China and the World Trade Organization

CRS Report for Congress
China and the World Trade Organization
Wayne M. Morrison
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
After many years of difficult negotiations, China, on December 11, 2001, become
a member of the World Trade Organization (WTO), the international agency that
administers multilateral trade rules. Under the terms of its WTO membership, China
agreed to significantly liberalize its trade and investment regimes. A main concern for
Congress is to ensure that China fully complies with its WTO commitments. According
to U.S. government officials and many business representatives, China’s WTO
compliance record has been mixed.. This report will be updated as events warrant.
After 15 years of bilateral and multilateral negotiations, China formally entered the
WTO on December 11, 2001. The negotiations on China’s accession to the WTO
focused on many Chinese practices that distort flows of trade to and from China, such as
high tariffs and non-tariff barriers, restrictions on foreign investment, lack of national
treatment for foreign firms, inadequate protection of intellectual property rights (IPR), and
trade-distorting government subsidies. Membership in the WTO requires China to change
many laws, institutions, and policies to bring them into conformity with WTO rules.1
The Role and Interest of the United States
China has been one of the world’s fastest growing economies over the past several
years (real GDP growth averaged 9.3% annually from 1979 to 2003), and many trade
analysts argue that China could become a potentially large market for a wide variety of
U.S. goods and services. A World Bank report estimates that China’s share of world trade
could triple from 3.0% in 1992 to 9.8% by the year 2020, making China the world’s
second-largest trading nation after the United States.2 The growing importance of China
in the world economy was an important factor in the heightened interest among WTO
members in bringing China into the WTO and thereby subjecting its trade regime to
multilateral trade rules.

1 See also CRS Issue Brief IB91121, China-U.S. Trade Issues, by Wayne M. Morrison.
2 The World Bank, China 2020: China Engaged, 1997, p. 31.
Congressional Research Service ˜ The Library of Congress

U.S. trade officials insisted that China’s entry into the WTO had to be based on
“commercially meaningful terms” that would require China to significantly reduce trade
and investment barriers within a relatively short period of time. Many U.S. trade analysts
viewed China’s WTO accession process as an opportunity for gaining substantially
greater access to China’s market and to help reduce the large and increasing U.S.-China
trade imbalance. Other U.S. proponents of China’s WTO membership contended that it
would advance the cause of human rights in China by enhancing the rule of law there for
business activities, diminishing the central government’s control over the economy and
promoting the expansion of the private sector in China.
China Joins the WTO
China completed all of its WTO bilateral agreements on September 13, 2001 (it
concluded an agreement with the United States on November 15, 1999) and completed
negotiations with the WTO Working Party handling its accession bid on September 17,

2001. China’s WTO membership was formally approved by the WTO on November 10,

2001, and on the following day, China informed the WTO that it had ratified the WTO
agreements. As a result, China officially joined the WTO on December 11, 2001. Under
the WTO accession agreement, China agreed to:
!Bind all tariffs. The average tariff for industrial goods will fall to 8.9%
and to 15% for agriculture, with most tariff cuts to occur by 2004 and all
cuts by 2010.
!Limit subsidies for agricultural production to 8.5% of the value of farm
output and will not maintain export subsidies on agricultural exports.
!Within three years of accession, grant full trade and distribution rights to
foreign enterprises (with some exceptions, such as for certain agricultural
products, minerals, and fuels).
!Provide non-discriminatory treatment to all WTO members. Foreign
firms in China will be treated no less favorably than Chinese firms for
trade purposes. Duel pricing practices will be eliminated as well as
differences in the treatment of goods produced in China for the domestic
market as oppose to those goods produced for export. Price controls will
not be used to provide protection to Chinese firms.
!Implement the Trade-Related Aspects of Intellectual Property Rights
(TRIPs) Agreement upon accession.
!Accept a 12-year safeguard mechanism, available to other WTO
members in cases where a surge in Chinese exports cause or threaten to
cause market disruption to domestic producers.
!Fully open the banking system to foreign financial institutions within five
years. Joint ventures in insurance and telecommunication will be
permitted (with various degrees of foreign ownership allowed).

WTO Implementation Issues
China’s implementation of its WTO commitments has been closely followed by U.S.
officials and various business groups. On December 11, 2002, the USTR released its first
annual China WTO compliance report.3 Although stating that China had made significant
overall progress in meeting its WTO obligations, the report raised serious concerns over
China’s compliance with its commitments on agriculture, services, IPR protection, and
transparency of trade laws and regulations. The USTR’s second annual China compliance
report (issued in December 2003)4 again emphasized that China had made significant
overall progress in meeting its WTO obligations, but raised concerns over China’s
compliance with its commitments on agriculture, services, IPR protection, tax policies,
transparency of trade laws and regulations, and trading rights and distribution services.5
U.S. business groups have raised similar concerns. The U.S.-China Business Council
(USCBC) mid-year 2003 report on China’s WTO implementation stated that there were
“growing concerns” among U.S. firms over China’s ability to deliver on key commitments
on time and in full.6 Finally, a survey of U.S. firms doing business in China conducted
by the General Accounting Office in 2003 found that a majority of those questioned felt
that China had implemented most of its WTO obligations only to some or little extent.7
U.S. officials have raised a number of WTO implementation issues with Chinese
officials over the past year:
!Soybeans. U.S. soybean exporters have faced uncertainty and, in some
instances, disruption in their soybean sales to China, stemming from
China’s announcement in 2001 that it would seen implement new rules
on bio-engineered foods (effective in 2002). China initially failed to
provide details of these rules, which led to a disruption in U.S. soybean
exports to China from January-March 2002. President Bush personally
raised the issue with Chinese officials, which led China to agree to the
interim use of U.S. and foreign safety certificates until China implements
its new biotechnology regulations. On October 18, 2002, China issued
regulations applying this policy through September 2003; the USTR’s
office stated that the regulation “should remove the threat of an8
interruption of U.S. soybean sales to China.” In July 2003 China further
extended the policy through April 2004. However, U.S. exporters have
complained that the regulations require each GMO shipment have an

3 USTR, 2002 Report to Congress on China’s WTO Compliance, December 11, 2002.
4 USTR, 2003 Report to Congress on China’s WTO Compliance, December 11, 2003
5 The USTR noted that China had made progress in implementing its commitments on the
administration of tariff rate quotas on agricultural products, removing restrictions on soybean
imports, reduced capital requirements for certain financial service providers and restrictions on
auto financing, and ended discriminatory tax policies on information technology products.
6 USCBC, China’s WTO Implementation: A Mid-Year Assessment, June 2003.
7 General Accounting Office, World Trade Organization: U.S. Companies’ Views on China’s
Implementation of Its Commitments, March 2004.
8 USTR Press Release, October 18, 2003.

interim biotech safety certificate and a Chinese government import
license. Additionally, in January 2003, the Chinese government
indicated that it might delay permanent approval of various GMO crops
and might require another round of food safety studies, a move that led
the U.S. to issue an official protest. Some analysts charge that China
may be attempting to use such regulations to limit biotech imports in
order to protect its domestic producers as well as its own biotech
industries. U.S. officials have warned that they make take this issue to
the WTO for resolution. Despite these problems, U.S. soybean exports
to China more than tripled in 2003 (over 2002 levels), making China the
largest market for U.S. soybean exports in 2003.9
!Tariff-rate quotas. In November 2001, the Chinese government
developed new rules on tariff- rate-quotas on certain agricultural
products that the U.S. charged were discriminatory and violated WTO
rules because they created two categories of import quota licenses: one
for domestic consumption and one for “processing” trade. The U.S.
further charged that China has failed to provide adequate information on
the administration of its tariff-rate quotas (TRQs) for farm commodities.
In July 2002, the U.S. Department of Agriculture (USDA) reported that
China’s TRQ licenses had authorized relatively small levels of imports,
making their use impractical.10 U.S. firms charge that this allocation
policy violates WTO rules on national treatment. In other instances,
China announced TRQs for various agriculture and manufactured
products several months after their required implementation date. In
December 2002, USTR Robert Zoellick sent a letter to the Chinese
government expressing U.S. concern over China’s administration of
TRQs. In January 2003, Zoellick was quoted in the press as saying that
the TRQ issue was “one of the areas we’re most frustrated with” in terms
of China’s WTO compliance, and warned the United States was
considering bringing a dispute resolution case to the WTO. In October

2003, China reportedly issued new regulations (effective January 2004)

eliminating sub-quotas and restrictive license procedures, and improving
transparency in identifying quota allocation recipients. However,
problems appear to remain. For example, China has failed to publish the
details of its 2004 TRQ allocation,11 and in March 2004, the National
Cotton Council charged that China continues to maintain two categories
of import quota licenses for cotton.12

9 However, U.S. soybean exports to China during the first five months of 2004 declined by 32%
over the same period in 2003.
10 For example, under the WTO accession agreement, China’s TRQ for cotton in 2002 was
818,500 tons. In June 2002, China announced that 500,000 tons of the TRQ would be allocated
for processing trade, 270,000 tons for state-owned mills, and 48,500 tons for private mills.
11 Inside U.S.-China Trade, February 11, 2004.
12 Despite these problems, U.S. cotton exports to China have increased sharply in recent years,
growing from $144 million in 2002 to $761 million in 2003. During the first five months of

!Export subsidies and discriminatory taxes. U.S. officials charge that
China has subsidized grain exports (mainly corn) and cotton, and uses its
tax system to discourage imports and encourage foreign firms to produce
domestically, contrary to its WTO commitments. For example, China
continues to give rebates on value-added taxes (VAT) for certain
industries, especially for high tech. In some instances, China imposes
higher VAT rates on certain imported products (such as fertilizers and
various agricultural products) than it does for similar products produced
domestically. On March 18, 2004, the USTR announced that it had filed
a WTO dispute resolution case against China over its discriminatory tax
treatment of imported semiconductors, charging that China applies a 17%
VAT rate on semiconductor chips that are imported into China but gives
a substantial rebate of the tax if the semiconductors are produced or
designed in China. On July 8, 2004, China agreed to this policy.
!IPR. While China has enacted a variety of new IPR laws and periodical
crackdowns on IPR violators, the piracy rate in China for copyrighted
products is estimated to be at 90%. The Chinese government estimates
the value of pirated goods made in China at $19 to $24 billion. U.S.
industry officials estimate that IPR piracy in China cost U.S. firms $2.6
billion in lost sales in 2003. Some members of Congress have called on
the Administration to bring a case against China in the WTO over its lack
of IPR enforcement. In April 2004, China pledged to “significantly
reduce” IPR infringement levels by increasing efforts to halt production,
imports, and sales of counterfeit goods, and lowering the threshold for
criminal prosecution of IPR violations.
Some analysts argue that China’s compliance with its WTO obligations is being
hampered by resistance to reforms by central and local government officials seeking to
protect or promote industries under their jurisdictions, government corruption, and lack
of resources devoted by the central government to ensure that WTO reforms are carried
out in a uniform and consistent manner (especially in regards to IPR enforcement).
Although Chinese government officials have promised to implement WTO related
reforms, it appears that they are concerned that trade liberalization could cause major
employment disruptions in certain sensitive sectors, especially agriculture, that could
result in social instability. In addition, many observers charge that, because the Chinese
government is trying to promote the development of various industries (especially high
tech) it deems critical for the country’s future economic development, it continues to
maintain policies that discriminate against imports in favor of domestic industries and/or
foreign-invested firms in China.
Despite the persistence of trade disputes between the United States and China, U.S.
exports to China have risen sharply since China became a member of the WTO. Between

2001 and 2003, U.S. exports to China have rose by 48%, making China the fastest

12 (...continued)

2004, U.S. cotton exports to China totaled $1.1 billion.

growing U.S. export market.13 Table 1 lists U.S. exports of selected products that were
a U.S. priority for liberalization during negotiations for China’s WTO accession. Some
priority U.S. exports have risen sharply (in both dollar and percentage terms), such as
poultry, soybeans, cotton, semiconductors, and autos and auto parts, while exports of
other priority products, such as corn, alcohol, and fertilizers, have risen more moderately.
Table 1. Selected U.S. Exports to China: 2001-2003
($ in millions)
2001200220032001-2003% Change
Total U.S. exports to China19,234.822,052.728,418.947.7
Corn 0.6 2.2 0.7 16.7
Wheat 21.4 25.9 35.2 64.5
Poultry meat39.051.2102.3162.3
Soybeans 1,012.5 888.7 2,830.3 179.5
Vegetable oils9.316.331.7240.9
Cotton 42.9 143.5 760.8 1,673.4
Semiconductors and related1,074.71,585.42,448.3127.8
Fertilizers 421.4 675.4 469.8 11.5
Pharmaceuticals 112.7 191.0 201.7 79.0
Spirits and alcoholic beverages4.15.75.636.6
Motor vehicles and parts272.9385.9614.5125.2
Source: USITC Trade Dataweb.
Congress will likely continue to press the Bush Administration to ensure China’s
compliance with its WTO commitments. Many U.S. business and labor representatives
have complained over a number of Chinese trade practices which they claim harm U.S.
economic interests, including dumping, subsidization of state firms, “currency
manipulation,” and unfair labor practices. Some Members have called on the
Administration to more aggressively use the WTO dispute resolution mechanism and/or
various U.S. trade laws (such as Section 301) to address China’s non-compliance with its
WTO and other “unfair trade practices.”

13 During the first five months of 2004, U.S. exports to China were rose by 38% over exports
during the same period in 2003.