U.S. High Tech Coalition on China
TIA is an active member of the Washington, D.C.-based
coalition of high tech industry trade associations and
companies dedicated to opening China's market to freer,
more liberalized trade in information technology
products. The Coalition was formed in 1997 to advocate
for China's accession to the World Trade Organization
(WTO). Since then, the Coalition's scope has expanded to
include support for annual renewal of Normal Trade
Relations (NTR) status for China, Permanent NTR for
China, and the group will monitor China's accession to
the WTO when that happens, hopefully in early 2001.
Members of the U.S. High-Tech Industry Coalition on
China include:
POSITION PAPER
CHINA'S ACCESSION TO THE WORLD
TRADE ORGANIZATION
 Click
here for a PDF version of the Position Paper. (125kb PDF, 8 pages)
The electronics market in China has enormous growth
potential. While today it is only one-tenth the size of
the U.S. electronics market, this picture will change
dramatically over the next 15 years. For instance, the
size of the personal computer market in China is
projected to double in five years and to equal the size
of the U.S. market by 2010. The telecommunications,
computers and semiconductor markets in China are
experiencing tremendous growth rates, with many of these
sectors= estimated growth rates ranging from 20% to 40%
annually over the next 15 years. In fact, in the area of
semiconductors, China could potentially become the
world's second largest semiconductor market by 2010.
Similarly, the analytical instruments market in China is
experiencing a healthy annual growth rate of about 15%,
with significant opportunities in environmental,
industrial and energy applications.
China was the United States' fourteenth largest
high-tech export market in 1997, with electronics
exports of over $2 billion. Nonetheless, our statistics
on U.S. electronics trade with China underscore the fact
that major barriers remain to foreign participation in
the expanding electronics market in China. Despite
growth in U.S. exports to China, electronics imports
from China increased by nearly 800% from 1990. In 1997,
high-tech imports from China amounted to over $13
billion, resulting in the second largest U.S. high-tech
trade deficit equaling over $11 billion1.
The sectoral U.S. trade deficit and unbalanced trade
growth are reflective of market access barriers to China
which should be removed.
In its internal political and economic dialogue,
China has indicated that the electronics industry is a
"pillar" industry, which means that China views this
industry as important to its national economic
development. The Coalition has been closely monitoring
the development of China's Electronics Industrial
Policy, under review by the State Council. Even though
China has indicated that it will not include any
provisions inconsistent with codes set forth in the
World Trade Organization (WTO) in its official
industrial policies, certain Ministries have indicated
that they intend to impose their own requirements. Some
ministries, such as the Ministry of Information
Industries (MII), apparently intend to impose export,
equity cap, and other requirements which are not
expressly written into the published policy. Among the
unwritten policies reportedly being considered are the
prohibition of majority ownership of joint ventures (JV)
to manufacture electronics and a requirement that JVs
export a percentage of their total production
commensurate with the equity percentage in the JV held
by the foreign investor.
Among the many current WTO-inconsistent barriers to
expanded U.S. trade with China, the Coalition believes
that the following should receive priority attention in
the WTO accession discussions with the Chinese
government and should be included in the accession
protocol. Emphasis should be placed on obtaining a
comprehensive agreement, addressing not only tariff
barriers but also a broad array of market access issues.
The Coalition appreciates the opportunity to outline the
issues most critical to the United States
high-technology industry below.
CORE OBLIGATIONS
China should be encouraged to adhere fully to the
core obligations of the WTO - such as national
treatment, nondiscrimination, transparency, and
consistent, uniform enforcement - immediately upon
accession.
TRANSITION PERIODS
As stated above, core obligations of the WTO should
be adhered to fully and immediately upon accession. The
focus should be to obtain a commitment to undertake the
full scope of WTO obligations, within reasonably short
time frames, in order to get the clock ticking toward
full implementation.
TRADING RIGHTS
China has reportedly agreed to grant all domestic and
foreign firms trading rights -- the ability to import
and export. Until this agreement is implemented, China
remains unique among the major trading nations by
greatly restricting the ability of domestic and foreign
firms to import finished products, to sell directly to
the domestic market, and to distribute freely within the
internal market. China also restricts imports by
foreign-owned companies of spare parts and components to
service and repair finished products. Unless they engage
in local manufacturing, foreign companies are required
to sell through Chinese trading agents who charge a
transaction fee equal to about 1-3% of the contract
value. Generally, these agents provide little or no
value-added so that their transaction fee represents an
additional business tax.
The ban against foreign firms operating their own
service centers presents another serious barrier to
trade. Even U.S. companies manufacturing in China lack
the clear legal right to import and sell directly
finished goods and spare parts needed to service their
products there. The right to provide direct service is
essential to control quality and ensure the authenticity
of the spare parts being delivered. Indeed, in other
important overseas markets, U.S. firms increasingly are
using quality service as a strategic weapon against
foreign competitors to win customers and grow market
share.
DISTRIBUTION RIGHTS
Equally important as trading rights but treated
separately in the WTO negotiations, is the right to
distribute goods and services. Currently under China's
rules and regulations, companies are prohibited from
distributing their own goods and services and must use
Government-authorized distributor and/or trading
companies. While many foreign-invested enterprises
(FIEs) control the distribution of the goods they
produce in China, distribution rights must involve the
full range of products the parent or sister companies
may produce abroad. Even more broadly, distribution
rights should extend to the full range of products
foreign firms are permitted to trade into and out of
China. It is essential that foreign companies be able to
choose their own forms of distribution and that they
have full rights and opportunities to distribute
directly or indirectly to customers. This must be seen
as a key element along with trading rights and the right
to provide after-sales service. This trio of
distribution rights, trading rights and after-sales
service provides the ability of companies to conduct
business completely and fully.
TARIFFS AND TAXES
In addition to the transaction Atax@ referenced
earlier (see trading rights section),
foreign-manufactured electronics products are subject to
steep Chinese tariffs that significantly inhibit foreign
exports to China. Current duty rates range from about
6-35%.
China should implement quickly and independently the
Information Technology Agreement (ITA) pursuant to
President Jiang Zemin's public commitment that China
would join the ITA "as soon as possible" at the October
1997 summit with President Clinton. The benefits of the
ITA are clear, as the ITA eliminates most tariffs on IT
products by the year 2000. The Agreement expands trade
in products such as computers, telecommunications,
semiconductors, software, semiconductor manufacturing
equipment and computer-based analytical instruments. It
affects $500 billion in global IT trade, including
$80-100 billion in U.S. exports alone.
In addition, tariffs should be dramatically reduced
or eliminated on a variety of other information
technology products, including but not restricted to:
medical electronics, microphones, copiers and audio
frequency electronic amplifiers.
Although not a WTO issue per se, the hefty
value-added tax (VAT) of 17% further adds to the cost of
foreign-made goods, making them less attractive to
Chinese consumers. This situation weakens another
strategic advantage usually enjoyed by many U.S.
electronics companies as low cost producers. There is an
additional problem with the inconsistent manner in which
the VAT can be and is applied.
NON-TARIFF MEASURES
China subjects electronics imports to a system of
quotas and tendering which can be a barrier to trade and
licensing requirements. Products covered by quota
administration are those whose import are deemed by the
Chinese authorities to inhibit domestic industry
development. By contrast, products exempt from quotas
are either those which China has already started to
produce, or those which have already been imported but
for which domestic production is still in its infancy
and the Chinese perceive that development needs to be
accelerated. Such products are imported primarily by
so-called tendering. The State Office of Import and
Export of Electrical and Mechanical Goods issues import
certificates that indicate under which of these two
categories a product may enter the country. While China
has eliminated quota and license restrictions on
thousands of products, per the 1992 U.S.-China market
access agreement, some of the products that have been
de-controlled may now be subject to new tendering
procedures. Therefore, all non-tariff barriers should be
eliminated and tendering procedures should be
implemented on a non-discriminatory basis.
NATIONAL TREATMENT
China's foreign investment laws all contain clauses
stating that, when conditions are the same, preference
should be given to purchasing within China rather than
from overseas (e.g., Article 57 of the Equity Joint
Venture Law Implementing Regulations). A recent decision
by the State Council urges government departments and
institutions to give preference to purchasing "science
and technology" products using "Chinese intellectual
property." China should be required to adopt immediately
the core obligation of national treatment. In addition
to formal laws, the real problem is the less-formal
guidance to implement substitution policies. For
example, a major premise behind the Office of Electrical
and Machinery Imports (JiDianBan), now under MOFTEC, is
to control the importation of products that can and are
produced in China.
TRANSPARENCY
Most of China's rules, laws, standards and
regulations are not developed within
internationally-accepted rules of judicial process.
Further, participation and/or comments on rules and
regulations by affected parties are not provided for or
encouraged. Additionally, many of these rules and
regulations are not published or if they are published
the actual practice is not consistent with the published
rule. Finally, many rules, laws, standards, regulations
and other requirements vary and often conflict between
national and provincial governments. Such an opaque and
complex system does not lend itself to fair and equal
trading rules. Immediately upon accession, if not
sooner, China should be required to adhere to this
important and core obligation of the WTO.
STATE-OWNED ENTERPRISES
State-owned enterprises control a significant share
of domestic and international trade in electronics goods
in China. Because state-owned enterprises include both
consumers and producers of electronics products, these
enterprises have the ability to significantly burden or
restrict sales of U.S. electronics products in China of
they do not make purchases and sales on the basis of
commercial considerations. Therefore, the protocol of
accession should include affirmative obligations on the
part of China to ensure that its state-owned enterprises
(including partially state-owned and recently privatized
enterprises that were formerly state-owned) make
purchases and sales on the basis of commercial
considerations. Further, China must afford the
enterprises of other WTO Members adequate opportunity to
compete for sales to state-owned enterprises. In
addition, the special Working Party administering the
transitional review mechanism should be directed to
review on a regular basis whether state-owned
enterprises are in fact making purchases and sale
consistent with these obligations. Finally, the protocol
should also explicitly provide that WTO Members may
continue to apply non-market economy antidumping
procedures with respect to goods of Chinese origin.
GOVERNMENT PROCUREMENT
Despite its commitment under the 1992 Memorandum of
Understanding (MOU) to publish all laws and regulations
affecting imports and exports, some regulations and a
large number of directives have traditionally been
unpublished (for internal use) , and there is no
publicly available national procurement code in China.
Only one tendering organization, the National Tendering
Center for Machinery and Electrical Equipment, has
published a tendering guide, which is brief and vague.
Since the tone for a competitive environment is often
set by the Government, it is essential that China adopt
an open, competitive, non-discriminatory and transparent
government procurement procedures.
INTELLECTUAL PROPERTY RIGHTS (TRIPS)
Although some progress has been made in the
enforcement of the 1995 Intellectual Property Rights
(IPR) Agreement and the negotiation of the 1996 IPR
Accord, China's rapid economic growth requires further
commitments and assurances that IP protection is
adequately extended and enforced. Immediately upon its
accession to the WTO, China should become a full
signatory to the TRIPs Agreement without a transition
period.
TRADE-RELATED INVESTMENT MEASURES (TRIMS)
A variety of trade-related investment measures
present barriers to foreign investment in China. As part
of the proposed Electronic Industrial Policy, some
ministries, such as the Ministry of Information
Industries, apparently intend to impose export, equity
cap, and other requirements which are not explicitly
written into the published policy. Among the unwritten
policies reportedly being considered are the prohibition
of majority ownership of JVs to manufacture electronics
and a requirement that the JV export as a percentage of
its total production commensurate with the equity
percentage in the JV held by the foreign investor.
- Export Requirements
Foreign investors
who want to engage in domestic manufacturing often are
subject to export performance requirements. Under
Chinese law, export requirements are mentioned in
connection with obtaining certain tax benefits and in
the Foreign Enterprise Law which mandates that Wholly
Foreign-Owned Enterprises (WFOEs) either adopt
advanced technology, or export at least 50% of total
annual production. However, import in China or export
requirements usually must also be specified as a
target in a foreign investor's original feasibility
study, as approved by the government authorities.
These targets are then treated as commitments and
spelled out either in the investment contract, or in
the approval document. Even when a particular
percentage of exports has not been specified, foreign
investors often must agree to a volume target or some
export indication in order to win project approval by
the State Development and Planning Commission (SDPC)
and contract approval from the Ministry of Foreign
Trade and Economic Cooperation (MOFTEC). Exceptions
typically are confined to companies in non-sensitive
sectors with sales below $30 million. However, these
ventures are small enough to be approved locally
rather than by the central government.
Export requirements may not be contained in the new
national industrial policies currently being drafted.
Nevertheless, the industrial ministries are likely to
continue to enforce them anyway. MII reportedly plans
to specify a 100% export requirement for WOFEs, 70%
for 70%-owned FIEs, etc. Some flexibility will be
allowed, depending upon the level of technology
transferred or other benefits conferred by the foreign
investor.
- Local Content
Localization goals
typically are set forth in the feasibility studies
required of foreign ventures by state planning
agencies. Also, for products manufactured in China,
local content levels below 40% content level,
triggering inspection and other requirements
applicable to imports, thus denying national treatment
for such products.
- Technology Transfer
Requirements
Technology transfer requirements
are not spelled out in Chinese law; however,
Government practice requires technology transfer for
market share. The approval authorities (SDPC, MOFTEC,
etc.) generally look for some tech transfer and
training commitments. There do not appear to be any
formal enforcement mechanisms other than to deny
certification as a Atechnologically advanced
enterprise,@ which entitles FIEs to certain tax
benefits. However, foreign companies may be encouraged
to accept tech transfer commitments as quid-pro-quos
for other government approvals or benefits.
Royalty income is capped, normally at 5%. This
limit is not imposed by law or regulation but through
the negotiation and approval process. The net effect
is to deny foreign investors from recouping R & D
costs and discourage the continual transfer of updated
technologies.
- Equity Caps On Foreign Investment
These
caps are not mandated by Chinese law, but have been
adopted as a matter of policy by several industrial
ministries. In particular, the MII trends to disfavor
majority foreign ownership. However, under China's
Equity Joint Venture Law, a minimum of 25% is set for
foreign equity, which, in theory, can rise to as high
as 99.9%. At 100% the entity becomes a WFOE. China
should be required to refrain from imposing and/or
enforcing equity caps which discourage foreign
investors.
- Production Limits
In some cases FIEs are
subject to production limits. Usually the feasibility
study contains estimates of annual production, and
FIEs must file an annual production plan with the
authorities. However, production limits are not widely
applied except for planning purposes. They must be
reported to the Customs Agency with tracks imports.
These limits may then be used by the state authorities
to establish import quotas and related import
requirements.
- Foreign Exchange Balancing
Under
existing investment laws, FIEs must balance foreign
exchange (forex), but this requirement is not being
enforced by the State Administration of Foreign
Exchange (SAFE). This situation tends to create
uncertainty and exposes foreign firms to potential
allegations of violating contractual commitments.
Especially in view of China's huge forex reserves and
its transition to current account convertibility at
the end of 1996, the forex balancing requirement
should be repealed to reflect current practice.
PRODUCT INSPECTION AND QUALITY STANDARDS
On October 1, 1996, the State Administration of
Import and Export Commodity Inspection (SACI) of China
implemented mandatory third party safety licensing
requirements. Products covered in 1996 include VCRs,
personal computers, visual display units, printers,
audio equipment, and switching power suppliers. On
October 1, 1997, an additional 18 products were covered
by these requirements, including telecommunications
terminal equipment, security technology protection
commodities and medical diagnostic X-ray equipment as
well as other medical electronic equipment. Though this
regime is not necessarily inconsistent with WTO rules
governing technical barriers (it applies equally to
domestic and foreign manufacturers), the regime can
serve as a market impediment due to its lack of
transparency.
TELECOMMUNICATIONS AND INFORMATION
INFRASTRUCTURE
China currently restricts full participation and
competition in basic telecommunications services.
Further, China maintains severe limits on content and
transmission of data over the Internet. In this era of
global communications, it is essential that China commit
to move towards a competitive model in
telecommunications by adopting the terms and
pro-competitive regulatory principles of the General
Agreement on Basic Telecommunications of the WTO. In
order for foreign companies to enter China on a level
playing field and increase open market mechanisms,
foreign ownership restrictions should be reduced and
ultimately eliminated.
CONCLUSION
In conclusion, China should be pressed to
expeditiously bring its laws and practices impacting
high technology trade into compliance with WTO rules. It
is essential that the world trading community ensure a
level playing field to enable all trading nations to
prosper in the future. The promotion of free trade
principles is not only in the interests of the United
States, but also to the benefit of China's development
as well. We appreciate the opportunity to offer these
comments and stand ready to provide any additional
assistance which you may require as the negotiations
proceed.
CONTACT INFORMATION Chairman of the Coalition
James F. Whittaker
Hewlett-Packard Company
900 17th Street, NW, Suite 1100
Washington, DC 20006
voice: 202-884-7019
fax: 202-884-7070
BUSINESS SOFTWARE ALLIANCE
Debra Rosay
1150 18th Street, NW, Suite 700
Washington, DC 20036
voice: 202-530-5131
fax: 202-872-5501
ELECTRONIC INDUSTRIES ALLIANCE
David Calabrese
2500 Wilson Boulevard
Arlington, VA 22201
voice: 703-907-7591
fax: 703-907-7501
INFORMATION TECHNOLOGY INDUSTRY COUNCIL
Kathryn Hauser
1250 Eye Street, NW
Washington, DC 2000
voice: 202-626-5736
fax: 202-638-4922
SEMICONDUCTOR INDUSTRY ASSOCIATION
Daryl Hatano
181 Metro Drive, Suite 450
San Jose, CA 95110
voice: 408-436-6600
fax: 408-436-6646
Secretariat
AMERICAN ELECTRONICS ASSOCIATION
Jennifer Guhl
601 Pennsylvania Avenue, NW, Suite 600
Washington, DC 20004
voice: 202-682-4445
fax: 202-682-9111
SOFTWARE PUBLISHERS ASSOCIATION
Ken Wasch
1730 M Street, Suite 700
Washington, DC 20036
voice: 202-452-1600
fax: 202-223-8756
TELECOMMUNICATIONS INDUSTRY ASSOCIATION
Eric Nelson
1300 Pennsylvania Avenue, NW, Suite 350
Washington, DC 20004
voice: 202-383-1484
fax: 202-383-1495
UNITED STATES INFORMATION TECHNOLOGY OFFICE
Yusuf Khapra
1730 M Street, Suite 700
Washington, DC 20036
voice: 202-331-1801
fax: 202-223-8756
1 Source:
The American Electronics Association. High-tech
merchandise trade encompasses: computers and office
equipment; consumer electronics; communications
equipment; electronic components; semiconductors;
industrial electronics; electromedical equipment; and
photonics. Statistics are reported using the Harmonized
Commodity Description and Coding System, corresponding
to the 45 Standard Industrial Classification codes used
to conservatively define the high-tech industry.
Click
here for a PDF version of the Position Paper. (125kb PDF, 8 pages)
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