China working party to conclude work on 13 September

by Chakravarthi Raghavan

Geneva, 7 Sep 2001 - - The working party on the accession of the Peoples Republic of China to the World Trade Organization is due to meet on 12 September to adopt and forward its report and the draft Protocol of Accession for adoption by the WTO at its 4th Ministerial Conference in Doha in November.

The working party will meet in informal session first on 11 September and then formally on 13th to adopt the report and the protocol. The working party on Taiwan is meeting informally on 12 September, and formally on 14 September, a day after the formal meeting of the working party on the PRC, to adopt the Taiwan accession.

The negotiations for settling the terms and conditions have taken over 14 long years - first in a working party of the old GATT established in March 1987, in terms of China’s resumption of status as a GATT Contracting Party and after the entry into force of the WTO and a fresh application from China for accession to the WTO in December 1995, when the old GATT working party became a WTO working party for Chinese accession.

A clean copy of the final text and protocol and annexes was readied and provided to the members on 31 July, so that it could be considered in the capitals before being adopted by the working party.

The draft report and accession terms for the PRC have been settled at the July meeting of the working party, though there are still two outstanding issues to be resolved.

One relates to ‘insurance sector’ and the situation relating to the US insurance company, the American International Group (AIG), which is now established in China, with a 100% ownership life insurance business and operation, and which the AIG is seeking to ‘grandfather’ through the protocol so that AIG could not only continue its present operations, but open more branches etc.

However, China in its accession terms in services has agreed to open up its insurance sector on a joint venture basis (50-50 ownership).

If the AIG is to continue to enjoy its privileged position, the EU and others are insisting that their insurance companies too should be able to operate on similar terms.

The AIG has been one of the very first foreign investors in the PRC, and through its support to both parties in the US (for Presidential and Congressional elections) commands considerable clout in the United States. Perhaps even more, it enjoys some cordial relationships with Beijing by showing some sensitivity to the Chinese and their view of the past.

For example, it acquired in an art auction sale in Europe and presented to the PRC, Chinese artifacts looted and removed from China by British soldiers during the Opium wars.

In the socalled ‘second opium war’, in 1860, the British marched on Beijing, looted and burnt the Summer palace of the emperor, with the British soldiers taking away all the arts and treasures. When this barbaric act created an uproar, the then President of the Chamber of Commerce of Hong Kong (seized in the first opium war), in justifying the behaviour of the British declared in 1870 that “China can in no sense be considered a country entitled to the same rights and privileges as civilized nations which are bound by international law.”

China and its people have not forgotten or forgiven this type of insult and treatment. And the AIG action in restoring to China its ancient artifacts made the Chinese feel more friendly.

Nevertheless China is aware that a way out has to be found, either with the AIG accepting the joint venture operations or China providing the same treatment to the EU, Swiss, Japanese and other insurers who are there (on a 50-50 basis) or might want to come in. After the July meeting, Chinese vice-Minister Mr. Long hoped AIG will show some understanding (for the problem to be resolved).

A second problem relates to the bilateral agreement with Mexico, where a sticking point has been on questions relating to some 1428 anti-dumping duties that Mexico has slapped on imports from China (after the Nafta agreement, and often encouraged by or in pursuance of Nafta) and which are in force, but inconsistent with the WTO and its anti-dumping agreement.

Mexico has been negotiating with China, and wanting a 15-year period to phase out these WTO-inconsistent measures. China has been willing to agree to a 5-year period.

However, a while ago, Mexico had announced that even if no agreement is reached, it will not stand in the way (by withholding consensus) of China’s accession, but that it would invoke the non-application clause. If this happens, and later a solution is found and an accord reached, it would still have multilateral implications, and ordinarily other members would not be concerned.

However, some of them have become slightly wary, because of the way the US and China reached agreements (in July) on a few outstanding points between them, for example, on foreign exchange matters, with a wording in language that could have had implications for other WTO members, and which the US sought to push through for this very reason - applying some arm-twisting to make the delegations having questions and doubts to give up. In this particular case, compromise language was worked out (with China itself showing understanding for the position of others and working with them) to evolve a compromise language.

The draft report of the working party and the protocol show that China has indeed paid a high price for accession, even if, once the political masters in Beijing decided on accession, the Chinese negotiators have used skills to safeguard themselves, and get the ‘best terms’ possible.

What effect it will have within China, when China begins the task of not only changing its laws and regulations, but begins to administer and enforce them, remains to be seen. It may not become as bad as that foretold by some foreign analysts and ‘doom sayers’, but the adjustments to be made by the Chinese people and their enterprises are going to be pretty tough and the price to be paid high. Also, to be seen, are Chinese positions in future WTO negotiations, viasvis positions of other developing countries with an effect on its own competitivity.

To meet Chinese sensitivities and domestic political considerations, several of the Chinese ‘concessions’ and acquiescence with the continuance of ‘discriminatory’ treatments against China, have been put in the report of the working party, and not in the protocol itself.

Legally, it makes no difference, as para 1.2 of the protocol makes clear that the protocol includes commitments set out in para 341 of the Working Party Report and become an integral part of the WTO Agreement. That para details some 130 paragraphs in the working party report where, on specific matters, China has undertaken commitments.

A general statement of sorts in the working party report, para 8, recognizes China’s status as a developing country entitled to enjoy special and preferential treatment, meeting an important domestic political issue for Beijing.

But the next para talks of the view of some WTO members to take a pragmatic approach to this, because of the “significant size, rapid growth and transitional issues of the Chinese economy”, and that each (WTO) agreement and China’s situation should be carefully considered and specifically addressed. The para then goes on to say:

“.... In this regard it was stressed that this pragmatic approach would be tailored to fit the specific cases of China’s accession in a few areas, which were reflected in the relevant provisions set forth in China’s Draft Protocol and Working Party Report. Noting the preceding statements, Members reiterated that all commitments taken by China in her accession process were solely those of China and would prejudice neither existing rights and obligations of Members under the WTO Agreement nor on-going and future WTO negotiations and any other process of accession. While noting the pragmatic approach taken in China’s case in a few areas, Members also recognised the importance of differential and more favourable treatment for developing countries embodied in the WTO Agreement.”

This was a formulation, negotiated after much bargaining and difficulty, but one several developing countries like India insisted upon, and more so when the major trading partners like the USA, praised the Chinese concessions and suggested this should be adopted by others too in the ongoing and future negotiations, raising the hackles of almost every developing country, many of whom in fact felt that China had given away more than it needed to.

In the case of the textiles and clothing sector, effectively, the discriminatory quota restrictions against imports from China would remain beyond 2005 (when the Agreement on Textiles and Clothing would disappear from the WTO).

Apart from the general safeguards provisions, product specific safeguards can be applied against imports from China for a period of 12 years.

On the issue of prices, and the administration of trade regimes by China, and the manner in which international obligations would be incorporated into the domestic law, the working party notes China’s commitments that it would incorporate its international obligations in a timely manner. This implies that there will be no automatic application, as set out in an earlier version of the draft.

The protocol provides for setting up a Transitional Review Mechanism, at the level of the WTO General Council. This mechanism is to review the implementation by China of the WTO Agreements and the provisions of the protocol (in turn the commitments spelt out in the working party report). Such reviews are to be done on an annual basis. China too could raise in this mechanism issues relating to any reservations (on all prohibitions, QRs and other measures maintained by WTO members against imports from China in a manner inconsistent with WTO Agreements and listed in Annex 7 of the protocol, and agreed to be phased out in accord with mutually agreed terms and time-tables). There will be annual reviews.

Issues considered under this review are without prejudice to rights and obligations of members, under the WTO agreements or plurilateral agreements, and shall not preclude or be a precondition to have recourse to consultations (and dispute settlement route).

In other parts of the working party report, it would appear that in relation to the ‘right to trade’, China has given concessions beyond the requirements of GATT Article III. This article requires socalled ‘national treatment’ on internal taxation and regulations for foreign goods after they cross the national boundaries. Similarly on state trading, China appears to have given ground more than was required under the GATT 1994.

On the various non-tariff measures maintained by it, China has given a phase-out schedule.

The provisions in the working party report and protocol on the issue of price controls could become quite a messy one in terms of implementation, and perhaps much would depend on the wisdom shown on all sides, and the extent to which major trading partners are willing to rein in the ‘greed’ of their corporations.

In Agriculture, China has agreed that in implementing Articles 6.2 and 6.4 of the Agreement on Agriculture, it would include government measures of support within its calculations of Aggregate Measure of Support (AMS). And China also has agreed to keep its de minimis claims and support at 8.5% and below - for product specific and non-product specific.

This proved a particularly contentious concession, for other developing countries to accept, but one which the United States (at the working party meetings) had said that this was a ‘very useful precedent’ for other developing countries in on-going agriculture negotiations.

Under Art. 6.2 of the AoA, developing country members could provide government support, direct or indirect, to encourage agricultural and rural development as an integral part of the development programmes. Investment subsidies generally available to agriculture in developing countries, and agricultural input subsidies generally available to low-income and resource-poor producers “shall be exempt from domestic support reduction commitments...”

Domestic support meeting these criteria shall not be required to be included in a developing country member’s calculation of its current total AMS.

Developing countries have been demanding, in the current agriculture negotiations, expansion of the rights for domestic support through a ‘development box’ and by higher de minimis levels.

The provision in para 9 of the working party report (quoted above) was formulated in order to make clear that these and other concessions were of China’s, and in no way affected others.

The paragraph of the working party report on foreign exchange, which as drafted and agreed between the US and China would have made Chinese foreign exchange restrictions if any in effect adjudicable by the IMF in the first instance, and perhaps later at the WTO too. At the insistence of India and Malaysia the original language was changed.

The draft provides that China would implement its obligations on foreign exchange matters in accordance with the provisions of the WTO agreements and related declarations and decisions of the WTO that concerned the IMF. The para then went on to say that the representative of China “confirmed” (in a draft subsequently modified at the insistence of India and Malaysia into “recalled”) China’s acceptance of Article VIII of the IMF’s Articles of Agreement which provides that “no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions.”

The para then goes on to say that in accordance with these obligation, and unless otherwise provided for in the IMF’s Articles of Agreement, China would not resort to any laws, regulations or other measures, including any requirements with respe4ct to contractual terms, that would restrict the availability to any individual or enterprises of forex for current international transactions within its customs territory to an amount related to the forex inflows attributable to that individual or enterprises.

A subsequent sentence, deleted at the insistence of India and Malaysia, then said that the representative of China “states, moreover, that China would not subject individual requests for forex for the making of payments and transfers for current international transactions including the issuance of credit or credits guaranteed for current international transactions (e.g. letters of credit, direct loans, guarantees of loans by financial institutions or other entities), top any form of approval or restriction (including a requirement for the presentation of an invoice) in a manner inconsistent with the its obligation under the IMF Articles of Agreement.”

The net effect of this (deleted portion) would have been that China’s commitments under the IMF would have been written into China’s protocol of accession to the WTO, and thus could have been invoked under the WTO’s dispute settlement provisions. If this had been done, no doubt at some future point, the US and others would have sought to bring it in for others.

In some tough talks, at the meeting on 17 July - where this was presented inside the meeting, without any time for countries to consult their capitals and with the US insisting it should be approved at that meeting - India and Malaysia made clear they would have to block it, in the absence of time to consult and capitals to give new instructions..

Ultimately the word (Chinese) ‘confirmed’ in the first sentence of the para was made into ‘recalled’, and the wording that would have made any Chinese commitments to the IMF jusiticiable in the WTO was deleted..

The Chinese working party report and protocol have some other derogations relating to the industrial tariffs, TBT agreement, issues relating to price comparability. On government procurement, China has agreed that it would administer this in a transparent manner, and this would apply to all types of Chinese authorities at various levels. – SUNS4962

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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