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China and the World Trade Organization

By Paul B. Edelberg, Esq., Special to Angel Investor News

The recent explosion of trade between China and the United States is primarily due to the conversion of China’s state controlled system to a market system and the openness of China’s existing government to promote foreign trade. This remarkable growth in international trade is about to take a giant leap forward with the accession of China to the World Trade Organization (“WTO”).

Its membership in the WTO will provide tremendous business opportunities for foreign companies, including American companies. To understand China trade and the new opportunities it presents, one must understand the issues related to China’s joining the WTO. This article will explore what China’s accession to the WTO will mean for American companies.

The World Trade Organization provides the institutional framework for the international trading system. It administers trading rules, offers a forum for trade negotiations and provides an international trade dispute resolution mechanism. Membership in the WTO requires that each member country grant the other permanent normal trade relation (“PNTR”) status. Members of the WTO enjoy lower tariffs in trading with each other. Members often have greater access to member markets, since members must adopt WTO rules limiting or in some cases lifting barriers for market access.

Membership can also compel a country to expand the ways foreign companies can do business within that country. The WTO also provides an international arbitration process for resolving trade disputes among members. Currently, there are 135 member countries in the World Trade Organization, and 31 additional companies have applied for membership.

A member country must grant permanent normal trade relation status to other WTO members with which it enters into a multilateral agreement. Under the Trade Act of 1974, United States was required to deny normal trade relation status with certain countries, including China. However, Section 402 of that Act permits a one year waiver against this prohibition under a process requiring the President’s recommendation and Congressional vote.

China has received this waiver each year since 1979. Last year Congress passed legislation authorizing the President to grant China permanent normal trade relation status upon its accession to the WTO. Until that time the President and Congress will be required to approve one year Section 402 waivers. Once China becomes a member of the World Trade Organization, it will no longer need yearly renewal of this status. President Bush has urged support of China’s accession to the WTO, and has approved PNTR status for China.

China reached tentative agreement on its bilateral negotiations with the United States in 1999 when the two countries entered into the U.S.-China Market Access Agreement, a comprehensive bilateral agreement covering market access issues. This updated the 1979 Agreement on Trade Relations, which established reciprocal “most favored nation” trade status between the two countries in certain areas. The 1999 Agreement reduced or lowered China’s tariffs on certain products over time, lowered non-tariff market access barriers (such as quotas and licensing requirements) and expanded product distribution methods for American companies, among other things. Despite the 1999 Agreement, certain issues remained unresolved in the bilateral agreement process, such as China’s farm subsidies. Within the last month, it has been reported that agreement has been reached on this issue and on all outstanding items for the bilateral agreement and that China is ready to finalize the multilateral negotiations.

The WTO working party reconvened with China’s trade representatives in late June of this year in Geneva and, according to reports, finalized the multilateral negotiations. Because of the successful conclusion of the multilateral negotiations, the protocol and the working party report could be prepared and a vote by the WTO’s General Council could take place as early as this year.

What are some of the favorable terms of China’s new bilateral trade agreement with the U.S. for American companies? The following is a summary of some of the highlights of the tentative bilateral agreement. This summary is based on articles, Congressional reports and newspaper articles and is a simplified explanation of a set of complex agreements and rules resulting from the bilateral agreement, some of which were classified information until recently and have been resolved within the last month. This summary is not intended to be comprehensive but rather to provide a sense of the types of concessions made by the China’s trade negotiators and the types of opportunities which will now be available to American companies.

·China has agreed to lower or eliminate various tariffs, many of which reductions will be phased in over a period of time. Industries which will benefit include the auto industry, the chemical industry, the electronics industry, the information technology industry, environmental technology equipment, power generation equipment and medical equipment, among others.

·China has agreed to lower certain market access barriers. Industries that will benefit include the telecom industry (particularly the basic and value-added services markets), banking, insurance and insurance brokering, accounting and legal services, and certain environmental protection services. Regarding the telecom industry, foreign companies will have much better market access for the sale of cellular networks, access network products, internet telephony networks, broadband transmission technologies, transmission media and telecommunications consulting services. China currently does not allow foreign companies to conduct both a trading business and a distribution business. Under its WTO agreement, it will now allow the combination of trading and distribution rights and will open up trading rights by foreign enterprises. Freight-forwarding businesses in particular should benefit from this provision.

·China has also agreed to improve the administration of its trade rules, to guarantee the right of foreign enterprises to import and export, to change some of its practices of its special economic zones, and to expand its intellectual property laws. An important concern of many WTO members is China’s commitment to comply with WTO trade rules and enforcement mechanisms and to permit monitoring of its progress in making mandated economic and trade reforms. Presumably this concern will be adequately addressed to the parties’ satisfaction in the multilateral agreement, although only time will tell how well China fulfills these commitments.

Many of these benefits will be phased in gradually, thereby moderating the speed at which U.S. companies can take advantage of these new opportunities. Nonetheless, this will give U.S. companies, as well as other foreign companies, the time to react to these changes and plan their new strategies. While U.S. companies will face increased competition from other foreign companies, U.S. companies will be able to operate more efficiently and compete more effectively in China, and will benefit from a more predictable trade relation status, including a stronger legal framework.

These new opportunities are not just limited to the large American companies. According to data from the US Department of Commerce International Trade Administration, 35% of all U.S. merchandise exports to China were generated by small and medium sized businesses (SMEs) (defined as fewer than 500 employees).

It is easy to see how China’s accession to the World Trade Organization would be favorable to American companies. And the data suggests that SMEs have taken and can continue to take advantage of the huge export market and component processing market in China.

A country must go through four phases to become a member of the WTO (commonly referred to as “accession” to the WTO). The first stage is the fact finding stage, during which period the applicant country must furnish information to and respond to questions of the WTO and its member countries.

The second phase is the negotiation phase, during which two types of trade agreements are negotiated. An applicant country must enter into bilateral agreements with all requesting members of the WTO, which are usually the major trading partners. These bilateral agreements cover issues such as tariff barriers, the export or import of specific products, distribution rights and market access rules. Once the bilateral agreement is entered into, the applicant country then enters into a multilateral agreement with all interested WTO members. The multilateral agreement is a conglomeration of all the bilateral agreements. Since WTO members work on the “most favored nation” principle, the best terms of all of the bilateral agreements will be incorporated into the multilateral agreement.

The multilateral agreement is negotiated by a working party comprised of WTO members. Any agreement on the terms of a multilateral agreement are contained in two documents: a protocol, which contains the terms of accession, and a working party report, which contains the narrative of the results of the negotiations.

Once the multilateral agreement is completed and the working party and the applicant country have reached a consensus, the final accession package is forwarded with the draft declaration for review by all WTO members. Each member country then must decide whether to accept the multilateral agreement or whether to invoke “non-application” status. A country invoking “non-application” status does not accept and is not bound by the multilateral agreement with the applicant country. Once that phase is completed, the WTO’s General Council (comprised of all WTO members) must accept or reject the application by a two-thirds vote.

The final phase is the implementation phase. The applicant country must conform to the requirements and practices dictated by the multilateral agreement and the WTO. Once it completes all these requirements, thereby implementing the multilateral agreement, it formally notifies the World Trade Organization by filing its acceptance, and the applicant country becomes a member thirty days after the notification of acceptance.

Paul Edelberg is a partner in the law firm of Rucci, Burnham, Carta & Edelberg, LLP, located in Darien, Stamford and New Canaan, Connecticut. He serves as Chairman of the Board of the Stamford Chamber of Commerce. He also is President of ChinaTrade2USA, a Stamford-based business to help small and medium sized American companies do business in China.

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