*EPF406 02/05/2004
Text: China Still Has "Long Way to Go" on Trade Reform, Jochum Says
(Commerce official's Feb. 5 remarks to U.S.-China panel) (3630)

China still has "a long way to go" to reform its economy fully, according to James Jochum, assistant secretary of commerce for import administration.

Speaking Feb. 5 before the U.S.-China Economic and Security Review Commission, Jochum said: "While we believe that China's leadership is serious about economic reform and its WTO [World Trade Organization] commitments, China still has a long way to go."

"China's transition to an economy that operates fully on market principles is far from complete, Jochum said. Main areas for concern include China's lack of enforcement of its laws to protect intellectual property rights; lack of regulatory transparency; the need to establish international standards systems; and the need to drop discriminatory value-added tax policies and protectionist industrial policies.

During the first two years following its accession to the WTO, China "reviewed literally thousands of laws and regulations in an effort to make the necessary changes to bring them into compliance with WTO rules," Jochum said. But the United States is concerned that "China seems to have lost its momentum in implementing its commitments."

"It is the pace of the ongoing reform of the Chinese economy toward a market model, of which the implementation of the Chinese WTO obligations is a part, that causes friction within our trade relationship," he said.

Nonetheless, China is one of the fastest-growing markets for much of what the United States produces, including American manufactured goods, Jochum said. U.S. exports surged 23 percent between 2002 and 2003, he noted.

"China's extraordinary economic growth right now makes it one of the most important engines of the world economy outside of the United States," Jochum said.

The U.S.-China Economic and Security Review Commission monitors, investigates, and reports to Congress on the national security implications of the bilateral trade and economic relationship between the United States and the People's Republic of China. The commission is composed of 12 members, all of whom are appointed by members of Congress.

Following is the text of Jochum's remarks, as prepared for delivery:

(begin text)

James J. Jochum
Assistant Secretary of Commerce for Import Administration
Before the
U.S.-China Economic and Security Review Commission
"China and the WTO: Compliance and Monitoring"
February 5, 2004

Thank you Chairman Robinson, Vice Chairman D'Amato, and Members of the Commission for inviting me to discuss the Commerce Department's role in helping ensure that China fully complies with its WTO obligations. I appreciate your dedication to this issue, and I further appreciate your giving me the opportunity to discuss the Department's efforts in this regard.

For both President Bush and Secretary Evans, the importance of trade extends well beyond the economic realm. As the President stated: "Open trade is not just an economic opportunity, it is a moral imperative. When we negotiate for open markets, we are providing new hope and promoting political freedom."

Economic and social imperatives associated with trade are the reason that the Administration has moved aggressively in pursuing an ambitious trade agenda. We will continue to move forward to expand our trade and the economic opportunities that it creates for all Americans, and to eliminate barriers to the free flow of all goods, services, investment and ideas.

This Administration understands that an aggressive trade liberalizing agenda must be accompanied by the strict enforcement of our trade laws. We understand the value of competition, and that it leads to innovation, growth, and a higher standard of living. But some of our trading partners have failed to embrace fair competition fully. Therefore, as we continue to encourage the opening of markets in countries such as China, we expect our trading partners to adhere to their international commitments. We will also work to identify areas where those commitments are not being met and will hold our trading partners accountable for resolving these short-comings.

At today's hearing I would like to take the opportunity to give an overview of the Commerce Department's role in monitoring one of the world's fastest growing economies and its participation as a member of the World Trade Organization. I will also highlight the importance of our trading relationship with China and actions the Department is taking to enhance this relationship.

Trade Relationship with China

Last year, as part of the Administration's Manufacturing Initiative, senior Commerce officials, including Secretary Evans and Under Secretary Aldonas, participated in more than 20 roundtables with manufacturers across the country. No single topic garnered more attention than our trade relationship with China. The stakes involved are high. While final trade statistics for 2003 have not yet been released, on an annual basis, bilateral trade merchandise reached $179.2 billion in 2003, making China our third largest trading partner, and our second largest source of imports. (1) Last year, China surpassed Mexico to become our second largest source of imports. Our imports from China are more than five times greater than our exports. The bilateral trade deficit hit $124.5 billion in 2003 (2). More positively, U.S. exports to China in November 2003 reached a record $3.3 billion.

It is important to note, however, that a large share of what we now import from China used to be imported from other Asian countries. Because China's current role in the restructuring of global manufacturing is that of the final assembly point for most Asian electronic equipment destined for the United States, China becomes the country of origin for what before would have been an export to the United States from other Asian countries. In other words, it may be more appropriate to look at our trade account with China as an indicator of competition in manufacturing across Asia, as opposed to the rise of Chinese manufacturing alone.

There is an obvious upside to China's growth and the benefit the Chinese derive as investment in Asia shifts toward China, as well. That shift, together with China's economic policies, has brought about a rising standard of living in China and a considerable rise in disposable income for the average Chinese -- in turn creating a consumer demand that did not previously exist in China. This consumer demand means an expanding market for goods and services, many exported from or provided by the United States, as opposed to the largely one-way street of the past. The fact that China's trade is nearly in balance overall, even though it runs a huge surplus with the United States, reinforces the link between a rising consumer demand and growth in imports.

All of this makes China an attractive market for much of what we produce in the United States, including for our manufacturers. China's extraordinary economic growth right now makes its one of the most important engines of the world economy outside of the United States. Put simply, in trade terms China today represents the fastest-growing market for U.S. goods and services. Our exports to China surged by 19 percent from 2000 to 2001, 15 percent from 2001 to 2002, and by 23 percent from 2002 to 2003, based on annualized figures.

China's Membership in the World Trade Organization

Since its accession to the World Trade Organization in December 2001, China has continued its course of ambitious economic reform in the transition to a rules-based, open economic system. One of the primary reasons for negotiating for 15 years with the Chinese over their accession to the WTO was to ensure that we would knock down the many barriers to entering China's market. The situation facing U.S. producers from a competitive perspective was far worse prior to China's entry into the WTO. Our exporters lacked access to the Chinese market, but Chinese producers had relatively free access to ours.

Today, by virtue of the WTO, the tariff rates that China imposes on our exports are lower on average than in most of the developing world, and in some instances, the developed world. In addition, China's WTO accession obligations require protection of the intellectual property of U.S. manufacturers and service suppliers. The agreement also phases out many of the barriers to the free distribution of American goods throughout the Chinese economy. American goods are increasingly able to move more freely through a variety of channels instead of being beholden to trading through a Chinese state enterprise, as in the past. Our farmers, manufacturers, and service providers all are finding new opportunities in the Chinese market.

China's WTO Compliance Record

Through the first two years following its accession to the WTO, China reviewed literally thousands of laws and regulations in an effort to make the necessary changes to bring them into compliance with WTO rules. Now, as we move further into China's participation in the WTO, we expect to see full enforcement of those laws and compliance with WTO rules in other areas. I know that the President, Ambassador Zoellick, Secretary Snow, Secretary Powell and most recently Secretary Evans have all made that point vigorously with their counterparts in China. And, I can attest that, at a working level, the rest of us have taken up the cause just as vigorously.

But there is still a very, very long way to go, which goes to the heart of the complaint many have about China. China seems to have lost its momentum in implementing its commitments. It is the pace of the ongoing reform of the Chinese economy toward a market model, of which the implementation of the Chinese WTO obligations is a part, that causes friction within our trade relationship. The WTO rules, and, indeed, the whole concept of trade are based on free competition in the marketplace. But, where one economy is organized under principles that are not completely consistent with that free market model, it can cause an enormous amount of friction within our trading relationships. Indeed, Secretary Evans articulated this key message in Beijing this past October.

Structural Concerns

China's transition to an economy that operates fully on market principles is far from complete. Without progress in the following areas, we at Commerce believe that China's other efforts to implement its WTO commitments will not be meaningful to U.S. companies. These are in addition to the list of specific issues that USTR will cover in its testimony. Let me briefly highlight four important areas of concern:

1. Protecting Intellectual Property Rights (IPR): While China has put in place the legal framework to protect intellectual property, it lacks an effective enforcement system. Some estimate that over 90% of business software in China is pirated, costing the rightful owners more than $1.5 billion a year in lost sales. Ensuring effective IPR enforcement is critical to doing business in China, not to mention protecting Chinese consumers from harmful products.

2. Increasing Transparency: The cornerstone of every market economy is a rules-based, transparent system. Transparency commitments underlie all other commitments to adopt WTO-consistent measures. The lack of regulatory transparency in China continues to make for an unpredictable environment for foreign businesses in China.

3. Establishing Standards: China is in the process of revising its standards system and adopting more international standards. However, in several areas we are seeing China adopt home-grown standards that are not based on international standards. China also continues to develop its standards in an opaque manner, in some cases not providing adequate comment periods or notice before establishing standards.

4. Ensuring Non-Discrimination/National Treatment: Whether it is through discriminatory value-added tax policies or through protectionist industrial policies, China's actions continue to raise concerns.

Notwithstanding these unresolved issues, we still believe China's leadership is earnest about its country's transformation to a market-based economy and has made much progress toward implementing its WTO commitments. For example, China recently took steps to improve the administration of the tariff-rate quota (TRQ) system for bulk agricultural commodities, such as wheat and cotton. China has also promised to keep the way clear for imports of soybeans, one of the top U.S. exports to China, as it implements its new biotech regulations. And during his recent visit to the United States, Chinese Premier Wen Jiabao stated his intention to work to increase U.S. exports to China as a means to address the trade imbalance between our two countries.

The Department of Commerce's Role in Trade With China

But we must remain vigilant. The Department of Commerce, in close coordination with USTR and other agencies, has adopted an aggressive and multi-pronged approach to ensure that China honors its WTO commitments and that U.S. companies benefit from these opportunities.

These efforts begin, and are greatly enhanced by, active engagement at the most senior levels of government. This past October, Secretary Evans traveled to China where he delivered a strong message, calling on the Chinese to ensure a level playing field in our trade relations and to create an economic system that is more transparent and that allows capital to flow freely in response to market forces. The Secretary's visit followed on the heels of visits by Treasury Secretary Snow and Ambassador Zoellick, during which similar messages were delivered. The Secretary and Ambassador Zoellick will continue this dialogue at an elevated meeting of the U.S.-China Joint Commission on Commerce and Trade (JCCT), to be held this April in Washington.

At the direction of Secretary Evans, the Department has devoted significant resources to monitoring China's progress in adhering to its WTO commitments. Specifically, each unit of the International Trade Administration (ITA) plays a critical role in this process. The Trade Development unit maintains a unique relationship with U.S. industries, ensuring that ITA has first-hand knowledge of U.S. industry's needs at home and in China. The Foreign Commercial Service, which gives the Commerce Department a global reach in interacting with foreign governments on behalf of U.S. companies, maintains offices in five cities on the mainland of China, plus Hong Kong. This represents our largest presence of commercial officers in any single country throughout the world.

ITA's Market Access and Compliance, a unit whose mission is to monitor our trading partners' compliance with trade agreements, houses an office solely dedicated to monitoring China with respect to its WTO commitments. The China compliance office is staffed with 18 employees, up from only seven a few years ago. Market Access and Compliance, along with Import Administration, has deployed four officers, and employs several Chinese nationals, in its Trade Facilitation Office in Beijing to gather information on the Chinese economy and assist in our evaluation of whether China is meeting its obligations.

At Import Administration, we also have in place an ongoing monitoring program that tracks import trends as well as certain government policies, business conditions, and company practices regarding China. We pay particular attention to China's subsidization of its commercial sector, which assists us in our work at the WTO Subsidies Committee.

I would note that the lack of sufficient transparency in China has greatly hindered our ability to obtain detailed information on actual subsidy programs. Accentuating this transparency problem is the Chinese government's failure to make the annual notification of government programs that meet the definition of a "specific" subsidy under the WTO Subsidies Agreement, a notification required of all WTO members by June 30 of each year. China's failure to make its required notification for two years running, coupled with an overall lack of publicly available information, greatly hinders our efforts to confirm whether China has complied with its accession obligations concerning subsidies. Apart from monitoring activities in China, ITA has also provided technical assistance to China since September 2000, in an effort to encourage and assist China in meeting its WTO commitments. Initial programs focused on increasing the awareness of general WTO principles among Chinese government officials. As China developed an increasingly sophisticated understanding of the WTO system, however, our programs have been tailored to more specific areas, such as standards development, intellectual property rights protection, and the rule of law.

In 2003, ITA sponsored or coordinated programs on areas of primary importance to U.S. industry and has helped improve the environment for foreign firms conducting business in China. One such program on fertilizer standards played a role in the indefinite postponement of the issuance of standards that would have closed China's $700 million fertilizer market to U.S. exports.

We continue to look for new ways in which we can utilize our expertise. Some programs already under development for this year include a health care forum and a standards development workshop, both to be held in Beijing. These programs allow us both to help the Chinese comply with their WTO obligations and to assist U.S. firms in expanding their businesses through trade with China.

While the Department will continue its focus on China's compliance activities, it is critical to continue to enhance the ability of U.S. businesses to compete in China. As China's market becomes open to foreign trade and investment, American companies will be competing with the rest of the world to gain access to rapidly expanding Chinese consumer markets. To that end, the information and expertise that we gain through participation in cooperative programs with the Chinese is shared with U.S. businesses, especially small- and medium-sized companies, here at home. Last year, ITA initiated its "Doing Business in China" seminar that will again be presented in cities across the country this year. These seminars are designed to assist U.S. companies, especially small- and medium-sized ones, gain the tools to be competitive in the Chinese market.

Finally, we are not only identifying areas in which China should change, we are also changing ourselves. For the first time in 20 years, plans have begun to implement an ITA reorganization that will equip us to more effectively meet the needs of U.S. industry and create a fair playing field for U.S. businesses trading with China.

Commerce will integrate and streamline the operations and procedures of export promotion services within the Department under a new Assistant Secretary for Trade Promotion. Funds have been allocated under this office to create a China Business Information Center. To further assist U.S. exporters, ITA will create at least six positions in American Trading Centers, to be established in major commercial centers around China. We expect that these changes will allow us to promote U.S. imports more aggressively in China and actively engage the Chinese on issues that matter most to U.S. companies.

Within Import Administration we are creating a new Unfair Trade Practices Task Force, a unit designed to strengthen ITA's ability to advance U.S. trade policies and negotiations and address the root causes of unfair trade. This task force will be analyzing market trends, trade flows and government actions to identify potential unfair trade practices and arrange consultations with governments in an attempt to preemptively resolve nascent unfair trade matters before they develop into disputes and result in trade cases. With respect to China, the task force has begun tracking imports from China in 30 key sectors in order to identify unfair trade practices. We will begin consulting with industry representatives to determine specific actions we can take in other sectors, as well.

Finally, to better address concerns on the effective enforcement of the trade laws with respect to China, Import Administration is in the process of creating a China Enforcement Office that will focus on anti-dumping cases brought by U.S. producers injured by Chinese imports. Imports from China represent a rapidly growing source of trade complaints. In fact, during the last three years, we have initiated more antidumping investigations and imposed more antidumping orders covering products from China than any other country, more than twice as many as the next leading country. In 2003 alone, more than 50 percent of all new antidumping orders put in place have involved China, up from historical levels of just under 20%. This new office will further cultivate the expertise necessary to address the unique problems encountered in the Chinese economy, and will review current policies and methodologies (including the Department's non-market economy methodology (NME) and new shipper reviews) to ensure that the trade laws work to the benefit of the United States.

Based on all of these activities, I can assure you that the Department of Commerce is dedicated to making sure China plays by the rules that it agreed to upon entering the WTO, and that American companies will be poised to take advantage of a more level playing field between the United States and China. We have already seen great progress in the form of record levels of U.S. exports to China. But much more work is still to be done and the tools we are putting in place will help us accomplish the goal of fully integrating China into a rules-based trading system.

In conclusion, I want to stress that this Administration is mindful of the importance of our trade relationship with China, and its place in world markets. While we believe that China's leadership is serious about economic reform and its WTO commitments, China still has a long way to go. We will continue to work with our interagency counterparts and the Congress to ensure that all Americans enjoy the benefits of free and fair trade.

Thank you for giving me this opportunity to testify on this important topic. I appreciate your support for our efforts and welcome your questions.

Notes:

(1). Bilateral merchandise trade data is annualized based on January through November 2003 actual data of $164.3 billion.

(2). Bilateral trade deficit is annualized based on January through November 2003 actual data of $114.1 billion.

(end text)

(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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