Reform by the book is slow going

As China approaches the end of its first year as a World Trade Organisation (WTO) member, two reports published by trade groups in the United States have assessed Beijing's record of compliance with its market-opening obligations.

The reports, released last month by the United States-China Business Council (USCBC) and the US Chamber of Commerce, provide a detailed breakdown of how American businesses have fared across various industries.

The consensus is that although China seems genuinely committed to implementing WTO reforms, especially at central government level, problem areas remain. In particular, regional and bureaucratic resistance to change has caused headaches for foreigners looking to participate in China's more sensitive markets.

Predictably, most progress has been seen in areas where reforms are easiest to implement. Beijing has amended or abolished more than 3,000 laws as part of a comprehensive review of its legal system's compliance with WTO rules. It has also moved to implement wholesale tariff reductions. As a result, average tariffs have fallen from 15.3 per cent before accession to 12 per cent today, according to the USCBC.

Other positive moves include legislation setting out a framework for foreign telecom operators to set up Chinese joint ventures (although no licences have yet been issued), and the lowering of tariffs on the import of vehicles, a sector especially vulnerable to foreign competition.

On the other side of the coin, both reports contain a laundry list of areas where Chinese compliance has apparently not been up to scratch.

One area of concern is a tendency for domestic regulations to be sometimes interpreted in ways that discriminate against foreign companies.

This happens either because the regulations are vaguely worded (Chinese laws often are) or because, according to the USCBC, 'practices promulgated at the central level have been designed with discriminatory and trade-restrictive intent'.

For example, the Chinese introduced regulations in June last year that impeded imports of certain agricultural products, which were expected to increase following accession. The basis for the ban was that the foreign products failed to comply with local hygiene and quarantine standards.

The rules applied in particular to genetically-modified organisms (GMOs) such as soybeans, of which US exports to China exceeded US$1 billion last year.

US and Chinese negotiators reached an interim deal over GMOs in March, but no permanent solution to the issue has yet been reached.

The USCBC sees the imposition of health-based barriers as a 'blatantly protectionist' ploy to protect the domestic agricultural sector, which is also singled out by the US Chamber of Commerce as one in which significant problems have developed.

Another row relating to agricultural imports concerns Chinese allocation of TRQs, or 'tariff-rate quotas'. TRQs allow low- or no-tariff imports of a given product up to a certain volume, after which higher tariffs apply.

Although China made specific commitments to allocate various TRQs, the authorities have in many cases either failed to allocate quotas at all, or allocated them in ways that make them hard to use.

The effect has been to block imports of certain products, in particular vehicles, fertiliser, wheat, corn, wool, sugar, and cotton.

Another key problem area cited by the reports is in foreign investment, especially in the services sector. Although Beijing has amended laws to allow foreign investment in many previously banned sectors, and has removed rules that set conditions on how foreign companies operate, such as mandating local content rules or export quotas, other barriers have sprung up in their place.

These include, the USCBC report says, 'unreasonably high capital requirements and burdensome licensing and re-licensing requirements to establish and branch'.

These new conditions affect a range of industries, but include in particular foreign banks, which have been hit by rules limiting new branch openings to one per year, and telecommunications companies, which face excessively high registered capital requirements.

Finally, both reports note Beijing's increasing use of anti-dumping rules as a means to protect vulnerable domestic industries, especially in the chemicals sector, which are involved in some 70 per cent of all dumping cases brought by the Chinese.

This said, however, US reports assessing China's compliance with its WTO obligations must be read in the light of America's own compliance track record, which is far from impressive.

Indeed, complaints of possible misuse of anti-dumping rules ring hollow coming from the US, which has a reputation for improper invocation of this type of remedy.

Since 1998, the US has been named in complaints before the WTO Dispute Settlement Body (DSB) far more than any other country. It has lost about 70 per cent of all cases.

Last month a DSB panel ruled against a recently-introduced US law, the Byrd Amendment, that sought to redistribute to US companies revenues earned from anti-dumping duties levied by the US government. The panel ended its ruling by suggesting the law be repealed.

Nor is this the only instance of the US and other developed countries adopting a dog-in-the-manger attitude towards opening their own markets.

Under the so-called 'Doha Development Agenda', a time-line was provided for developed countries (principally Canada, the European Union and the US) to provide increased growth rates for imports of textiles and clothing, which tends to originate from developing economies, China in particular.

There now seems little chance of the deadline being met following what amounted to a filibuster by developed nations at a July meeting of the WTO General Council.

Hong Kong's ambassador to the WTO, Stuart Harbinson, described the proceedings as 'a charade', and demanded redress for affected countries, citing unjustified anti-dumping actions and changes in the rules of origin that hurt developing nations.

This is only the latest in a long history of disputes concerning inadequate implementation of WTO obligations by developed nations, especially in relation to imports from developing countries.

With role models such as these, it can hardly come as a surprise if China too were to look for ways to hedge its bets over opening its markets to free trade.