U.S.-China Commission Hears Testimony on China and the WTO

Four Senators, including Schumer (D) and Graham (R), gave testimony, as well as six former government officials and academics. Press reports indicate that Senators Schumer and Graham have committed to introducing a new China currency bill in the next few weeks if Treasury or China fail to act on the yuan revaluation issue.

(Most of those who gave testimony focused on the problems with the U.S. trade relationship with China, in light of China’s WTO commitments and membership.)

Of the former officials and academics, the written testimony of Dr. Shenkar of Ohio State University was particularly readable, and included the following points, among others (the Senators did not provide written testimonies):

U.S. Firms Have Received Greater Access to China’s Markets

The benefits that have accrued to U.S. companies from China’s entry to the WTO are substantial. They include the opening of sectors such as retail which have been either closed or severely restricted in terms of ownership structure and region. Data show that after WTO succession foreign companies have markedly increased the proportion of their China operations that are wholly owned either by forming a new wholly owned foreign enterprise by acquiring the Chinese partner’s stake in an equity joint venture.

In addition to the opening of the domestic market, American and other foreign firms continue to dominate Chinese exports (data from 2005 shows foreign invested enterprises accounting for 58% of Chinese exports). This percentage was significantly higher in technology sensitive sectors such as IT, and might be unsustainable primarily because it is not acceptable to the Chinese leadership that is worried of foreign domination.

Indirect benefits have also accrued to Chinaengaged U.S. firms in such realms as aviation, where China’s WTO accession played a part in accelerating economic growth which in turn has generated demand for foreign goods such as passenger aircraft. Other benefits have been accrued for U.S. firms that import Chinese inputs and components as a way to lower product cost and remain competitive.

China Has Not Fulfilled its Non-Discrimination Commitments

With respect to a WTO commitment nondiscrimination, to accord foreign players a level economic and market playing field, and, in particular, versus domestic companies, the Chinese record is spotty. China has opened up to foreign firms much more than most emerging economies. Yet, there are frequent instances of discrimination and the situation appears to be worsening and will worsen further in the future.

While China has made the vast majority of the formal changes in legislation and regulations that are consistent with the principle of nondiscrimination, the record on the ground has often been quite different. For instance, environmental regulations are selectively enforced, with the burden on foreign players almost always higher than that borne by domestic players. Part of the reason for the difference is a substantial gap in employee wages and benefits but regulation has a lot to do with it, with discrimination in anything from social security payments to the protection of intellectual property rights (IPR). The extent of the gap varies substantially across various Chinese localities.

Another example of discrimination is the policy of “indigenous innovation,” which has become a code word for preference accorded to domestic players in procurement by the government and stateowned enterprises under the guise of promoting innovation. There are indications that this practice is becoming more widespread at an alarming rate.Furthermore, discrimination may more and more occur on the level of “nottariff barriers”, that is, that more and more obstacles will be put in front of foreign players in the form of technical standards, variable enforcement, and the such.

Corruption, now acknowledged by the Chinese authorities to be rampant at least at the local level, is a classic example of a nontariff barrier since foreign companies, especially U.S. firms, are less likely to engage in the practice given codes of conduct and the Foreign Corrupt Practices Act.

Still a Lack of Transparency in China’s Government Actions

The lack of transparency results in the abrupt introduction of new rules and changes in

existing rules are made practically overnight and usually without any formal or informal consultation with affected parties. Under those circumstances, local players who have much closer relation to the authorities have an opportunity to influence the rule and or will have heads up on the coming changes and thus will have an opportunity to prepare.

China Has Failed to Protect IPR, One of the Most Important Areas for U.S.

A specific and extremely important area where China fails to comply with its WTO obligations is the protection of intellectual property rights. IPR was one of the most important issues for the competitiveness of U.S. firms and that China was quite possibly the main challenge in that area. Given that U.S. firms are usually the innovators and Chinese firms are usually the imitators, and given that IPR related sectors have been globally growing much faster than the rest of the economy, this issue is of critical importance that is not always appreciated. There is hardly a sector, from pharmaceutical to machine making, that is not affected.

On the positive side, China now has the legal and regulatory infrastructure to handle IPR infringement, however enforcement has been spotty at best and in some respect, the situation is getting worse, Given intense globalization, infringing goods now find their way to international markets including the United States, and with them come other problems, such as defective goods. This obviously undermines the sales of legitimate goods, not only those made in China but also those made in the USA and elsewhere,

China will undertake selective enforcement of IPR, protecting the rights of domestic players much more vigorously than those of foreign firms; In addition, Chinese firms who infringe IPR will benefit from exports into large parts of the world where IPR are openly flaunted.

There is Pressure on Foreign Firms to Transfer Technology

Obtaining foreign technology has been the one constant in three decades of Chinese reforms that saw many changes in policy and an evolution of governance and ownership structures. Such pressures continue today and may intensify. The pressure is moving from the transfer of given technologies to the transferring of the ability to develop new technology, hence the pressure to shift Research and Development capabilities to China. Most companies will not admit that they are bowing to pressure on this or other issues, but this often comes from unwillingness to antagonize a government that continues to oversee the economy closely, as it did for centuries.

Finally, it is highly likely that in the next few years we will see multiple acquisitions of U.S. companies, including innovative startups, by cash rich Chinese firms. These acquisitions will upgrade the capabilities of Chinese firms, making them much more formidable competitors in China, the United States, and in third countries. The willingness of such firms to do business anywhere without regard to human rights, bribery, or other issues of concern to US firms, will also not produce a level playing field.