On February 24, 2023, the Office of the United States Trade Representative (USTR) released its 2022 Report to Congress on China’s WTO Compliance (the “WTO Report”). This is the 21st report prepared pursuant to section 421 of the US-China Relations Act of 2000, which requires the USTR to submit an annual report to Congress on China’s compliance with commitments made in connection with its accession to the World Trade Organization (WTO).1 Shortly after the release of the report, the Biden Administration released a policy agenda announcing steps the USTR has taken “to advance President Biden’s trade agenda over the last two years, as well as its priorities for 2023 and beyond.”2 The policy agenda “emphasize[s] new tools the US Trade Representative is developing in lieu of standard trade agreements and ‘re-aligning’ relations with China.”3
The WTO Report consists of three main sections: 1) an assessment of China’s WTO membership; 2) US trade policy toward China; and 3) specific Chinese policies and procedures that the USTR views as problematic.
Assessment of China’s WTO membership
This section provides a brief history of China’s accession to the WTO, then explains the obligations and steps China agreed to take in order to accede, including special provisions drafted to address China’s specific situation. In particular, the report emphasizes that China “agreed to embrace the WTO’s open, market-oriented approach” and integrate this approach into its trading system and institutions. The report asserts that China has a “poor record” when it comes to “complying with WTO rules and observing fundamental principles on which the WTO agreements are based.” Since the previous report, there has been no change in the USTR’s assessment of China’s record in terms of the adoption of market-oriented policies or compliance with WTO rules. The report claims that China “continues to shield massive sub-central government subsidies from the scrutiny of other WTO members, while also obscuring massive central government subsidies provided through a newer vehicle known as ‘government guidance funds.’” The report asserts that the WTO dispute settlement mechanism “has not been effective in addressing” these serious issues, and, as a result, “China has been able to reinforce its state-led, non-market policies and practices” without any effective disciplinary measures by the WTO.4
The report then identifies the persisting “unresolved problems” with China’s “state-led, non-market trade regime.”5 The report emphasizes as most important the “fundamental structural issues” that have yet to be addressed, which include, among others:
China’s heavy reliance on market-distorting industrial policies covering virtually every sector of the economy, preferential treatment of state enterprises, massive subsidization of domestic industries (including financial support to and through state-owned enterprises and other state entities at multiple levels of government and a banking system dominated by state-owned banks favoring state-owned enterprises and targeted industries), forced technology transfer, state-sponsored theft of intellectual property and severe and persistent nonmarket excess capacity in key industries.6
In remarks about the policy agenda released on March 1, US Trade Representative Katherine Tai “called market distortion by China ‘a factor that we absolutely cannot ignore’ . . . and ‘a global challenge’ to the fundamental premises of” globalization.7
The report also alleges the following serious issues:
significant market access restrictions, unjustified non-tariff barriers, import substitution, violations of internationally recognized labor rights (including forced labor), lax or unenforced environmental standards, increased adoption of unique Chinese national standards . . . continued gaps in intellectual property protection and enforcement, overly broad cybersecurity regulation designed to favor domestic companies, unwarranted data localization requirements and cross-border data transfer restrictions, the misuse of competition policy for industrial policy objectives, purposeful obfuscation of trade and economic policies, especially with regard to China’s subsidies practices, and inadequate regulatory transparency.8
The section concludes by claiming that China’s economic system “facilitates control and direction of all aspects of the economy by the Chinese government and the Chinese Communist Party”, and that this non-market economic system has resulted in the creation of excess capacity, forced technology transfer, and other “serious harm” to industries and workers in the United States and other WTO members.9
US trade policy toward China
This section summarizes the “various challenges that the United States and other WTO Members face as a result of China’s” approach to the economy and trade, as well as the “multi-faceted strategic approach that forms the foundation of” US trade policy toward China.10 The report alleges the following current challenges: China’s failure to embrace market-oriented policies, the distortions of which, due to China’s size as a trading partner, cause “substantial costs on” China’s trading partners; existing WTO rules “do not, and cannot, effectively discipline many of China’s most harmful policies and practices;” China’s circumvention of existing WTO rules; other trading partners replicating and/or accepting China’s trade practices; and China’s use of “its economic clout in a coercive way if it perceives that a foreign company or a foreign country has spoken or acted in a way that undermines China’s economic and trade interests.”11 However, the report emphasizes that, in addressing these perceived challenges, the US is “not seeking to build a wall between the United States and China”—not only is it not possible to build one, but even if it were, “it would not address the problems posed by China. It would also ignore China’s importance to, and integration into, the world economy.”12
Turning to US strategy, the report states that “any U.S. trade policy toward China must account for current realities in the U.S.-China trade relationship and the many challenges that China poses for the United States and other trading partners, both now and in the future.” The report alleges that China’s “approach to the economy and trade has evolved and become more sophisticated,” and thus US strategy must also evolve and become more sophisticated. This “multi-faceted strategic [U.S.] approach” consists of the following:
1) domestic investment in and policies that support “the industries of today and tomorrow,” such as the recently passed CHIPS and Science Act, Inflation Reduction Act, and Infrastructure Investment and Jobs Act;
2) continued bilateral engagement with China, while claiming previous “U.S. efforts have not led to fundamental changes in China’s trade regime,” and thus “it will be up to China to decide whether and to what extent it is willing to work constructively with the United States to address” US concerns;
3) working to ensure that China “lives up to its existing trade commitments, including the ones that China made in the Phase One agreement”;
4) continued use of domestic trade tools, which the United States “is prepared to use . . . as needed in order to achieve a more level playing field with China for U.S. workers and businesses”;
5) exploration of an update to the United States’ trade tools, both by strengthening existing trade tools and creating new ones; and
6) collaboration with “like-minded” trading partners to explore new initiatives to “explore strategies for addressing the unique problems posed by non-market policies and practices,” such as the US and the EU establishing a Trade and Technology Council, the US and Japan establishing a Partnership for Trade, strengthening existing trade relationships in the Indo-Pacific region, working to make critical supply chains less vulnerable, and pursuing initiatives at the WTO and forums like the G7, G20, and Organization for Economic Cooperation and Development. In particular, at the WTO, the US agenda “includes pushing for and building support for WTO reforms to update the organization and respond to contemporary challenges, including China’s accession to the WTO.”13
In Katherine Tai’s March 1, 2023, remarks, she reasserted that the US is not “on a path toward decoupling its economy from China”–rather, the administration is “de-risking” by trying to avoid “over-dependence on China.”14
Specific Chinese policies and procedures
The third and final section summarizes the United States’ key concerns regarding China’s approach to domestic economic policy and trade. The report flags a broad range of concerns, including: state-led, non-market trade regime; state-owned enterprises; subsidies; import policies; sanitary and phytosanitary measures; investment restrictions; export policies; intellectual property rights; pharmaceuticals and medical devices; services; digital trade and electronic commerce policies; government procurement; and administrative process.
State-led, non-market trade regime
The report focuses specifically on China’s industrial plans and related policies “that seek to limit market access for imported goods, foreign manufacturers and foreign services suppliers,” while providing significant benefits to state-owned enterprises and domestic Chinese companies; forced technology transfer; and policies “aimed at promoting China’s so-called ‘indigenous innovation’ that ‘provide various preferences when intellectual property is owned or developed in China[.]’”15 The report argues that “one of the more far-reaching and harmful industrial plans” is China’s Made in China 2025 plan, which it claims has an “overriding aim . . . to replace foreign technologies, products and services with Chinese technologies, products and services in the China market through any means possible[.]”16
The report states that China has made numerous commitments, both as part of its WTO ascension and in bilateral dialogues with the US, that business activities of state-owned and state-invested enterprises would be subject to WTO rules and that China would “develop a market environment of fair competition[.]” The report asserts that China “instead took steps intended to strengthen the role of state-owned and state-invested enterprises in the economy and to protect them against foreign competition.”17
The report alleges that China “continues to provide massive subsidies to its domestic industries,” some of which “appear to be prohibited under WTO rules.” The US has used domestic countervailing duty proceedings and dispute settlement cases at the WTO to address this perceived issue. Along with other WTO members, the US also has “continued to press China to notify all of its subsidies to the WTO” in accordance with its obligations. The report acknowledges “China’s WTO subsidy notifications have marginally improved over the years in terms of timeliness and completeness.” However, it asserts that “China has not yet submitted to the WTO a complete notification of subsidies maintained by the central government.”18 The report also flags that in 2022, China “began encouraging soybean production through various support programs,”19 and that the US will be looking closely at China’s fisheries subsidies, with the report claiming that “China is the world’s largest provider of harmful fisheries subsidies[.]”20
The report claims that China’s antidumping and countervailing duty practice suffers “in the areas of transparency and procedural fairness.” In particular, it claims that China often uses these tools as a “retaliatory” measure rather than “a mechanism to nullify the effects of dumping or unfair subsidization[.]”21 The report also claims that China’s tariff-rate quota system lacks sufficiently defined criteria and clear producers, and that China has failed “to announce quota allocation and reallocation results,” making traders “unsure of available import opportunities[.]” As an example, the report points to China’s corn imports from 2020 to 2022, which it claims “significantly exceeded TRQ levels, but . . . large state-owned enterprises in China appear to have been the only beneficiaries of the increased imports[.]” Finally, the report alleges that China’s VAT rebates for agricultural commodities has “caused tremendous distortion and uncertainty in the global markets for wheat, corn and soybeans[.]”22
Sanitary and phytosanitary measures
The report states that “China remains a difficult and unpredictable market for U.S. agricultural exporters, largely because of inconsistent enforcement of regulations and selective intervention in the market by China’s regulatory authorities.” It also argues that China is “unwilling to routinely follow . . . international standards and guidelines and to apply regulatory enforcement in a transparent and rules-based manner[.]” Specifically, the report argues that the Chinese “regulatory approval process for agricultural biotechnology products creates significant uncertainty among developers and trades,” and that China’s Decrees 248 and 249 (related to food safety) “place excessive strain on food producers, traders and exporting countries’ regulatory authorities, with no apparent added benefit to food safety.”23
The report alleges that China’s Foreign Investment Law and implementing regulations “perpetuate separate regimes for domestic investors and investments and foreign investor and investments,” which can result in “discriminatory treatment.” It also claims that China continues to apply “prohibitions, foreign equity caps and joint venture requirements and other restrictions in certain sectors.” For example, “China’smost recent version of its Foreign Investment Negative List, which entered into force in January 2022, leaves in place significant investment restrictions in a number of areas imports to foreign investors[.]” The report claims that it appears “China is pursuing the objective of replacing its case-by-case administrative approval system for a broad range of investments with a system that would only be applied to ‘restricted’ sectors,” but that is “remains unclear whether China is fully achieving that objective in practice.”24
The report claims that China has used export restraints to “provide substantial economic advantages” to downstream producers in China “at the expense of foreign downstream producers, while creating pressure on foreign downstream producers to move their operations, technologies and jobs to China.” The report asserts that a “more recent concern involves China’s potential regulation of rare earth exports,” its “export ban on certain fertilizers,” and “export restrictions on corn starch,” despite the Chinese government not publishing an official notice of such restriction.25
Intellectual property protection
The report notes that China has “published a number of draft measures for comment and issued some final measures relating to implementation of the intellectual property chapter of the Phase One Agreement.” In particular, the report flags that China amended the Patent Law, the Copyright Law and the Criminal Law, and that China has reported “increased enforcement actions against counterfeit medicines and increased customs actions against pirated and counterfeit goods.” However, the report alleges that “China has outstanding work to [do to] finalize the draft measures . . . and to publish other measures in accordance with the Intellectual Property Action Plan that it released in April 2020,” and that the US “continues to monitor China’s implementation of the intellectual property chapter of the Phase One Agreement.”26
Katherine Tai’s March 1, 2023 speech alleged that China has engaged in anti-competitive practices, including “‘illicit’ methods of obtaining foreign intellectual property[.]”27
Pharmaceuticals and medical devices
The report alleges the following longstanding issues:
overly restrictive patent application examination practices, regulatory approvals that are delayed or linked to extraneous criteria, weak protections against the unfair commercial use and unauthorized disclosure of regulatory data, issues with the implementation of an efficient mechanism to resolve patent infringement disputes, and restrictions on receiving patent term extensions for unreasonable marketing approval delays. . . . the United States has raised concerns about China’s pricing and tendering procedures for medical devices and its discriminatory treatment of imported medical devices.28
The USTR notes that China has “implemented some helpful reforms,” but that the above concerns remain, “especially as it pertains to treatment of foreign companies.” The report also claims that, while in November 2015 China committed to “giv[ing] imported medical devices the same treatment as medical devices manufactured or development domestically,” when it came to market access, “China continues to pursue a wide range of policies that direct China’s purchasing authorities to prioritize the procurement of domestic medical device manufacturers[.]”29 The report also singles out China’s volume-based procurement approach for medical devices, which originally was limited to a few provinces and municipalities but has since “becomes further engrained in China’s system.” The US industry has expressed that this system, absent “significant changes . . . could lead to the creation of a low-cost, low-quality medical devices sector and low-quality monopolies in China[.]” Finally, the report notes that the US industry has seen increased financial support by sub-central governments in China to domestic medical devices companies.30
The report states “the U.S. share of China’s services market remains well below the U.S. share of the global services market, and the Organization for Economic Cooperation and Development continues to rate China’s services regime as one of the most restrictive among the world’s major economies.” The report identifies numerous challenges that persisted in 2022 in several service sectors, which it attributes to Chinese regulators’ continued use of “discriminatory regulatory processes, informal bans on entry and expansion, case-by-case approvals in some services sectors, overly burdensome licensing and operating requirements, and other means to frustrate the efforts of U.S. suppliers of services to achieve their full market potential in China.” While the Phase One Agreement “addresses a number of longstanding trade and investment barriers to U.S. providers of a wide range of financial services,” the report notes that “China’s excessive restrictions on cross-border data flows could continue to create significant challenges for U.S. financial services providers in China.”31
Digital trade and electronic commerce policies
The report alleges that China has passed laws and regulations that “prohibit or severely restrict cross-border transfers of ‘important data,’” a term that the report claims is “broad” and “vaguely defined.” It also claims that, under these measures, sometimes personal information is “collected by companies through their operations in China.” One such measure is the Security Assessment Measures for Outbound Transfers of Data, which took effect in September 2022. The report states that such restrictions are concerning because cross-border transfers of data “are routine in the ordinary course of business and are fundamental to any business activity.”32 The report also claims that China is passing measures “to impose severe restrictions on a wide range of U.S. and other foreign ICT products and services,” which “support[s] China’s technology localization policies by encouraging the replacement of foreign ICT products and services with domestic ones.”33 Furthermore, use of ICT products and services require “robust encryption.” The report acknowledges that China adopted a Cryptography Law in October 2019; however, the law has a broad definition of “commercial encryption products that must undergo a security assessment,” which “raises concerns that the new Cryptography Law will lead to unnecessary restrictions on foreign ICT products and services.” The US continues to monitor China’s implementation of the law.34
The report claims that China’s WTO ascension agreement included making “a commitment to accede to the WTO Agreement on Government Procurement (GPA) and to open up its vast government procurement market to the United States and other GPA parties.” However, the report argues that China has yet to fulfill this commitment, notwithstanding exponential growth in its government procurement. The report claims that under its “government procurement regime and its tendering and bidding regime, China continues to implement policies favoring products, services and technologies made or developed by Chinese-owned and Chinese-controlled companies through explicit and implicit requirements that hamper foreign companies from fairly competing in China.”35
The report argues that “[o]ne of the core principles reflected throughout China’s WTO accession agreement is transparency.” However, the report claims China still “has a poor record when it comes to adherence to its transparency obligations,” pointing to issues with its publication of trade-related measures, notice-and-comment procedures, translations, and inquiry points.36 The report also finds issue with what it calls China’s “corporate social credit system,” which the report argues “provides mechanism to penalize companies with poor corporate and legal compliance records by, among other things, subjecting them to public censure . . . while rewarding compliance companies with positive incentives[.]” Those companies on the censure list “could face increased inspections, reduced access to loans and tax incentives, restrictions on government procurement, reduced land-use rights, monetary fines or permit denials, among other possible penalties.” To date, “there is no fully integrated national system for assigning comprehensive social credit scores for companies[.]” However, a draft law introduced in November 2022 would establish “NRDC and PBOC as the main government agencies for construction of the social credit system,” which would have the effect of “further embedding” the system into “China’s regulatory network.” The report asserts that foreign companies worry that, among other things, the Chinese government will use this system “to pressure [foreign companies] to act in furtherance of China’s industrial policies or other state priorities or otherwise to make investments or conduct their business operations in ways that run counter to market principles or their own business strategies.”37
The WTO Report demonstrates that the US continues to harbor significant concerns over China’s key economic and trade policies. Interested parties should watch carefully how China responds to the “multi-faceted [US] strategic approach” and whether new tools, e.g., non-conventional trade or economic cooperation agreements, would be developed under that approach.
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For a more detailed look, please refer to the full text of the WTO Report and President Biden’s policy agenda.
1 USTR, 2022 USTR Report to Congress on China’s WTO Compliance at 6, 15, 22 (February 2023), available at https://ustr.gov/sites/default/files/2023-02/2022 USTR Report to Congress on China's WTO Compliance - Final.pdf [hereinafter WTO Report].
2 USTR, USTR Releases President Biden’s 2023 Trade Policy Agenda and 2022 Annual Report (March 2023), available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2023/march/ustr-releases-president-bidens-2023-trade-policy-agenda-and-2022-annual-report.
3 Jennifer Doherty, Partnerships, China Remain Core of Biden’s 2023 Trade Policy, Law360 (March 2023), https://www.law360.com/internationaltrade/articles/1581018?nl_pk=aff3264b-470e-431d-b2e2-67790b9cb417&utm_source=newsletter&utm_medium=email&utm_campaign=internationaltrade&utm_content=2023-03-02&nlsidx=0&nlaidx=0 [hereinafter Partnerships, China Remain Core of Biden’s 2023 Trade Policy].
7 Partnerships, China Remain Core Of Biden's 2023 Trade Policy.
14 Partnerships, China Remain Core Of Biden's 2023 Trade Policy
27 Partnerships, China Remain Core Of Biden's 2023 Trade Policy
mai 252023Global Financial Markets Podcast