NPC and State Council level are currently under review for probable revision. In addition, each industry (headed by the relevant ministry or bureau) is responsible for conducting its own legal review. These industry groups report to the State Council General Office Legal Task Force, headed by State Councilor Wu Yi.
Among the laws China may issue for the first time are those covering foreign investment and trade--today, there is no overarching law guiding either of these regimes. Laws that have been stalled in the PRC legislative process for years, such as the telecommunications law, may also be finalized (see The CBR, May-June 1999, p.16). The NPC Standing Committee met in late October to discuss revisions to the implementing regulations that govern equity and cooperative joint ventures, and wholly foreign-owned enterprises. The government also evidently plans to revise its Catalogue Guiding Foreign Investment in Indusry, first released in 1995 and updated in 1998.
Some of the key areas that are likely to require immediate revision include
- The tax code China must alter the provisions of the tax code that subsidize exports outright or act as de facto subsidies to domestic enterprises. China must also change other tax provisions that provide incentives for purchases of domestically made equipment and that provide tax exemptions for domestic enterprises' social welfare expenditures.
- Subsidies In addition to subsidization through the tax system, China must verify that it no longer engages in other forms of subsidization incompa tible with WTO rules. Such subsidies would include government-directed lending to state-owned enterprises (SOEs) or other specially designated enterprises; subsidies that take the form of goods and services; and subsidies that depend on export performance. China has submitted a list to the working party of the subsidies it grants to domestic companies, but this list reportedly has been less comprehensive than the working party would like. China also appears to be seeking developing-country status, which would permit it to take longer to phase out such subsidies.
- Trade-related investment barriers China must change rules that do not comply with the WTO's Agreement on Trade-Related Investment Measures (TRIMs), such as export requirements and rules requiring foreign-invested enterprises (FIEs) to balance foreign exchange. China will need to draft new laws that void these and other WTO-inconsistent provisions in the contracts of FIEs. For example, it must change the provisions in the law on wholly foreign-owned enterprises (WFOEs) that require a WFOE to use advanced technology and equipment and to export all or most of its products from the PRC.
In one high-profile example of the kinds of restrictions China imposes on foreign investment, after Motorola Inc. obtained government approval for a $1.9 billion investment in mobile-phone and chip factories, the Ministry of Information Industry (MII) stated that the Motorola cell-phone manufacturing plant would be the last one it approves. In a Chinese publication, M II underscored that foreign-owned cell-phone manufacturing plants must export at least 60 percent of their product and boost local content to 50 percent by 2001. Such local content and export requirements will be clear violations of China's WTO commitments once it accedes.
- Distribution-related services and trading rights China must change its laws to open up distribution services to foreign investment under terms no worse than those negotiated in China's bilateral agreement with the United States. China will also have to abolish the current restrictions on foreign firms' trading rights. For the most part, foreign investors currently may not import finished products and may only export products made in China. They must use Chinese trading companies to handle all other trading activities.
- Intellectual property rights (IPR) IPR protection and enforcement are enormous problems for foreign and Chinese companies alike. The WTO's Trade-Related Aspects of Intellectual Property Rights (TRIPs) agreement requires that China put in place much more stringent enforcement mechanisms. Its protection regime is fairly TRIPs-compatible, however.
- Quota and standards administration policies Many PRC policies in this area are inconsistent with the WTO's Agreement on Sanitary and Phytosanitary Measures, and the Agreement on Technical Barriers to Trade. The PRC's standards inspection procedures also lack transparency. At recent negotiations in Geneva, the working party reportedly objected to the PRC's intention to maintain two standards inspection bodies after accession, one for domestic products and one for imports. The working party insisted that the unification of standards inspection functions within one government body was essential to improve transparency and to prevent China's inspection process from continuing to be a barrier to trade.
- Sector-specific TRIMs violations Some industries have specific restrictions that violate WTO rules. For example, the auto industrial policy, promulgated in 1994, imposes both export and local-content requirements on FIEs. China will also have to lift many of its restrictions in the Internet and telecommunications sectors, specifically the prohibition on foreign investment in value-added telecommunications services.
It will prove difficult for the working party to compel China to implement all of its commitments from day one. At the September 28-29 session of the working party in Geneva, Chinese negotiators reportedly balked at the working party's efforts to clarify WTO-inconsistent legislation and regulations in key areas. Moreover, many of China's numerous WTO-inconsistent laws at the provincial and local levels are unlikely to be addressed directly in China's accession package. Real changes at the provincial and local levels will take time, and will likely be implemented by government officials only after they have received training, education, and some relevant experience. Indeed, experts have noted that although a clean WTO agreement is crucial, it is not the sole determinant of whether the concessions granted by a WTO member will be carried out effectively.
The WTO also does not require acceding members to make legal changes immediately for commitments that enter into effect in the years after accession. Thus, even after it enters the trade body, China may still have many laws and administrative regulations on its books at the central level that contravene WTO rules. It will be up to the WTO--either the General Council or a special working party appointed to monitor implementation of China's commitments--to ensure the country meets to its obligations in subsequent years.
2. Education
MOFTEC has held seminars in Beijing and across China in recent months to educate officials and companies about WTO principles and procedures and the implications of membership for local economies. Specifically, MOFTEC's seminars are telling companies that they will no longer be able to rely on subsidies and must prepare for international competition. MOFTEC has drawn on the expertise of members of the Chinese WTO negotiating team, the MOFTEC Treaty and Laws Division, and academic institutions to speak at these seminars. In addition to MOFTEC, individual bureau s and governments have conducted their own programs. For example:
- In interviews, the Office of Standards under the State Quality and Technical Supervision Bureau reported that it has held conferences for local officials to clarify their responsibilities under the WTO. The conferences have, for instance, explained that local officials will have to set up open and transparent standards and inspection processes, so that the bureau's procedures do not violate WTO rules against non-tariff trade barriers.
- Local governments like Shanghai are planning training programs for their officials.
- The Beijing People's Court will hold a two-week training program for local judges to brief them on IPR commitments under the WTO.
- Two thousand county-level Communist Party chiefs will take part in a six-month training program at the Central Party School on management and the WTO.
Prominent research institutions, including the State Council's Development Research Center, have begun serious analyses of the WTO and the Chinese economy. The Chinese press has also run regular stories on the impact of WTO accession on different industries and parts of China, and has published analyses of WTO rules and how compliance will affect China's existing regime.
3. Preparation for new competition
The PRC government and Chinese companies are attempting to prepare for the new rules of WTO membership with varying levels of commitment. Industrial sectors, for example, began this review process in spring 2000. SETC asked each sector ministry or bureau to detail the impact of WTO rules on its industry and submit the preliminary findings to SETC by mid-April.
Though most government agencies are participating in the WTO preparation process, some are, at the same time, trying to enhance their resources before the new rules no longer allow them to win concessions from foreign investors. Until the TRIMs-compliant changes are written into PRC law, for example, ministries will be able to demand that FIEs comply with current Chinese rules on local-content and export ratios.
The central government has its own set of priorities in the run-up to WTO accession. Near the top is establishing an effective national social safety net, which has been a growing necessity for years. Several pilot programs have been in place for some time, but WTO accession adds urgency. The WTO-induced rise in foreign competition, coupled with the removal of trade barriers, will accelerate the restructuring of PRC industry, with a predictable effect on unemployment. The NPC expects to pass a social security law in 2001, and the Ministry of Labor and Social Security has announced plans to implement a complete social security system within three years. In a related move, in September the government appointed former Ministry of Finance chief Liu Zhongli head of a national social security fund.
China's WTO commitments to open its financial sector and the resulting specter of foreign competition similarly leave China's policymakers with little choice but to carry out essential financial reforms more rapidly. Specific efforts to prepare China's financial sector for WTO-mandated libe ralization include plans for a new bourse in Shenzhen for companies with strong growth prospects; new alliances among domestic banks, and cooperative agreements between domestic and foreign banks; moves to allow open-ended mutual funds and permit domestic insurance companies to invest a larger percentage of their holdings in China's stock markets; consolidation in the securities industry; and the rollout of new financial products and e-banking services by domestic banks.
The central government has also accelerated mergers among domestic companies to create economies of scale and to secure domestic market share in sectors likely to face the strongest competition after WTO entry. Examples, in addition to the consolidation of financial services firms, include the restructuring and international public listing of PetroChina and Sinopec as part of oil industry overhauls; the recent government-mandated consolidation among China's 30-plus airlines; and the creation of large telecommunications and cable companies. The power, auto, infrastructure, petrochemicals, consumer electronics, beer, pharmaceuticals, and photographic film industries are also consolidating. And the reported merger of Nanjing Medicine and Jinling Pharmaceutical Group would create one of the PRC's largest pharmaceutical companies.
Sink or swim: Chinese companies
While the government moves ahead with its legal and regulatory ref orms, opposition is emerging from protectionist forces within China. Local governments, industrial ministries not yet effectively refashioned into independent regulatory bodies, and PRC enterprises form the core of this opposition.
But not all enterprises fear WTO accession. The reaction of Chinese companies to the small amount of WTO information they have obtained to date has been decidedly mixed. Haier Group, Legend Group, Huawei Technologies Co., Ltd., and other large Chinese companies with realistic aspirations of growing into competitive multinational corporations are eager to take advantage of the influx of new business and technology. These companies emerged as leaders in sectors that are already competitive domestically. Many of them are staffed at the highest levels by Chinese with foreign MBA degrees, who understand the difficulties WTO membership will impose on their operations, but see future competition as a mechanism to help them improve their own practices. Haier, for example, recently hosted and participated in a seminar on strategic planning during the fall Qingdao Investment Fair.
These firms also look forward to the benefits of membership in the trading club. They are aware that under WTO rules they will be able to challenge other countries' protectionist policies within a multilateral dispute resolution framework.
Leading PRC companies have sought to tap western capital market s over the last year, partly in anticipation of new WTO-induced competition from foreign companies. In addition to the oil firms, PRC telecommunications and Internet firms have actively sought such listings. China Mobile, China Unicom, and a number of Internet service and content providers have been forced to adapt to the more rigorous disclosure requirements of the New York Stock Exchange, NASDAQ, and Hong Kong's Growth Enterprise Market. They have also been forced to shed redundant workers.
Rusty state-owned enterprises (SOEs), on the other hand, are unlikely to make any moves to restructure until they feel the bite of competition--and until they are relieved more fully of their obligations to provide medical, pension, and unemployment insurance to their employees. SOEs are also having trouble preparing because of their poor access to information about China's WTO terms and the changes WTO membership will bring.
In fact, most Chinese companies have little information about China's bilateral commitments. Press articles have provided general information about the WTO and the impact of WTO accession on specific industries and regions, but an official Chinese version of the US-China bilateral agreement has not been made available to PRC companies, and the EU and other bilateral agreements are unavailable in any language. To be sure, the release of the US-China agreement was an unprecedented step taken mainly for US domestic political reasons; the texts are generally kept secret until the POA is complete. In the absence of such key information, however, companies have made few significant adjustments beyond those the government has orchestrated.
Much of the government leadership, however, is still researching the implications of membership, and the central government's education efforts have only just begun. Further, most SOEs have traditionally relied on guidance from the government before taking action, especially when it comes to the complicated issues of laying off workers and closing down uncompetitive product lines. SOEs have also traditionally relied on the government for funding, if indirectly through the state banks. Unless some of these issues are resolved in the months preceding accession, the majority of China's SOEs will be unprepared for the effects of WTO entry.
US companies: Reading the roadmap
US companies in China have reacted in a number of ways to the prospect of China's imminent accession. Many companies that have long been denied access to the market are scurrying to position themselves so that they can take advantage of market openings as they happen. Some companies, especially those that have been unsatisfied with their performance in China to date, are using this opportunity to conduct top-to-bottom reviews of their company structure in China to find areas for growth. N ew entrants to the market are exploring options in the traditional manner: conducting market research, meeting prospective partners, and looking at areas for cooperation.
The majority of US companies in China are not yet making any decisive moves, however. Their efforts focus on
- Research and discussion US investors, like the Chinese, are researching the WTO regime in general, as well as specific WTO commitments China has made in their industries. They are also trying to understand the potential changes in areas such as tax, distribution, after-sales services, and IPR protection that will affect all industries.
- Government relations Many firms are re-evaluating their government-relations strategies (see p.42). Companies realize that they must have strong government contacts not just in Washington but also Beijing and the localities in which they have business. It may no longer be enough for foreign companies to deal just with PRC government-designated intermediaries such as MOFTEC. This is because MOFTEC is largely an approval organization, not a decisionmaking authority. Its role is to make sure that all paperwork is in order and that other relevant ministries and commissions have signed off on approval paperwork. Even today, SETC and the State Development Planning Commission (SDPC) play a more important role in the decisionmaking process. After foreign firms receive national tre atment under WTO rules, many approval procedures that apply only to foreign firms will disappear. Foreign investors will thus be better served by going directly to the decisionmaking bureaus. MOFTEC will continue to promote investment and trade, but individual investment issues will probably require more direct involvement with SETC and SDPC.
- Education of local governments Companies are starting to talk to local governments in China about the importance of implementation. Some are developing comprehensive education efforts. As in the past, they are also relying on third parties, such as US government diplomats and commercial association representatives, to bring issues that are sensitive or cross company or industry lines before PRC government officials.
Other preparations foreign investors are making focus on the WTO commitments themselves. For example, some companies in China are resisting pressure from PRC officials and companies to make deals under terms that do not comply with WTO standards. They are also taking steps to time their market strategies to coincide with China's opening commitments.
No matter their approach, all foreign companies are coming to grips with what China's WTO entry will mean and what it won't. WTO membership will mean that China's markets will become more open to foreign companies. It will mean that foreign companies will receive national treatment and benefit from a more uniform, rules-based system of trade. Regulations will become more transparent, eliminating some of the unpleasant shocks that result from the current practice of sudden regulatory change.
China's WTO membership does not mean that all of the problems foreign companies face in China will go away. WTO requirements do not cover China's process of doling out operating licenses, for example, though the criteria companies will have to meet to obtain such licenses may change. There will still be competition from domestic and foreign competitors--although companies with operations in China may also find that the impact of tariff reductions on their competitors' imports is minimal because so many products come into China without paying full duty rates. Operational barriers--whether the result of infrastructure or bureaucratic limitations, or both--between different regions in China will persist, even after companies become able to conduct business across the country. And the market itself will take time to mature, particularly during the next several years of intense restructuring. Companies may find, for example, that while there is no longer an import tariff on their product, there is no market for it yet in China.
Revision of WTO-inconsistent rules and regulations and drafting of new WTO-compliant legislation are unlikely to benefit foreign companies across the board. A number of recent PRC statements and papers indicate that officials at SETC and other government think tanks are closely scrutinizing so-cal led "supernational treatment" of foreign companies in China. Foreign companies in China have long benefited from tax holidays and other preferential investment incentives. While these investment incentives are likely to continue in the medium term, a gradual leveling of the playing field is likely over the longer term.
Thus, some companies will continue to operate in China the way they always have. They will evaluate the economic and investment environments and identify and seize opportunities that fit their China plans. They will rely on the basic strategies for doing business successfully in China. This approach is probably wise, as even Chinese officials committed to WTO implementation will be looking to enhance the advantages of WTO membership for China--and these will not always coincide with the goals of foreign companies.
|
China's plans to implement its WTO commitments are moving forward, but foreign investors are reserving judgment until they see results. Though it has been slow to produce details in Geneva, the PRC central leadership has, in fact, already launched a top-down review of all laws and regulations to determine their compatibility with WTO commitments. Real changes at the provincial and local levels will take time, and will likel y be implemented by government officials only after they have received training, education, and some relevant experience. Though most government agencies are participating in the WTO preparation process, some are, at the same time, trying to enhance their resources before the new rules no longer allow them to win concessions from foreign investors. Most Chinese companies have little information about China's bilateral commitments. Press articles have provided general information about the WTO and the impact of WTO accession on specific industries and regions, but an official Chinese version of the US-China bilateral agreement has not been made available to PRC companies, and the EU and other bilateral agreements are unavailable in any language. China's WTO membership will not put an end to all of the problems foreign companies face in China. WTO requirements do not cover China's process of doling out operating licenses, for example, though the criteria companies will have to meet to obtain such licenses may change. |