*Project Manager and Principal Research Officer, China and the World Trade Organization Project, Faculty of Law, The Australian National University, Canberra, Australia; LLB, B Ec. (Adelaide), brett.williams@anu.edu.au, Telephone +61-2-62799619; Fascimile +61-2-62493971. I would like to thank Deborah Cass and Dr Ian McEwin, the Project Directors of the China and the World Trade Organization Project for their comments on drafts of this working paper and to thank Graeme Thomson and Klea Maniatis of the Trade Negotiations Division of the Australian Department of Foreign Affairs and Trade for helpful discussions on this topic. I am solely responsible for the opinions expressed and for any mistakes. This paper may be downloaded from http://law.anu.edu.au/china-wto/work.html Any comments, corrections or criticisms would be gratefully received.
The GATT contains provisions which are designed to prevent Members from using state owned or controlled enterprises from imposing barriers to imports. These are discussed in sections 3 and 4 below. However, these provisions are generally regarded as ineffective.1 Since, in the case of China, state trading enterprises occupy a significant place in the economy, WTO Members have been concerned to ensure that China would not be able to circumvent GATT disciplines on import barriers by directing the imports of state trading enterprises. Therefore, the accession negotiation has included the negotiation of additional obligations, discussed in section 7, designed to stop state trading enterprises from being able to control the level of imports.
In 1978, less than 20 Foreign Trading Corporations owned and controlled by the central government held effective monopolies in the import and export of a broad range of products.3 By 1998, the Chinese government had given rights to engage in foreign trade to over 200,000 firms.4 To describe the extent to which state trading enterprises are able to control the level of imports, it is necessary to set out briefly the way in which various entities are permitted to import under Chinese law.5 The underlying principle is that no one may engage in foreign trade except as otherwise provided by law.6
The Ministry of Foreign Trade (MOFTEC) controls specialized foreign trade corporations (SFTC). Between 1956 and 1978, these held a monopoly over imports. During that time, Chinese production enterprises could only import by purchasing imports from the SFTCs and could only export by selling to the SFTCs.7 Some of these SFTC still have monopolies in particular areas.
STE's controlled by other Central Government Ministries
After 1978, other Ministries also established SFTCs. These could only import products that were directly related to the production enterprises that were controlled by the particular Ministry.8
STE's controlled by Provincial Governments
Also after 1978, provincial governments were permitted to establish foreign trade corporations. They could not sell the goods they imported beyond the boundaries of the province. In 1990, 443 of the 500 biggest foreign trade companies in China were locally created state trading enterprises.9
State Owned Production Enterprises
Since 1984, state owned production enterprises have been able to apply for a foreign trade operating right ("FTOR") which would enable them to import what they needed for their own production without having to buy through the SFTCs. Originally this applied to large production enterprises only but the grant of FTOR has been progressively relaxed so that now all state owned production enterprises can receive FTOR unless there is a good reason why it should not be given. By 1995, 5000 large production enterprises had been granted FTOR. One exception has been introduced to the restriction of the FTOR of production enterprises to what is needed for their own production. An extension of the trading right to products similar to those produced by the relevant production enterprise is available to large enterprises meeting certain tests relating to minimum export values.10
In 5 special economic zones, as a pilot programme, the FTOR of production enterprises are subject to a registration system rather than a licensing system. In theory, the grant of FTOR became automatic. In practice, such grants are conditional upon demonstration of being a going concern as a producer and having the resources to carry on a trading business. The FTOR obtained through registration still limits imports to those necessary for the enterprise's own production.11
State Owned Domestic Trading Enterprises
Since 1992, state owned domestic trading enterprises (as opposed to production enterprises) have been able to obtain a FTOR. These FTORs are limited by tests involving the maintenance of a ratio between imports and exports. By 1995, 62 domestic trading enterprises had been granted FTOR.12
2.2 Foreign Invested Enterprises
Since 1984, foreign invested enterprises ("FIE") have been able to import what they need for their own production. PRC laws relating to Sino-Foreign Equity Joint Ventures,13 to Sino-Foreign Contractual Joint Ventures14 and to Wholly Owned Foreign Owned Enterprises15 introduced respectively in 1979, 1988 and 1986 provide for such FIE to be able to import what they need for their own production.16 By the end of 1996, there were 140,000 FIEs permitted to import to that limited extent.17
Since September 1992, certain joint foreign-Chinese corporations have been permitted a more general right of import through the establishment of specialized foreign trade companies ("Sino-Foreign-Investment Foreign Trade Corporations" or "SFIFTC"s). They cannot import products outside their approved scope of business and are subject to any laws requiring import licences or allocation of quotas that may relate to any particular products. The State Council has controlled the number of such corporations.18
2.3 Private Chinese Enterprises
It is only since 1 January 1999 that private Chinese business enterprises have been able to apply for a right to trade. Such rights are limited to the importation of products that are needed for the production of the enterprise.19
2.4 Can the Chinese Government Control Imports through STEs?
In summary, under Chinese law, import transactions can be carried out by state owned foreign trading enterprises owned at the central government level by either MOFTEC or certain other ministries or at the provincial level, and also by other entities only if they have FTOR: state owned production enterprises, state owned domestic trading enterprises, FIEs, SFIFTCs and private Chinese enterprises. It must be stressed that the grant of FTOR is upon certain conditions. In general, the right to import is conditional upon achieving certain level of exports. This requirement is part of the government policy of controlling foreign exchange flows. These conditions may raise questions of conformity with various aspects of the GATT including national treatment and TRIMS. However, I do not intend to address these issues in this paper but only to address the capacity of the government to use state owned enterprises to informally control the level of imports.
The change in regulation of the right to import has been substantial and is clearly still in a state of continuing change. The most significant move so far is the change implemented from 1 January 1999 to enable private Chinese enterprises to apply for FTOR. In addition, the pilot scheme for registration of FTOR rather than licensing is indicative of future changes. In fact, the government has undertaken to change to a registration system rather than a licensing system within 5 years of entry to the WTO.20 However, the vast majority of Chinese people are still prohibited from engaging in import transactions. Business enterprises cannot import for resale and Chinese individuals and households cannot import whether for their own consumption or for resale. They can only buy imports through one of the government authorized intermediaries.
It is difficult to determine precisely the extent to which the government would still be able to use state trading enterprises to control the quantity of imports. There would be many products in respect of which there would be a large number of entities engaged in importing and it would simply no longer be possible for the Chinese government to direct the various firms with rights to import a particular product so as to be able to control the quantity of imports. Nevertheless, it seems that for a significant range of products,21 there remains a situation in which a reasonably small number of state trading enterprises or other licensed entities are subject to unified supervision. For example, the right to trade in sugar and tobacco is severely limited. In these situations, it would remain possible for the Chinese government to control the level of imports. Other WTO members, concerned about this possibility, have sought to impose additional obligations upon China.
(i) In the past, the record of compliance with the notification rules has not been good. For example, between 1980 and 1994, only about 21% of GATT parties gave notification of the activities of STEs.32 Some countries have taken a fairly restrictive approach to determining which enterprises should be covered in their Article XVII notifications. For example, in the late 1980s, Hungary took the view that most of its STEs fell outside the scope of matters required to be notified under Article XVII.33 It seems that many of China's trading partners are not happy with the general level of transparency in China's legal system and, given that background, are not confident about being able to ensure that China's notifications are complete.
(ii) The application of Article XI:1 requires the identification of a particular governmental measure and if there is no governmental law or regulation limiting the quantity of imports, it may be difficult to establish the existence of a quantitative restriction within the meaning of Article XI:1. Despite the rapid changes that are occurring in China's legal system, Chinese law and system of governance are still notorious for implementing informal controls through administrative practice and guidance.
(iii) If there is no tariff binding in the Schedule of the Member in respect of the relevant product, then Article II:4 cannot apply. This was one of the motivations for the across the board bindings achieved in the Uruguay Round agriculture negotiation. In the case of the Chinese accession, it appears that China's schedule will in fact include a tariff binding for every product.34
(iv) Article II:4 has been interpreted so that it does not apply in circumstances in which, pursuant to an exception to Article XI:1, a tariff quota is in place.35 A GATT panel said that, in such circumstances, the mark up was a consequence of the conditions of scarcity caused by the quantitative restrictions and that it would be inappropriate to apply the rule in Article II:4 to such situations. In the case of China, it appears that the Article XI:1 prohibition will come into force subject to a phase out of some remaining import quotas on a fairly extensive list of products. Therefore, Article II:4 will not be able to discipline the mark-ups by STEs on imports of those products until the end of the phase out period.
(v) Where there is a tariff binding on a product, it is clear that Article II:4 does limit the mark up that can be charged but there is a lack of clarity under the rules for determining the mark that is permissible. The formula set out in Article II:4 refers to "protection on average exceeding" that which is inherent in a bound tariff rate. The panels in the three complaints regarding Korea's Import Restrictions on Beef said that Article II:4 required that "an import monopoly not charge on the average a profit margin which was higher than that which would be obtained under normal conditions of competition (in the absence of monopoly)."36 There are some complications in the calculation of the permissible margin. Article II:4 is supposed to be interpreted in the light of Article 31 of the Havana Charter, paragraph 4 of which provides for the exclusion from the calculation of the mark-up of internal taxes, transport and distribution costs.37 Whether or not this poses a special problem in respect of China will depend upon whether there are any special difficulties in collecting the relevant information about internal taxes, transport costs, and other costs. An additional problem is that Article II:4 requires the calculation of an average. As with any calculation of an average, the data to be used in calculating the average requires definition and the periods over which relevant data is taken must also be defined.38 As with the exclusion of the expenses, whether this poses a special problem in respect of China will depend upon whether there are any special difficulties in collecting the relevant information about landed prices and sales prices (and also about the various costs and internal taxes) over appropriate periods.
(vi) It is uncertain whether the GATT rules can control the situation in which a state controlled or authorized import monopolist exercises a discretion to import a certain quantity of imports which is less than the quantity which the domestic economy would demand at a price equal to the sum of the world price plus a margin equal to the bound tariff. Even where there is a tariff binding and the state trading entity does restrict its mark-up to the rate of the bound tariff, it is uncertain whether Article II:4 controls the situation in which the SOE exercises a discretion to limit the quantity below that which would be demanded at the price equal to the world price plus the permissible mark-up. As mentioned above, an interpretative note to Article II:4 provides that it should be "interpreted in the light of the provisions of Article 31 of the Havana Charter" and paragraph 4 of Article 31 contains guidelines for calculating the markup, in particular prescribing that the calculation of markup should exclude transportation and distribution costs and internal taxes. Article 31 of the Havana Charter also provides, in paragraph 5, that subject to some qualifications, an import monopoly must "import and offer for sale such quantities of the product as will be sufficient to satisfy the full domestic demand for the imported product". While there have been GATT panel decisions which have used paragraph 4 of Article 31 of the Havana Charter to aid interpretation of Article II:4, there has never been a decision in which paragraph 5 of Article 31 has been used to aid interpretation of Article II:4. Nor has there been such a decision of the WTO Dispute Settlement Body. The question has not arisen because there has not been an adjudication of a dispute in which a STE had applied a mark-up on a bound product that did not exceed the level of protection afforded by the bound tariff but had also chosen to limit the quantity of the imports to a quantity that was below the level sufficient to fill domestic demand. To sustain a complaint in such circumstances would require the complainant to establish that the effect of the interpretative note was to bring the obligation set out in Article 31(5) into force under GATT Article II:4 even though Article II:4 sets out only an obligation relating to the price of sales not the quantity of sales. It seems possible that a panel or the Appellate Body might take the view that the Interpretative Note to Article II:4 only incorporates into Article II:4, that part of Article 31 which relates to the calculation of the permissible mark-up.
To illustrate that point, the following section describes three contexts in which the problem of state trading enterprises has arisen: first, attempts to negotiate amendments to the GATT provisions on state trading; secondly, in the accession and continued participation in GATT of countries with centrally planned economies and, thirdly, in the use by numerous parties, including many with market economies, of state trading enterprises or state authorized monopolies in the area of agricultural trade.
5.1 Attempts to Negotiate Amendments
Whilst there have been some attempts to negotiate the inclusion of more effective provisions in the GATT, no such negotiations have ever resulted in amendments to the GATT. In particular, in the 1955 General Review of the Agreement, the Working Party considered but did not adopt proposals to incorporate the provisions of the Havana Charter into the text of the agreement or to consolidate the provisions affecting state trading into a single article.39 There appears to have been disagreement about which parts of Article 31 of the Havana Charter ought to inform the interpretation of Article II:4.40 A reformulation of the Interpretative note to Article II:4 was embodied in a "Protocol Amending Part I and Article XXIX and XXX which failed to gain the required unanimous approval and was abandoned".41
During the Uruguay Round, in 1989, the USA proposed the adoption of a new agreement which would have, inter alia, provided that state trading enterprises must act in accordance with the national treatment principle.42 Other parties disagreed43 and the Understanding on Article XVII which finally emerged only addressed the notification process.
Therefore, the WTO Members negotiating with China are doing so with the knowledge that it may not be possible to reform the rules on STEs in the future. This means that, if after China's accession, problems do arise in disciplining China's use of STEs under existing rules, it may not be possible to reach agreement on amendments to the rules. If that is correct then any improvements to the rules disciplining China's STEs must be negotiated before China joins and must be incorporated into China's treaty obligations. It may even be that the negotiation of additional rules upon China will make it easier to amend the GATT in the future so as to increase the disciplines upon other WTO Members' use of STEs.
5.2 Accessions of Centrally Planned Economies to GATT
It seems that the approaches taken in the accession of former socialist economies have not been successful and do not provide a model for the Chinese accession.44 This is borne out by the following brief review of GATT experience with Yugoslavia, Poland, Romania and Hungary.
In the case of Yugoslavia, the process of accession was drawn out until Yugoslavia had satisfied the other parties that it had transformed its economy from a planned economy to a market economy. It was granted observer in 1959, applied GATT rules bilaterally with a number of GATT parties between 1959 and 1962, became a provisional member in 1962 and a full member in 1966.45
A new approach was taken with Poland which acceded to the GATT in 1967.46 Poland clearly was a planned economy not a market economy. Its imports were completely controlled by state planning. Under its Protocol of Accession, the Schedule of commitments under Article II did not contain any tariff concessions. Instead, it contained a single undertaking that Poland would increase its level of imports by 7% per year.47 This provision had limited success. Poland was unable to meet the figure and renegotiated it by replacing the annual commitment with 2 and 3 year commitments.48 This obligation was terminated when Poland later renegotiated its whole customs tariff.
Apart from the fundamental problems with trying to move to a market determination of the level of imports by setting quantitative targets, a number of specific difficulties were perceived with the Polish commitment including that being based on current prices and a specific currency was exposed to changes caused by inflation and changes in exchange rates.49
The approach taken to Poland was varied slightly when Romania acceded to the GATT in 1971.50 At the time, Romania did not have any customs tariff at all. Imports were carried out entirely by state foreign trade enterprises in accordance with the governments Five-Year Plans. The Protocol of Accession provided that Romania would increase "imports from contracting parties at a rate not smaller than the growth of total Romanian imports provided for in its Five Year Plans".51 As in the case of Poland, this obligation was terminated when Romania later renegotiated its whole customs schedule.
Hungary acceded to the GATT in 1973.52 At that time the Hungarian government was still maintaining monopoly control over imports. However, this time the Protocol did not contain any additional obligations relating to imports. The reviews disclose concern by some GATT parties that Hungary was controlling the source53 and the level of imports and doing so through its state trading enterprises. In the Sixth review in 1986, Hungary rejected criticisms that it was failing to make notifications under Article XVII.54 No direct challenge was made through GATT dispute settlement.55 It seems that the dismantling of Hungary's monopoly occurred through other pressures in the late 1980s and that until then the GATT rules had little impact. In fairness to Hungary, it should be noted that part of the reason that Hungary was able to resist pressure from other parties relating to its control of imports was that many other GATT parties were maintaining discriminatory quantitative restrictions on imports from Hungary, having failed to phase them out as they had undertaken in Hungary's accession Protocol .
Since the creation of the WTO, there have been a number of accessions of countries in the process of transition from centrally planned economies to market economies. Under the former systems, state trading enterprises had had a monopoly over foreign trade. It appears that in every WTO accession, the applicant country had at least represented to the WTO working party dealing with the accession that it had abolished the monopoly of the state trading enterprises over foreign trade.56 Two examples are Latvia and the Kyrgyz Republic which acceded during 1999. In both cases, the countries were in the process of privatizing state owned enterprises, but crucially, the remaining state owned enterprises had been divested of any monopoly rights with respect to foreign trade.
At the time of accession, Latvia was fairly well advanced in its transition from centrally planned economy to market economy with the bulk of the former state owned enterprises having been privatized. The Protocol of Accession did not create any additional obligations with respect to Latvia's operation of its state trading enterprises other than a commitment to provide annual reports to WTO Members on the progress of its privatization programme.57 In addition, the report of the working party on the accession of Latvia recited the confirmation by the representative of Latvia "that the former State monopoly in foreign trade had been abolished and that no restrictions existed on the right of individuals and enterprises to import and export goods into Latvia's customs territory.58
When the Kyrgyz Republic acceded to the WTO, its transition from centrally planned economy to market economy was less advanced that Latvia's, at least in terms of the progress of privatization of state owned enterprises. However, like Latvia, the Kyrgyz Republic has removed any monopoly powers over foreign trade from state owned enterprises. The Working Party report recorded the confirmation by the representative of the Kyrgyz Republic that the former state monopoly in foreign trade had been abolished and that there were no special registration requirements or other restrictions on persons engaging in foreign trade.59 The Protocol of Accession did not impose any additional requirements on the remaining state owned enterprises apart from an undertaking to notify WTO members of the progress of the privatization programme.60
(a) The Uruguay Round Tarrification of Import Barriers Implemented by State Trading Enterprises
In the field of agricultural trade, particularly, the use of state trading enterprises has been a problem. Until the Uruguay Round, the percentage of agricultural tariff lines that were bound was significantly less than the percentage of industrial tariff lines that were bound. As a consequence, the rule in Article II:4 could not apply to major parts of agricultural trade. Therefore, when in the Uruguay Round, GATT parties addressed the question of tariffication, that is, the conversion of non-tariff import barriers to ordinary customs duties, it was decided that this process should apply to barriers implemented through state trading enterprises. In negotiation, it was agreed that all agricultural products must be subject to bound tariffs equivalent to the difference, on a given date, between the world price and the internal price. The final schedules of bound tariffs that eventually came into effect did not in many cases accord with the in-principle agreement as to how the tariff equivalents of the pre-existing non-tariff barriers were supposed to be calculated.61 Nevertheless, the position at the end of the Uruguay Round was that all Members did have tariff bindings on every agricultural product (subject to four exceptions).62 Therefore, since the end of the Uruguay Round, it has been possible for Article II:4 to be applied to the margins applied by state trading enterprises to agricultural products. However, apart from the adjustments to the notification requirements effected by the Understanding on Article XVII, the Uruguay Round did not introduce any new disciplines upon state trading enterprises. The pre-existing difficulty with disciplining discretionary limitations on the volume imported by a STE was not remedied.
(b) The New Problem with STE administration of Agricultural Tariff Quotas
Although the Uruguay Round achieved the formal tariffication of non-tariff barriers including those imposed through state trading enterprises, the ordinary bound tariffs were accompanied for many countries by the negotiation of tariff rate quotas, that is, commitments that a small volume of imports would be subject to a zero or low rate of customs duty. In many countries, the allocation of the in-tariff quota is administered by state trading enterprises.63 It seems that, for some countries, the creation of the tariff rate quotas led to the establishment of new STEs to administer the tariff rate quotas.64 Ingco and Ng cite the example of the Philippines having "established a new STE to administer its meat tariff rate quotas".65 They also refer to accession applicant Taiwan having set up a new STE to administer its tariff rate quotas on rice and poultry and to the fact that China has only recently re-introduced state trading in oilseeds.66
The operation of Article II:4 is complicated by the
presence of TRQ because it means that there are two bound tariff rates
in the schedule, one for the in-TRQ volume and another for the out of TRQ
volume. This means that the obligations under Article II:4 upon a country
whose schedule contains, for a given product, an ordinary bound tariff
and also a low rate tariff binding for a TRQ are:
5.5 Concluding Note on Past Practice
We can make a few useful observations from the past practice which provide important background to the negotiation for the accession of China.
(1) The GATT parties have never been able to agree on the insertion of additional substantive obligations into the GATT. As mentioned above, this means that it is foreseeable that it may not be possible to reach agreement on stronger disciplines in the future. Therefore, if any additional obligations are to be placed upon China, they must be inserted into the Protocol of Accession.
(2) Up to the present time, the GATT has relied upon the effect of Article II:4 and the reporting requirements of Article XVII:4 to discipline the use of state trading enterprises to implement import barriers. The only obligations going beyond those that have ever been undertaken by any GATT party were the obligations placed upon Poland and Romania to meet quantitative import targets. Those requirements have now faded from their schedules of concessions and the quantitative target approach to disciplining state trading enterprises can now be regarded as a historical curiosity.68
(3) Two sides of the same coin are the two propositions that:
(ii) secondly, so far, no country acceding to the WTO has been required to assume obligations with respect to imports by state trading enterprises that go beyond the provisions of the GATT.
After accession to the WTO, the activities of such STEs will be regulated by the rules set out above. The rules will apply to STEs controlled by any level of government, central, regional or municipal. Chinese STEs will have to source their imports on the basis of commercial considerations. Subject to one qualification, China will not be able to use STEs to implement quantitative restrictions. The qualification is that it appears likely that China's Protocol of Accession will not require an immediate application of Article XI:1 but will provide for a phase out of import quotas over a period of years after which Article XI:1 would apply. In the meantime, Chinese STEs could be used to implement quantitative restrictions which are in accordance with the phase out schedule. Similarly, subject to one qualification, China will not be able to use STEs to implement non-national treatment of imports. The qualification is that this depends upon whether China brings the TRIMS Agreement into immediate effect or phases in its obligations. If the TRIMS Agreement does not come into immediate effect then it will be permissible for STEs to discriminate in their purchases in the way and to the extent that is provided for in a phase-in of the TRIMS obligations. Provided that, as reports on the negotiation indicate, China's customs schedule will bind every product, then the rule in Article II:4 will limit the mark-ups on each imported product to the level of protection represented by the bound tariff rate. This is also subject to the qualification that following the approach taken in the Korean Beef cases, the rule in Article II:4 will not be able to apply to a product during any period during which an import quota is maintained in accordance with China's schedule for phasing out import quotas. This accentuates the importance for China's trading partners of negotiating a short programme for the phase out of import quotas. Once the various phase out periods have expired, the whole set of rules will apply.
Nevertheless, bearing in mind the difficulties experienced in the past in disciplining operations of STEs under existing GATT rules, China's trading partners have still been concerned that the activities of STEs might undermine the value of China's tariff concessions. The text above has already mentioned the fact that the existing GATT rules do not apply any discipline in the situation in which an import monopoly does limit its mark-up in the manner required by Article II:4 but limits the quantity of imports below that which consumers demand at that price. As mentioned, in that situation, competition at later stages of the distribution chain will bid up the price of the product which will result in a margin between the world price and the domestic price which exceeds that which is implicit in the tariff binding. Nothing in the ordinary rules of the GATT restrict the mark-up that can be charged by entities further down the distribution chain.
There are two ways to address this possibility.70 One way would be to seek an application of the interpretation of Article II:4 mentioned above, under which the Interpretative Note, be viewed as incorporating into Article II:4 the obligation set out in Article 31(5) of the Havana Charter. However, as discussed above, it is extremely doubtful whether such an argument would be successful in dispute settlement. The second way is to incorporate obligations additional to the content of the GATT into China's Protocol of Accession. The parties to the negotiation for the accession of China to the WTO have chosen this path.
The two provisions are as follows
(1) Paragraph 6 which is directed toward disciplining the actions of state trading enterprises to prevent them from exercising monopoly powers.
(2) Paragraph 5 which is directed toward removing the monopoly power of state trading enterprises.
This contains the following provisions:
"6(1) China shall ensure that import purchasing procedures of state trading enterprises are fully transparent, and in compliance with the WTO Agreement, and shall refrain from taking any measure to influence or direct state trading enterprises as to the quantity, value, or country of origin or goods purchased or sold, except in accordance with the WTO Agreement.72"The first paragraph requires transparency but the mere non-specific reference to transparency may not result in any discipline on transparency that goes beyond compliance with Article XVII and the Uruguay Round Understanding on Article XVII."6(2) In accordance with the GATT 1994 and the Understanding on the Interpretation of Article XVII of the GATT 1994, China shall provide full information on the pricing mechanisms of its state trading enterprises for exported goods, including domestic procurement prices, contract terms for delivery and financing terms and conditions."73
The second part of paragraph 1 is an attempt to impose disciplines that go beyond Article II:4 and Article XVII. It would oblige China to
It deals with a number of aspects of state trading. The question of influencing the country of origin of STE purchases is already disciplined under the Article XVII:1 rule requiring non-discriminatory treatment interpreted in accordance with Article XVII:2 which excludes non-commercial considerations. It seems that any measure by the PRC government to influence or direct STEs to purchase from a particular country could already be adjudicated upon on the basis of the test of whether it is based on commercial considerations. It may be that, to this extent, paragraph 6(1) adds nothing.refrain from taking any measure to influence or direct state trading enterprises as to the quantity, value, or country of origin of goods purchased or sold, except in accordance with the WTO Agreement.
The more interesting question is whether paragraph 6(1) would add anything to existing disciplines (which are imposed under Articles II:4, III, XI:1 and XVII:1) upon whether the PRC can take any measure to influence the quantity or value of goods purchased. No doubt express directions from the government to a STE limiting the quantity of purchases would violate this paragraph. However, such directions would violate Article XI:1 anyway. Similarly, limitations in government economic plans supplemented by directions to comply with government economic plans would violate this paragraph and would violate Article XI:1 anyway. But, what if the decision of the state trading enterprise to limit the quantity of imports is made in circumstances in which there is very little evidence of any pressure from the government to limit imports ? Recent WTO Dispute Settlement Body decisions have taken a fairly broad view of what constitutes a 'measure' of a government,74 but still seem to require a complainant to be able to identify particular actions of the government. Therefore, there would still be severe evidentiary difficulties with establishing that a government had applied informal pressures and incentives to act in a particular way. It is hard to see how such evidentiary difficulties would be any less significant in an action under the proposed paragraph 6(1) of the Protocol than under the existing provisions of the GATT. Therefore, this provision would probably not make it any easier to deal with situations in which the PRC government employs informal administrative guidance to limit the quantity of imports purchased through STEs.
As to paragraph 6(2) on notifications relating to STEs, it is possible that this might assist to obtain better information on the operation of Chinese STEs. However, paragraph 6(2) expresses the obligation as requiring conduct "in accordance with the GATT 1994 and the Understanding on the Interpretation of Article XVII of the GATT 1994". A GATT panel might interpret this as not requiring China to do anything that is not required by the ordinary provisions of the GATT and the Understanding.
In conclusion, it seems unlikely that Article 6 would add anything to the legal obligations that would apply to China under the ordinary provisions of the GATT.
(a) Paragraph 5(1) - Removal of Limitations on the Right to Trade
The alternative approach is to prevent any enterprise from having the monopoly power which would enable its choice as to the quantity it imports to have an impact on the total quantity imported into China.75 In previous accessions, the working party reports annexed to the accession protocols have included representations that the former monopolies over foreign trade had been dismantled but the acceding countries had not actually been required to give any legal commitments such as would prevent the reinstatement of the monopoly. In the case of China, the other Members have gone one step further. China's trading partners have asked China to give an undertaking which is additional to the obligations contained in the WTO treaties. This is an undertaking that China will permit any entity within China to import any product. This would create an environment in which it would be impossible for a state enterprise to exercise monopoly control over the import of any product such as would have the effect of undermining a tariff concession.
The negotiation of an obligation to permit any entity to import any product was not consistent with the Chinese government's policy of retaining control over imports in certain industries. Although the Chinese government has substantially liberalized its former control over trade in goods, there are still restrictions. Entities can only import or export a given product if the government has granted them a licence to trade in that product. In some product areas, so many licences have been granted that the price and quantity of imports is beyond government control. In certain other product areas, the granting of rights to trade has not been so liberal. For some products, the government does not permit anyone other than certain state owned companies to import the relevant products.
Therefore, in order to maintain the restrictions on the right to trade in certain products, the Chinese government has insisted that certain products be exempt from the general obligation to permit any entity to import any product. Therefore the general obligation has been drafted in the draft Protocol with references to lists of exempt products. The relevant provision is Article 5(1) of the draft Protocol which provides.
The key obligation is contained in the first sentence. It provides that, within 3 years, all enterprises shall have the right to trade in (including import and export) all goods except those listed in Annex 2a. The penultimate sentence also provides for China to phase out restrictions on the right to trade from products listed in another annex, Annex 2b. The division between the two annexes reflects a division made by the Chinese government between products in respect of which (at that time) it was intended to maintain state import monopolies and products in which trade was in the process of being liberalized through 'designated trading rights'.77Without prejudice to China's right to regulate trade in a manner consistent with the WTO Agreement, China shall progressively liberalize the availability and scope of the right to trade, so that, within three years of the entry into force of this Protocol, all enterprises in China shall have the right to trade in all goods throughout the customs territory of China, except for those goods listed in Annex 2a which continue to be subject to state trading in accordance with this Protocol. Such right to trade shall be the right to import and export goods. All such goods shall be accorded national treatment under Article III of GATT 1994, especially paragraph 4 thereof, in respect of their internal sale, offering for sale, purchase, transportation, distribution or use, including their direct access to end-users. For those goods listed in annex 2b, China shall phase out limitation on the grant of trading rights pursuant the schedule in that Annex. China shall complete all necessary legislative procedures to implement these provisions during the transition period.76
Annex 2a-1 sets out lists of goods for which a general
right to import would not be required to be given.78
For each product, it also lists the state trading enterprises that do have
the rights to import the relevant product. The list contains 7 types of
products as set out in the following table.
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2 China National native Products and Animal By-Products Import & Export Co 3 China Resources Co 4 China Nam Kwong National Import & Export Co 5 China Liangfeng Cereals Import & Export Co 6 China Cereals Oil and Foodstuff Co (Group) |
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2 China Export Commodities Bas Construction Co 3 China Overseas Trade Co 4 China Sugar & Wine Co (Group) 5 China Commerce Foreign Trade Co |
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China International United Petroleum & Chemicals Co China National United Oil Co |
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If China were to accede on these terms, then China could prohibit firms other than those STEs listed above from importing the above 7 products.
With a limited number of STEs having exclusive rights to import these `Annex 2a-1 products', it might be possible for the Chinese government to control the quantity of their imports by influencing the purchasing decisions of the STEs and, as discussed above, it may be that such influence cannot be disciplined under existing provisions of the GATT or even by the additional obligations which would derive from the proposed paragraph 6 of the Protocol.
As mentioned above, apart from the above-described provision on the right to trade with the exceptions for the STEs listed in annex 2a-1, paragraph 5 also contains the obligation to phase out restrictions on the products listed in Annex 2b. This list contains products for which China had already designated certain trading companies to have the right to import and export. The list comprises 6 groups of products: rubber, acrylic fibre, steel, plywood, timber and wool.79 By March 1997, China had already authorized about 60 to 100 companies to import and export these products.80 Pursuant to Annex 2b, China would agree to phase out the restriction on the number of trading corporations which could trade in these products. For these products, China has offered a phase out period on the restricted right to trade of either 3 years or 5 years. For steel, China offers 5 years. For, rubber, acrylic fiber and steel, China offers 3 years.81 Once the phase in periods have expired, China will be obliged to remove any quantitative limit on the number of enterprises that can import any of these products.
Paragraph 5 of the Protocol does not specify the relationship between the two obligations, that is the obligation to permit all enterprises to import in all products except for those listed on Annex 2a-1, and the obligation to phase out limitation on the grant of trading rights listed in Annex 2b. In particular, it does not clarify whether the first obligation is intended to apply to the products listed in Annex 2b, that is, whether after 3 years China would be obliged to allow all enterprises to trade in the products listed in Annex 2b. Now that the negotiation has reached a point where the time of coming into force of most of the obligations has converged together at 3 years after accession, then these provisions should be redrafted.
(b) Paragraph 5(2) - National Treatment in Respect of the Right to Trade
Paragraph 5 also contains the following
"5(2) Except as otherwise provided in this Protocol, all foreign individuals and enterprises, including those not invested or registered in China, shall be accorded treatment no less favourable than that accorded to enterprises in China with respect to the right to trade."
This clause would not create any obligations
in respect of the products listed in Annex 2a-1 where, in fact, trade is
exclusively reserved to a STE. It would create obligations in respect of
other goods.
A proper explanation of this proposed clause requires
a clarification of the ordinary GATT rules so that the extent to which
this goes beyond ordinary GATT rules is clear. The ordinary provisions
of the GATT include Article III:4 which requires that domestic laws affecting
internal sale should not apply less favourably to imported goods than to
domestic goods. However, the ordinary rules of the GATT do not otherwise
regulate competition or require competition between entities in the distribution
chain. The GATT rules do not preclude the government from interposing a
'middle-man' of local nationality or from giving such a 'middle man' a
monopoly over sale of all imports. Nor do the GATT rules require governments
to act to prevent private entities from attaining monopoly power in the
distribution chain or using such power anti-competitively. Such government
'middle-men' with monopoly powers over distribution of alcoholic beverages
in Canada have been the subject of the two GATT disputes.82
As those two disputes illustrate, what the GATT does do is prevent such
a middle man in a government authorized monopoly position from acting less
favourably in relation to the imported goods contrary to Article III, imposing
quantitative restrictions on imports goods contrary to Article XI, or from
charging a mark-up on the imported goods that exceeds bound tariff rate
contrary to Article II:4. However, the ordinary provisions of the GATT
do not prevent governments from conferring the monopoly power with respect
to imports. For example, in the two Canadian disputes, there was nothing
illegal about the fact that the Canadian government had given the marketing
boards monopoly power with respect to the sale of imported alcoholic beverages.
The proposed paragraph 5(1) of the Protocol goes
a step further that the ordinary GATT provisions. It imposes an additional
obligation which prevents China from conferring monopoly powers with respect
to the sale of imported products except for those listed in Annex2a-1.
It does so by forbidding China from imposing a limit on the number of importers
or traders in any covered product. The provision does not distinguish between
nationals and foreigners. China could comply with the obligation by permitting
any Chinese person to import or trade in the products but prohibiting foreigners
from doing so. If it were to do so, the non-national treatment of the right
to trade of foreigners would not in any way circumvent tariff concessions.
The provisions of paragraph 5(2) go a step further than simply requiring the removal of limitations on the number of enterprises that may import any product. This proposed commitment to provide national treatment to foreign traders is something that would normally be negotiated in the context of negotiations under the GATS, in particular, the scheduling of obligations relating to distribution services. Such a commitment is not ordinarily required as a necessary accompaniment to tariff concessions on goods under the GATT.
In respect of the out of TRQ volume, China will be obliged under Article II:4 not to charge a mark-up greater than the out-of-TRQ bound tariff rate. In respect of this volume, there will remain the difficulties of using the ordinary GATT rules to discipline a discretionary limitation of quantity. This difficulty will be remedied by the insertion of the obligation to permit any enterprise to import except in relation to the exception listed in Annex 2a-1. However, for those products, listed in Annex 2a-1, the problem will remain.
In respect of the within TRQ volume, China will be obliged under Article II:4 not to charge a mark-up greater than the within TRQ bound tariff rate. If the relevant Chinese STE charged a mark-up higher than the in-TRQ bound tariff rate in circumstances in which it had not already accepted or allocated for import a volume of imports equal to the TRQ volume upon which it had charged a mark-up not exceeding the in-TRQ bound tariff rate, then China would be in violation of Article II:4.
It appears that the level of out-of-TRQ bound tariff rates which China is proposing to apply to agricultural products may mean that the market-determined volume of imports would be determined solely by the volume of the TRQ. However, it seems that the countries with which China is negotiating are concerned that China might use STEs to control the level of imports so that tariff rate quotas are not fully utilized. Again, for those products, for which China is obliged to permit any enterprise to import, it will not be possible for a STE to prevent the TRQ from being filled. However, for those products listed in annex 2a-1 which are excepted from that obligation, the same possibility for STEs to use discretionary limitations of quantity arises in respect of the in-TRQ volume as it does in respect of the out of TRQ volume of imports.
China's negotiating partners have attempted to address this problem by seeking permission for private traders to import within the TRQ volume even where a STE has an import monopoly over other imports of the same product. Press releases have indicated that China would be required to allocate a fixed portion of a TRQ to private traders. This approach might not be adequate since it would not ensure that STEs would have to compete with private traders. A better approach would be to require China to permit private traders to import any unused portion of the TRQ.
Clearly, there are some issues both in the drafting of the Protocol and in the content of the Annexes which are still contentious. Most clear is that the phase out periods for import quotas are crucial because no disciplines on mark-ups can operate until the completion of those phase outs. Secondly, the scope of the obligation to allow any entity to import any product is crucial, as is the terms of any exceptions to that obligation. If any of these exceptions become permanent, then it may never be possible for such an obligation to be generalized through an amendment to the GATT. From a systemic point of view, it is crucial that such exceptions are only temporary. The final content of Annex 2a-1 may well be critical to the system as a whole.
It is also important that this additional rule which would deprive STEs of their monopoly power can also operate in the agricultural sector. It seems that China will be required to permit private traders to compete with STEs even in the within TRQ volume. However, press releases do not yet contain sufficient detail of how this will be implemented and whether it will affect the drafting of the clause on the right to trade. It is critical that the arrangements negotiated with China must not be such as would encourage China to oppose the complete phase out of TRQ being an essential element of the continuation of the process of reform under the Agreement on Agriculture.
Therefore, the negotiation of China's accession crytallizes some inherent problems in the architecture of the GATT rules. These problems must be dealt with in the accession negotiation. Otherwise, the accession of China may make it even more difficult to fix them in the future.
1 Both Latvia and Kyrgyz Republic have represented to the relevant working parties on their accessions that the monopolies on imports by state trading enterprises had been removed. Does this accord with experience in these countries?
2 To what extent has it developed as a general practice that acceding countries are required to demonstrate that the monopolies of state trading enterprises have been removed?
3 In cases in which import quotas are not in place and the Chinese government has authorized a large number of entities to import particular products, is there any evidence that the government is still trying to control the quantity of imports ?
4 Does the behaviour by Chinese STE's discriminate against imported goods?
5 Are there going to be any particular difficulties in checking the completeness of China's notifications under Article XVII regarding activities of STE?
6 In calculating the mark-ups applied by Chinese STEs, will there be any particular difficulties in determining the relevant period for calculation of averages or in collecting the relevant information on landed costs, costs of transport and distribution, internal taxes and sales prices?
7 Is it possible that China will remove the list of exemptions to the obligation on the right to trade, that is, might China agree to giving all entities a right to import any product?
8 Does the imposition upon China of an obligation to permit any entity to import create a precedent for reform of the GATT rules for all WTO members?
9 The problem with discretionary limitation of quantity by a state import monopoly is related to the existence of monopolies at later stages of the distribution chain. Even if the monopoly over imports is dismantled, if there is a monopoly over distribution, then the distributors would be able to extract a higher price for their services and the resulting price for the imported product would be just as high as if an import monopoly existed. Nothing in the GATT prohibits the creation of a monopoly in distribution (provided that there is no violation of Article III). Neither does anything in the GATT prohibit such a monopoly from exploiting its market power (again, provided that there is no violation of Article III). The Kodak Fuji case has demonstrated that GATT rules may have little impact on the situation where a government fails to constrain the exercise of market power by a private entity. However, government monopolies over distribution or government regulation of monopolies over distribution must abide by the national treatment rule. Any distribution monopoly, therefore, must treat imports and domestic products equally, in which case the resulting increase in the price of both imported and consumer goods should not impede the ability of the foreign sellers to gain market share by dropping their price. Therefore, there is an advantage to be obtained by removing the power of monopolies over imports even if there is no attempt under the GATT to regulate abuse of market power in internal markets. The conclusion is that there is no need to tie reform of GATT rules on state trading monopolies to the development of GATT rules on domestic competition. Any comments?
Anderson, Erwidodo & Strutt, Agriculture and the Next Round of WTO Negotiations ACIAR Indonesian Research Project Working Paper 99.09 (University of Adelaide Centre for International Economic Studies, Adelaide , June 1999) (available from http://www.adelaide.edu.au/cies/wp9909.pdf ).
Baban, Roy, "State Trading and the GATT" (1977) JWTL 334-353.
Bernier, Ivan, "State Trading and the GATT" in M.M.Kostecki (ed), State Trading in International Markets (MacMillan, London, 1982) p245.
Blumenthal, David, " 'Reform' or 'Opening'? Reform of China's State-Owned Enterprises and WTO Accession - The Dilemma of Applying GATT to Marketizing Economies" (1998) 16 UCLA Pac Basin L.J. 198.
Hartland-Thunberg, Penelope, "China's Modernization: A Challenge for the GATT" (1987) 10(2) (Spring) The Washington Quarterly 81-97
Hudec, Robert E, Enforcing International Trade Law: The Evolution of the Modern GATT Legal System (Butterworth, Salem, N.H,. 1993).
Ianni, Edmond M., "State Trading: Its Nature and International Treatment" (1983) 5 International Law & Business 46-64.
Ingco, M D & Ng, F., Distortionary Effects
of State Trading in Agriculture (World Bank Policy Research Working
Paper No. 1915, World Bank Washington, 1998) (available from http://www.worldbank.org/html/dec/Publications/Workpapers/WPS1900series/wps1915/wps1915.pdfhttp://www.worldbank.org/html/dec/Publications/Workpapers/WPS1900series/wps1915/wps1915.pdf
)
Jackson, John H., The World Trading System - Law
and Policy of International Economic Relations (MIT Press, Cambridge, Mass.
& London, Eng. 1989)
Lackowski, Bohdan, "Poland's Accession to GATT - The Quantitative Undertaking" (1971) 5 JWTL 110-119.
Martin, Will, & Christian Bach, ""The Importance of State Trading in China's Trade Regime"" in Abbott, F M (ed), China in the World Trading System: Defining the Principles of Engagement (Kluwer, Cambridge,1998) pp155-171.
McKenzie, Paul D., "China's Application to the GATT: State Trading and the Problem of Market Access" (1990) 24 (5)(October) Journal of World Trade 133
Patterson, Eliza R., "Improving GATT Rules for Nonmarket Economies" (1986) 20 (March April) Journal of World Trade 185-205.
Reuland, James M., "GATT and State-Trading Countries" (1975) 9 JWTL 318-339.
Stewart, Terence P. (ed), The GATT Uruguay Round - A Negotiating History (1986-1992) (Kluwer Law & Taxation, Deventer, Boston, 1993) Volume II: Commentary, pp1831-1832.
USA, United States General Accounting Office, State Trading Enterprises - Compliance with the General Agreement on Tariffs and Trade (GAO-GGD, Washington, August 1995) paper GAO/GGD-95-208.
Williams, Brett, The Importance of Disciplining the Choice Between Policy Instrument to the Effectiveness of the GATT as International Law Disciplining Agricultural Trade (unpublished PHD thesis, University of Adelaide, 1999)
Williams, Mark and ZHONG, Jianhua, "The Capacity
of Chinse Enterprises to engage in Foreign Trade: Does Restriction Help
or Hinder China's Trade Relations?" (1999) 8 J. Transnat'l L. & Policy
197.
YU-SHU, Feng, "China's Membership of GATT: A Practical
Proposal" (1988) 22(6) Journal of World Trade 53
1 Ingco, M.D & Ng, F., Distortionary Effects of State Trading in Agriculture (World Bank Policy Research Working Paper No. 1915, World Bank, Washington 1998), (available from http://www.worldbank.org/html/dec/Publications/Workpapers/WPS1900series/wps1915/wps1915.pdf ) p5.
2 For a general review of the way that the role of state trading enterprises has and is changing and the importance of these changes to China's accession to the WTO, see Blumenthal, David, " 'Reform' or 'Opening'? Reform of China's State-Owned Enterprises and WTO Accession - The Dilemma of Applying GATT to Marketizing Economies" (1998) 16 UCLA Pac Basin L.J. 198. Much has been written about the failure or limited success of the programme to reform state enterprises, for example, see HUANG, Yiping & DUNCAN, Ron, "How Successful Were China's State Sector Reforms?" (1997) 24 Journal of Comparative Economics 65-78 setting out empirical work indicating that the effects of reform on productivity of state owned enterprises has been negligible.
3 Martin, Will & Christian Bach, ""The Importance of State Trading in China's Trade Regime"" in F M Abbott (ed), China in the World Trading System: Defining the Principles of Engagement (Kluwer, Cambridge, 1998) pp155-171 at p157 citing Lardy, Nicholas, Foreign Trade and Economic Reform in China, 1978-1990 (Cambridge University Press, Cambridge, 1991).
4 Martin, Will & Christian Bach, ""The Importance of State Trading in China's Trade Regime"" in F M Abbott (ed), China in the World Trading System: Defining the Principles of Engagement (Kluwer, Cambridge, 1998), p161 citing Australia, Department of Foreign Affairs, East Asian Analytical Unit, China Embraces the Market (DFAT, Canberra, 1997).
5 Apart from the references to specific PRC Laws, the description that follows is drawn entirely from WILLIAMS, Mark & ZHONG, Jianhua, "The Capacity of Chinese Enterprises to Engage in Foreign Trade: Does Restriction Help or Hinder China's Trade Relations" (1999) 8 J. Transnational L. & P 197. I have mostly followed their terminology. Williams & Zhong (at pp222-224) point out that the consequence of an unauthorized Chinese party entering into an import transaction is that the contract is invalid under Chinese law so that, even though it is possible that courts of other countries might enforce the contract depending on choice of proper law and the place of performance, in practice, an exporter to China needs to find a Chinese buyer that has the capacity under Chinese law to enter into the contract.
6 This underlying principle is embodies in the Article 9 of the 1994 Foreign Trade Law which provides "Foreign trade operators must ... obtain the permission from the competent department in charge of foreign economic relations and trade under the State Council". See Foreign Trade Law of the People's Republic of China (adopted at the 7th meeting of the Standing committee of the 8th National People's congress on 12 May 1994, promulgated by Order No 22 of the President of the People's Republic of China on 12 May 1994 and effective as of 1 July 1994).
7 Williams & Zhong, as above, pp200-201.
8 Williams & Zhong, as above, pp204-205.
9 Williams & Zhong, as above, p205.
10 Williams & Zhong, as above, pp201-202, 207-210.
11 Williams & Zhong, as above, pp228-229.
12 Williams & Zhong, as above, pp210-211.
13 Law of the PRC on Sino-Foreign Equity Joint Ventures (adopted at the 2nd session of the 5th National People's Congress on 1 July 1979, and revised in accordance with the Decision of the National People's Congress regarding the Revision of the Law of the PRC on Sino - Foreign Equity Joint Ventures adopted at the 3rd session of the 7th National People's Congress on 4 April 1990) (SFEJV Law). This law is implemented by the Regulations for the Implementation of the Law of the PRC on Sino-Foreign Equity Joint Ventures which was promulgated by the State Council in September 1983. (See Williams & Zhong, as above, fn 114). Art 9 of the SFEJV Law permits a Chinese-foreign equity joint venture to purchase "raw materials and semi-processed materials, fuels, auxiliary equipment, etc.," "directly on the world market with foreign exchange raised by itself".
14 Law of the PRC on Sino-Foreign Contractual Joint Ventures (adopted at the First Session of the 7th National People's congress and promulgated by Order No 4 of the President of the People's Republic of China on 13 April 1988 and effective as of the date of promulgation) (SFCJV Law). This law is implemented by the Rules for the Implementation of the Law of the PRC on Sino-Foreign Contractual Joint Ventures which was approved by the State Council on 7 August 1995 and promulgated by Decree No 6 of MOFTEC on 4 September 1995. (See Williams & Zhong, fn 115) Art 19 or the SFCJV Law provides "A contractual joint venture may, within its approved scope of operation, import materials it needs and export products it produces. A contractual joint venture may purchase, on both the domestic market and the world market, the raw and processed materials, fuels, etc within its approved scope of operation". Article 20 provides that "A contractual joint venture shall achieve on its own the balance of its foreign exchange receipts and expenditures".
15 Law of the PRC On Wholly Foreign Owned Enterprises (adopted at the 4th session of the 6th National People's Congress, promulgated by Order No 39 of the President of the People's Republic of China and effective as of 12 April 1986) (WFOE Law) . This law is implemented by the Rules for the Implementation of the Law of the PRC on Wholly Owned Foreign Enterprises which was approved by the State Council on 28 October 1990 and promulgated by Decree No 1 of MOFTEC on 12 December 1990. (See Williams & Zhong, fn 116) Art 15 of the WOFE Law provides "Within the scope of operations approved, enterprises with foreign capital may purchase, either in China or from the world market, raw and semi-processed materials, fuels and other materials they need".
16 In addition to the specific provisions cited in the 3 preceding footnotes, Article 9 of the Foreign Trade Law (in paragraph 3) provides "Enterprises with foreign investment shall be free from obtaining the permission as stipulated in the first paragraph of this Article, if they, in accordance with the laws and administrative rules and regulations governing enterprises with foreign investment, import non-productive goods for their own uses, or necessary equipment, raw materials and other goods for their production, or export their own products".
17 Williams & Zhong, as above, pp213-214
18 Williams & Zhong, as above, pp314-215.
19 Williams & Zhong, as above, pp214; citing Provisional Decision on Issues concerning Authorizing Productive Enterprises and Scientific Research Institutions the Right to Handle Import and Export (FTOR for Private enterprises), issued by MOFTEC on 1 October 1998, effective 1 January 1999, (MOFTEC Gazette, 16 October 1998, Issue No 26, Serial No 175.
21 See the discussion at section 7 below on draft Annexes 2a-1 and 2b.
22 The following summary of the rules affecting state trading is drawn from see chapter 11, section 3.4. .
23 See GATT, Interpretative Note Ad Articles XI, XII, XIII, XIV and XVII. That Article XI:1 does apply to quantitative restrictions implemented by state import monopolies was confirmed by the panel report in Japan - Restrictions on Imports of Certain Agricultural Products L/6253, adopted 2 February 1988, GATT, BISD, 35S/163, 229, paras 5.2.2.1 - 5.2.2.2 and in Canada - Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies, report of the panel adopted on 22 March 1988 (L/6304), GATT, BISD, 35S/37 at 89, para 4.24.
24 See Agreement on Agriculture, Article 4(2) and footnote 1. See Ingco, Merlinda & Francis Ng, Distortionary Effects of State Trading in Agriculture World Bank Policy Research Working Paper No 1915 (accessible at http://www.worldbank.org/html/dec/Publications/Workpapers/WPS1900series/wps1915/wps1915.pd ).
25 Cf. the decision to the contrary in Canada - Import, Distribution and Sale of Alcoholic Drinks By Canadian Provincial Marketing Agencies report of the panel adopted on 22 march 1988 (L/6304) GATT BISD, 35S/37 at p89, para 4.24. It is submitted that the panel's decision on this point (that Article XI:1 applies to a restriction applied by a state import monopoly on internal sale) is wrong. In the subsequent decision on similar restrictions, the panel referred to the finding of the 1988 panel but neither supported not contradicted it saying that it was unnecessary to decide in that case, whether Article XI:1 had been violated: see Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies report of the Panel adopted on 18 February 1992 (DS17/R), GATT, BISD 39S/27 at 75-76, para 5.6.
26 Note the two sentences in Article III:2 and the interpretative note, having the effect that the first sentence prohibits less favourable taxing of "like products" and the second sentence prohibits using internal taxes to protect "directly competitive or substitutable products".
27 It has been argued that the absence of a reference to Article III in the Interpretative Note to Articles XI, XII, XIII, XIV and XVIII means that Article III is not supposed to apply to actions of state trading enterprises (see the argument made by Canada at para 3.47 on p62 of Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies report of the panel adopted on 22 March 1988 (L/6304) GATT BISD 35S/37). However, argument is weakened by the fact that all of the other provisions specifically mentioned in the interpretative note relate to measures affecting importations and the need for the interpretative note may be explained by a need to ensure that Article XVII, also concerned with importation, is not regarded as an exclusive rule. Indeed, the absence of the specific reference to Article III in the interpretative note did not prevent the panel in Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies (GATT, BISD 39S/27) from finding that certain practices of Canadian liquor marketing boards were in violation of Article III.
28 Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Boards report by the panel adopted on 18 February 1992 (DS17/R) GATT BISD 39S/27 at 80, para 5.16. The same panel held that various practices of provincial STEs with an import monopolies of setting a minimum price for sales afforded less favourable treatment to imported beer that would otherwise be sold below the minimum price and, therefore, was in violation of Article III:4 (see para 5.30 on p84), and that the practice of the Ontario liquor board of permitting imported beer to be sold only in six-packs whilst allowing domestic beer to be sold in other packaging was a violation of Article III:4 (see para 5.4 on p75).
29 See Understanding on the Interpretation of Article XVII of the GATT 1994, esp para 5. The obligation derives from GATT, Article XVII:4(a) and (b). The format of the questionnaire is set out in BISD 9S/184-185.
30 There is an interpretative note to Article II:4 which provides: "Except where otherwise specifically agreed between the contracting parties which initially negotiated the concession, the provisions of this paragraph will be applied in the light of the provisions of Article 31 of the Havana Charter". The text of Article 31 is set out in GATT, Analytical Index (GATT, Geneva, 6th ed, 1994) pp87-88. Article 31 of the Havana Charter provided for parties to negotiate in respect of import monopolies, either maximum import tariffs or other satisfactory arrangements. Paragraphs 4 and 5 provided:
"(4) The import duty negotiated under paragraph 2, ... , shall represent the maximum margin by which the price charged by the import monopoly for the imported product (exclusive of internal taxes conforming to..., transportation, distribution and other expenses incident to the purchase, sale or further processing, and a reasonable margin of profit) may exceed the landed cost; Provided that regard may be had to average landed costs and selling prices over recent periods: and Provided further that, where the product concerned is a primary commodity which is the subject of a domestic price stabilization arrangement, provision may be made for adjustment to take account of wide fluctuations or variations in world prices, subject where a maximum duty has been negotiated to agreement between the countries parties to the negotiations."(5) With regard to any product to which the provisions of this Article apply, the monopoly shall, wherever this principle can be effectively applied and subject to the other provisions of this Charter, import and offer for sale such quantities of the product as will be sufficient to satisfy the full domestic demand for the imported product, account being taken of any rationing to consumers of the imported and like domestic product which may be in force at that time."
31 See Belgium
- Family Allowances, GATT BISD 1S/59 at 60, para 4, that "as
regards the exception contained in paragraph 2 of Article XVII, it would
appear that it referred only to the principle set forth in paragraph I
of that article, i.e. the obligation to make purchases in accordance with
commercial considerations and did not extend to matters dealt with in Article
III". See also Canada - Administration of the Foreign Investment Review
Act GATT, BISD, 30S/140 at 60, para 5.16: that the panel "saw
great force in Canada's argument that only the most-favoured-nation and
not the national treatment obligations fall within the scope of the general
principle referred to in Article XVII:1(a)". See P. D. McKenzie, "China's
Application to the GATT: State Trading and the Problem of Market Access"
(1990) 24 (5)(October) Journal of World Trade 133, at p138 expressing
doubt that Article XVII:1(b) imposes a national treatment obligation (and
in support citing Bernier, Ivan, "State Trading and the GATT" in M.M.Kostecki
(ed), State Trading in International Markets (MacMillan, London,
1982) 245 at 251.
32 USA, United States General Accounting Office, State Trading Enterprises - Compliance with the General Agreement on Tariffs and Trade (GAO-GGD, Washington, August 1995) paper GAO/GGD-95-208, pp3-4.
33 See "Trade with Hungary - Sixth Review under the Protocol of Accession" report by the working party adopted on 22 May 1986 (L/5977) GATT, BISD 33S/136 at 147-148, paras 36-37.
34 See USTR, Market Access and Protocol Commitments annexed to Press Release 99-34 "Statement of Ambassador Charlene Barshefsky Regarding Broad Market Access Gains Resulting from China WTO Negotiations, dated 8 April 1999, p6.
35 Korea - Import Restrictions on Beef complaint by Australia, L/6504, GATT BISD 36S/202 at 229, para 105-106; complaint by New Zealand L/6505, 36S/234 at 266-267, para 121-122; & complaint by USA, L/6503, 36S/268 at 305, para 127-128; all adopted 7 November 1989.
36 Korea - Import Restrictions on Beef complaint by Australia, L/6504, GATT BISD 36S/202 at 229, para 104; complaint by New Zealand L/6505, 36S/234 at 267, para 122; & complaint by USA, L/6503, 36S/268 at 305, para 126; all adopted 7 November 1989. These passages are quoted in GATT, Analytical Index, (GATT, Geneva, 6th ed, 1994) p87.
37 The text of the Interpretative note to Article II:4 and the complete text of Article 31 of the Havana Charter are set out in full at footnote 12 above. For an example of the application of this provision, see Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Boards report by the panel adopted on 18 February 1992 (DS17/R) GATT BISD 39S/27 at p80.
38 On difficulties with determining whether the average has been exceeded, see Baban, Roy, "State Trading and the GATT" (1977) JWTL 334-353 at 342 and P. D. McKenzie, "China's Application to the GATT: State Trading and the Problem of Market Access" (1990) 24 (5)(October) Journal of World Trade 133 at 140.
39 See "Report Relating to the General Review of the Agreement - Other Barriers to Trade", L/334 and addendum, report adopted 3 March 1955, GATT, BISD, 3S/222 at 227-228, paras 25-26.
41 See GATT, Analytical Index, 6th ed, p89.
42 See Stewart, Terence P. (ed), The GATT Uruguay Round - A Negotiating History (1986-1992) (Kluwer Law & Taxation, Deventer, Boston, 1993) Volume II: Commentary, pp1831-1832.
44 See Feng YU-SHU, "China's Membership of GATT: A Practical Proposal" (1988) 22(6) Journal of World Trade 53, at pp60-62.
45 See Feng YU-SHU, "China's Membership of GATT: A Practical Proposal" (1988) 22(6) Journal of World Trade 53 at p60.
46 See GATT, Analytical Index 6th ed, Appendix VI.A, Accessions under Article XXXIII, p1050. See Protocol for the Accession of Poland, done Geneva 30 June 1967, in force 18 October 1967, GATT BISD 15S/46, the working party report at 15S/019 and the decision of the contracting parties at 15S/60. For a Polish view of the accession negotiation, see Lackowski, Bohdan, "Poland's Accession to GATT - The Quantitative Undertaking" (1971) 5 JWTL 110-119, esp at 118 arguing planned quantities to be imported were not quantitative restrictions within the meaning of Article XI:1.
47 See "Schedule LXV - Poland" in Annex B of and para 9 of Protocol for the Accession of Poland GATT BISD 15S/46. See Paul D. McKenzie, "China's Application to the GATT: State Trading and the Problem of Market Access" (1990) 24 (5)(October) Journal of World Trade 133 at p141 & Reuland, James M., "GATT and State-Trading Countries" (1975) 9 JWTL 318-339 at 325.
48 See "Consultation with Poland - Third Review under the Protocol of Accession" report of the working Party adopted on 2 February 1971 (L/3475) GATT BISD 18S/188 at 198-201. See McKenzie, Paul D. "China's Application to the GATT: State Trading and the Problem of Market Access" (1990) 24(5) Journal of World Trade 133 at 142 saying "Poland's inability to meet that figure caused it to elect to reduce its export levels", citing Peter C. Sheridan, "The Accession to GATT of the People's Republic of China: New Challenges for the World Trade Regime" (1987) 23:3 Willamette LR 843 at 847.
49 See Paul D. McKenzie, "China's Application to the GATT: State Trading and the Problem of Market Access" (1990) 24 (5)(October) Journal of World Trade 133 at 142.
50 See GATT, Analyticial Index 6th edition, Appendix VI.A, p1050. Protocol of Accession of Romania GATT, BISD 18S/5; Decision of the Contracting Parties 18S/23.
51 See GATT, Analytical Index 6th edition, p445. The commitment is in Annex B of the Protocol of Accession of Romania.
52 See GATT, Analytical Index 6th edition, appendix VI.A, p1050. Protocol of Accession of Hungary to the GATT, GATT, BISD 20S/3; Decision of the contracting Parties 20S/17.
53 Concerns with the sourcing of imports from socialist countries arose in the 4th review of the Protocol in 1982 ( BISD, 29S/129, para 39), the 5th review in 1984 (31S/156, para 31), the 6th review in 1986 (33S/136, para 34).
54 "Trade with Hungary - Sixth Review under the Protocol of Accession" report by the working party adopted on 22 May 1986 (L/5977), GATT, BISD, 33S/136 at 147-148, para 36-37.
55 See the "Table of Complaints by Defendant", Hudec, Robert E, Enforcing International Trade Law: The Evolution of the Modern GATT Legal System (Butterworth, Salem, N.H,. 1993) at p385. The table shows no complaints initiated against Hungary. Interestingly, the table shows that no complaints were made against any of the other transition economies, Poland, Romania or Yugoslavia.
56 I need to check some more post-WTO accession protocols to verify this statement. Check Bulgaria 1/12/96; Mongolia 29/1/97; Slovenia 30/7/95; Estonia 13/11/99.
57 Protocol of Accession of Latvia to the Marrakesh Agreement Establishing the World Trade Organization" done Geneva, 14 October 1998, in force CHECK DATE (WT/ACC/LVA/35 dated 23 October 1998). See paragraph 3 of the Protocol incorporating the provisions of, inter alia, para 18 of the Working Party Report. "Report of the Working Party on the Accession of Latvia to the World Trade Organization", WT/ACC/LVA/32, 30 September 1998
58 See the Working Party report, WT/ACC/LVA/32, para 39.
59 Report of the Working Party on the Accession of the Kyrgyz Republic, WT/ACC/KGZ/26, 31 July 1998.
60 Protocol of Accession of the Kyrgyz Republic to the Marrakesh Agreement Establishing the World Trade Organization, done Geneva, 14 October 1998, in force, CHECK DATE (WT/ACC/KGZ/29 dated 23 October 1998). See para 2 of the Protocol incorporating, inter alia, para 14 of the Working Party Report.
61 On the so-called 'water' in the tariff equivalents, see Williams, Brett G., The Importance of the Disciplining the Choice of Policy Instrument to the Effectiveness of the GATT as International Law Disciplining Trade Policies, unpublished PHD thesis at p685, citing inter alia Anderson, Kym, Agriculture and the WTO into the 21st Century (University of Adelaide, Centre for International Economic Studies, Policy Discussion Paper No 98/03, March 1998) Table 1 on "Dirty Tariffication" based on data from Ingco, M., "Agricultural Trade Liberalization in the Uruguay Round: One Step Forward, One Step Back?" supplementary paper prepared for a World Bank Conference on The Uruguay Round and the Developing Countries, Washington DC, 26-27 January 1995.
62 See the Agreement on Agriculture, Annex 5. A perusal of the schedules discloses that the only exceptions taken under this annex were Japan, South Korea and The Philippines on rice and Israel on sheep meat.
63 See M D N Ingco, F., Distortionary Effects of State Trading in Agriculture (Report No. 1915, 1998), p13, Table 1.
64 See M D N Ingco, F., Distortionary Effects of State Trading in Agriculture (Report No. 1915, 1998), p16.
67 See M D N Ingco, F., Distortionary Effects of State Trading in Agriculture (Report No. 1915, 1998), p15.
68 See Hartland-Thunberg, Penelope, "China's Modernization: A Challenge for the GATT" (1987) 10(2) (Spring) The Washington Quarterly 81-97 at 89-90 that the precedents established thus [referring to the cases of Poland, Romania and Hungary] offer only a negative guide for the case of China, teaching what should be avoided rather than what should be sought".
69 See below, the table of products extracted from the draft of Annex 2a-1 of the draft Protocol of Accession dated 6 March 1997.
70 On approaches
being pursues in the WTO to reform of state trading rules, see
Anderson, Erwidodo & Strutt, Agriculture
and the Next Round of WTO Negotiations ACIASR Indonesian Research Project
Working Paper 99.09 (University of Adelaide Centre for International Economic
Studies, Adelaide, June 1999) at p19-20 and also Anderson, Hoekman &
Strutt, Agriculture and the WTO: Next Steps (Centre for International
Economic Studies, Adelaide, 1999) CIES Discussion Paper 9914 at pp16-17.
(both papers available from http://www.adelaide.edu.au/cies
).
71 "Draft Protocol on China WTO Accession" dated 6 March 1997, Inside U.S Trade, 14 March 1997, pp23-29. See the earlier Draft Protocol dated 20 December 1994 (attached to Chairman's note to Members of the Working Party at the conclusion of the Nineteenth meeting of the Working Party), reproduced in Inside US Trade, 27 January 1995, ppS2-S7.
72 "Draft Protocol on China WTO Accession" dated 6 March 1997, Inside U.S Trade, 14 March 1997, pp23-29.
74 Eg, see"Japan - Measures Affecting Consumer Photographic Film and Paper", report of the panel dated 31 March 1998, WT/DS44/R, adopted by the DSB 22 April 1998 (see para 10.6 ff).
75 M D N Ingco, F., Distortionary Effects of State Trading in Agriculture (Report No. 1915, 1998), p29.
76 "Draft Protocol on China WTO Accession" dated 6 March 1997, Inside U.S Trade, 14 March 1997, pp23-29.
77 See "New Draft China WTO Protocol Shows U.S. Concessions On Trading Rights", Inside US Trade 14 March 1997 (from http://www.insidetrade.com/sec-cgi/as_web.exe?SEC_IT1997+D+6798135 ). It is not clear whether the term designated trading rights derives from terminology used by the Chinese government. It seems possible that the use of term designated trading rights has arisen from the use of the term 'designated enterprises' in paragraph 5(1) of the December 1997 draft Protocol, that is, that the term arises not from China but from the parties with which the Chinese government is negotiating.
78 See Annex 2a-1 Products subject to State Trading (Import) among the revised annexes to the Draft Protocol submitted to the WTO Working Party in July 1997 under cover of the document "Working Party on the Accession of China - Communication from China" dated July 1997. The document has not been derestricted by the WTO Working Party. However, it is available at http://www.insidetrade.com/sec-cgi/as_web.exe?SEC_world18+B+iwp972762#iwp972762 .
79 See "New Draft China WTO Protocol Shows U.S. Concessions On Trading Rights", Inside US Trade 14 March 1997 (from http://www.insidetrade.com/sec-cgi/as_web.exe?SEC_IT1997+D+6798135 ).
80 See "New Draft China WTO Protocol Shows U.S. Concessions On Trading Rights", Inside US Trade 14 March 1997 (from http://www.insidetrade.com/sec-cgi/as_web.exe?SEC_IT1997+D+6798135 ).
82 See fn 5 and 7 above and accompanying text.
83 See the document "Market Access and Protocol Commitments" which is annexed to USTR, Press release 99-34 dated 8 April 1999 (available from http://www.ustr.gov) at p4. (Some caution must be exercised in considering this press releases since the Chinese government challenged the accuracy of the contents of the press release.) See also the press release of 17 November 1999, The White House Office of Public Liaison, "Summary of US-China Bilateral WTO Agreement", (available from http://www.uschina.org/public/991115a.html ) at p2-3.
84 See "China WTO Entry to Boost US Farm Exports by $2 Bln", Muzi News, 10 February 2000, ( http://dailynews.muzi.com/cgi/lateline/news.cgi?p=59082 )
85 See "Market Access and Protocol Commitments" which is annexed to USTR, Press release 99-34 dated 8 April 1999. This agreement may have been superseded by subsequent negotiations.
86 Jackson contrasts the situation of other non-market economies with that of China, see Jackson, John H., The World Trading System - Law and Policy of International Economic Relations (MIT Press, Cambridge, Mass. & London, Eng.) 1989) at p286.