<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:80730.wais]
WTO: WILL CHINA KEEP ITS PROMISES? CAN IT?
=======================================================================
HEARING
before the
CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JUNE 6, 2002
__________
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CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
LEGISLATIVE BRANCH COMMISSIONERS
Senate
House
MAX BAUCUS, Montana, Chairman DOUG BEREUTER, Nebraska, Co-
CARL LEVIN, Michigan Chairman
DIANNE FEINSTEIN, California JIM LEACH, Iowa
BYRON DORGAN, North Dakota DAVID DREIER, California
EVAN BAYH, Indiana FRANK WOLF, Virginia
CHUCK HAGEL, Nebraska JOE PITTS, Pennsylvania
BOB SMITH, New Hampshire SANDER LEVIN, Michigan
SAM BROWNBACK, Kansas MARCY KAPTUR, Ohio
TIM HUTCHINSON, Arkansas SHERROD BROWN, Ohio
JIM DAVIS, Florida
EXECUTIVE BRANCH COMMISSIONERS
PAULA DOBRIANSKY, Department of State
GRANT ALDONAS, Department of Commerce
D. CAMERON FINDLAY, Department of Labor
LORNE CRANER, Department of State
JAMES KELLY, Department of State
Ira Wolf, Staff Director
John Foarde, Deputy Staff Director
(ii)
C O N T E N T S
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Page
STATEMENTS
Opening statement of Hon. Max Baucus, a U.S. Senator from
Montana, Chairman, Congressional-Executive Commission on China. 1
Levin, Hon. Sander, a U.S. Representative in Congress from
Michigan....................................................... 3
Kaptur, Hon. Marcy, a U.S. Representative in Congress from Ohio.. 4
Huntsman, Jr., Ambassador Jon M., Deputy U.S. Trade
Representative, Washington, DC................................. 5
Aldonas, Grant D., Under Secretary of Commerce for International
Trade, Washington, DC.......................................... 6
Westin, Susan S., Managing Director, General Accounting Office,
Washington, DC................................................. 9
Murck, Christian, Chairman, American Chamber of Commerce,
Beijing, China................................................. 30
Clarke, Donald, professor of law, University of Washington,
Seattle, WA.................................................... 32
Fiedler, Jeffrey L., consultant, Food and Allied Service Trades
Department, AFL-CIO, Washington, DC............................ 34
APPENDIX
Prepared Statements
Huntsman, Jr., Jon M............................................. 46
Aldonas, Grant D................................................. 48
Westin, Susan S.................................................. 54
Murck, Christian................................................. 61
Clarke, Donald C................................................. 66
Fiedler, Jeffrey L............................................... 78
Baucus, Hon. Max................................................. 80
Pitts, Hon. Joseph R............................................. 82
Kaptur, Hon. Marcy............................................... 82
Questions and Answers
Responses of Jon M. Huntsman, Jr. to questions from:
Representative Wolf............................................ 83
Representative Levin........................................... 83
Representative Kaptur.......................................... 84
Responses of Grant D. Aldonas to questions from:
Senator Baucus................................................. 84
Representative Wolf............................................ 86
Representatives Kaptur and Wolf................................ 86
Representative Kaptur.......................................... 87
Representative Brown........................................... 88
Responses of Susan S. Westin to questions from:
Representative Wolf............................................ 88
Representative Kaptur.......................................... 89
WTO: WILL CHINA KEEP ITS PROMISES? CAN IT?
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THURSDAY, JUNE 6, 2002
Congressional-Executive
Commission on China,
Washington, DC.
The hearing was convened, pursuant to notice, at 2:38 p.m.,
in room SD-215, Dirksen Senate Office Building, Senator Max
Baucus (Chairman of the Commission) presiding.
Also present: Representative Bereuter (Co-Chairman of the
Commission), Senator Hagel, Representatives Wolf, Pitts, Levin,
Kaptur, Brown, and Davis; Grant Aldonas, U.S. Department of
Commerce; and D. Cameron Findlay, U.S. Department of Labor.
OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM
MONTANA, CHAIRMAN, CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
The Chairman. The Commission will come to order.
At the Commission's earlier hearings, we focused on the
relationship between human rights and the rule of law in China.
We stressed that human rights can only be protected when there
is a rules-based legal system that includes transparency and
accountability.
Today, we will focus on developments in China in the area
of commercial law. We will also look at the implications of
this on broader legal reform in Chinese society.
Last December, we ushered in a new era with China's formal
entry into the WTO [World Trade Organization]. The negotiations
took over a decade. We spent a year in the Congress on passage
of PNTR [permanent normal trade relations]. Now we are
beginning to monitor Chinese implementation of the commitments
they undertook.
What do we want to accomplish? First, we want to ensure
that China complies with the terms of accession and with the
global standards of action embedded in the WTO.
This is important. It is important to American
manufacturers, to American service companies, to our farmers,
to our ranchers, to our workers. China is our fourth-largest
trading partner and is the country where we have our largest
trade deficit. China's accession to the WTO should provide
greater opportunities for all Americans doing business there.
Second, we want to promote continued progress in the
development of the commercial rule of law in China. This will
likely accelerate changes in the way China is governed,
including in non-commercial areas.
For example, as a WTO member, China must establish and
maintain judicial and administrative mechanisms to review
trade-related sanctions by government agencies. These must
operate independently of the agencies that carried out the
actions in question. If implemented, this should contribute to
the development of a more open, market-oriented society.
The government will be bound by the written rules. I
believe that China's membership in the WTO can be an important
force in driving the development of the rule of law more
broadly.
We are now at an early stage in WTO adherence and
commercial law development in China. Senior Chinese leaders are
fully committed. We are already seeing changes in thousands of
national and local laws and regulations.
The Chinese Government has welcomed assistance from foreign
governments and NGOs [non-governmental organization] to conduct
extensive training sessions on WTO requirements, on
administrative law, and on judicial reform. Chinese Government
officials at all levels have been eager to learn about the
steps needed to ensure that they are complying with
commitments.
Yet, there have been mixed signals about China's
commitments. There have been reports that new barriers have
been erected to replace barriers that were abolished, sanitary
and phytosanitary standards that are still being used where
there is no scientific basis, and regulations that were
supposed to be in effect at accession that have not been
promulgated.
We need to monitor these developments closely, and we need
to speak out vigorously and promptly when China has fallen
short. After all, what we are concerned about deals with the
terms of China's accession--the terms under which we granted
China PNTR status.
There are also questions about the capacity of the Chinese
Government to implement the vast changes needed, and the
national government's ability to impose its will on the
provinces. We need to examine the problem closely and see if
there are ways that our government can assist more in capacity
building.
We have embarked on a long process, and that is why the
Finance Committee asked the General Accounting Office [GAO] to
do a long-term investigation into China's WTO compliance. We
will hear more about that in a few minutes.
But let me just say that this GAO study can only proceed
with full cooperation from the Executive Branch, and I expect
all agencies to cooperate and be forthcoming with information,
documents, and other assistance.
As we scrutinize China's WTO compliance closely, we must
also remind ourselves that this is but one step, albeit a major
one, in the process of economic reform that began over two
decades ago.
We must evaluate the WTO process by looking both at a
snapshot of the current reality and at the full video that
incorporates trends over a 20-year period.
While the topic of today's discussion is China, I want to
say a word about the other major non-market economy, Russia. We
have just been told that the Commerce Department plans to begin
treating Russia as a market economy under United States trade
law.
I recognize the considerable reforms that Russia has
undertaken in recent years and agree that it may no longer be a
non-market economy, but it seems to me that the web of State
monopolies and state-controlled commerce in Russia still falls
short of meeting the requirements for being a market economy.
I recognize the decision does not affect the Jackson-Vanik
application to Russia. Still, I am concerned that today's
decision will further undermine the Administration's
credibility as the enforcer of U.S. trade law.
That said, we have two distinguished panels to help us
examine China's access to the WTO, the commercial impact on
American firms, and implications for legal reform and the rule
of law in China.
We will start with Deputy U.S. Trade Representative Jon
Huntsman, Under Secretary of Commerce Grant Aldonas, and GAO
Managing Director Susan Westin.
We have an interesting situation today. Grant Aldonas will
testify on the first panel, but because he's a member of the
Commission, he will join us up here and grill the second panel.
Yogi Berra said, ``When you come to a fork in the road,
take it.'' Grant is the only person I know who can take both
parts of the fork and do it well.
But, before we proceed with our panelists, I would like to
open this up to the rest of the members of the Commission for
any comments they might have.
Does anyone wish to speak?
Representative Levin. Just briefly.
The Chairman. All right. Congressman Levin.
[The prepared statement of Chairman Baucus appears in the
appendix.]
STATEMENT OF HON. SANDER LEVIN, A U.S. REPRESENTATIVE IN
CONGRESS FROM MICHIGAN
Representative Levin. Just very briefly. First of all, I
would like, though it is not the topic of our meeting here, our
session, to join you in your comments on the decision of the
Commerce Department. We will talk about that some other time,
but it is an important issue, Russia and non-market economy
economics.
Also, I just wanted to underline what Senator Baucus has
said about the importance of this hearing. These are busy days
here and they are condensed into very few days each week, so it
is hard for members to be here. It is hard for members of the
Administration to be here.
But this is a subject of exceptional, and I think unusual,
importance. As we all read the media, there are more reports
about these issues in China than most other subjects. What is
transpiring in China is going to have such a major impact not
only within that country or within Asia, but in the world.
The establishment of the Commission was a reflection of the
exceptional importance of China's evolution and our
relationship with China. So as we proceed, I think all of us
feel a special obligation to make this Commission work, to tap
into the energies of all of the members of the Commission, both
those within the Congress and those within the Executive
Branch.
An exceptional challenge has led to an exceptional
instrumentality, a joint Congressional-Executive Commission. It
worked once before when it related to Russia, to the Soviet
Union. While the circumstances are different, the importance is
of equal, if not potentially greater, significance.
So I hope all of you as witnesses, even though all of us
could not be here today, will take into account that there is a
deep and abiding interest within this institution, and I think
within the Executive Branch, to make sure that we take what was
on a piece of paper some months ago--it seems so long ago--and
make it a reality.
Thank you very much, Mr. Chairman.
The Chairman. Thank you very much, Congressman.
Congresswoman Kaptur.
STATEMENT OF HON. MARCY KAPTUR, A U.S. REPRESENTATIVE IN
CONGRESS FROM OHIO
Representative Kaptur. Thank you, Mr. Chairman. Mr.
Chairman and members of the Commission, I welcome our
witnesses, as does everyone else here today.
I just wanted to State for the record that the hearing
today on WTO regulation implementation is an interesting choice
for a hearing topic, since our Commission was charged with
examining and monitoring human rights and the rule of law in
China.
But I am willing to listen. I would suppose and hope that
China would diligently work to come into compliance with WTO
obligations. But, even if it does, what connection does that
have to a new world of rights and freedoms for the Chinese
people? I would like to hear the witnesses discuss that
linkage.
Really, does the development of commercial relationships
lead to an expansion of liberty or human rights, or labor and
environmental rights globally? Commercial transactions may have
a logic, but they do not really have an ethic. They certainly
do not have an ethic in societies where there is no rule of
law, nor transparency in the judiciary.
In closing, I would just like to say on the record that the
people of China deserve our sincerest efforts, as well as of
their own leaders, to uphold internationally recognized human
rights, not as a condition of any trade agreement, but as a
moral right and as a condition under the tenets of free peoples
around this world that have respect for the dignity of every
individual.
So I am very pleased to be here and look forward to the
testimony of the witnesses.
[The prepared statement of Representative Kaptur appears in
the appendix.]
The Chairman. Thank you very much, Congresswoman.
Any other panelists from the Commission wish to make
remarks?
[No response.]
If not, we will begin with you, Mr. Huntsman. Thank you
very much for taking the time to come here today. I know how
hard you have been working. You are a great public servant.
Thanks again. We would love to hear what you have to say on
progress we are making in this area.
STATEMENT OF AMBASSADOR JON M. HUNTSMAN, JR., DEPUTY U.S. TRADE
REPRESENTATIVE, WASHINGTON, DC
Mr. Huntsman. Thank you very much, Mr. Chairman, and to the
other members of the Commission. Thank you for inviting me and
the other panelists to appear before you today to discuss the
Administration's perspectives on the United States' trade
relationship with the People's Republic of China, and in
particular, the topic of China's WTO implementation.
It gives me great comfort sharing the stage with two
respected colleagues whom I deem it an honor to be associated
with. They add enormous professionalism to the task at hand.
China's accession to the WTO was a decisive victory for
reform in China. This point should never be discounted. China's
reformers clearly understood the values and benefits of
openness in the economic sphere and that is why they pursued
WTO membership.
They know that WTO membership will help them transform
China's economy, and many hope and believe China's society
generally, in positive ways. This Administration, like the
previous Administration, worked closely with China's reformers
throughout the many years of WTO accession negotiations.
The result was a comprehensive set of commitments with
which this Commission is familiar. With the negotiations now
over, we have continued to work with China's reformers on the
next phase of this process as China embarks on the enormous
task of implementing the numerous WTO commitments it has made.
Clearly, implementation is, and will continue to be, a
major challenge for China and its reformers. They must find
ways to ensure that recalcitrant ministries, state-owned
enterprises [SOEs], and provincial and municipal authorities
all act in conformity with China's WTO commitments.
But China's leadership appears prepared to take on this
challenge. It is committed to make China competitive in the
international economic arena in the 21st century. It knows that
it needs to develop a market economy compatible with the WTO's
rules for this to happen. It also knows that there will be a
price to be paid as this transition takes place.
The ability of China to meet this challenge and implement
its WTO commitments in full will depend on the outcome of
several sets of dynamics.
No. 1, China's internal government coordination.
As we have anticipated and as we have seen at times during
the first 6 months of China's WTO membership, there will not
always be agreement among the central government's ministries
on WTO compliance matters. Some of the ministries are reform-
minded and generally understand the benefits of full compliance
with WTO rules. The Ministry of Foreign Trade and Economic
Cooperation [MOFTEC], which had the lead in the WTO
negotiations, is one example. But other ministries,
particularly those with proprietary functions or a domestic
focus may be less interested in, and even resistant to, full
compliance. In certain circumstances, they will be more
inclined to seek ways to protect their, and their constituents'
existing rights and privileges, so they will present a
particular challenge to the implementation process.
No. 2, center versus periphery, or Beijing versus the rest
of the Middle Kingdom.
We have also anticipated a similar set of dynamics
involving the central government and the localities. While some
provincial and municipal authorities appeared to see immediate
benefits in complying with WTO rules, others do not see these
benefits or simply do not yet understand WTO rules.
Historically, Beijing's influence has not extended uniformly
over local authorities, and at this point the breadth and
extent of this influence vis-a-vis China's WTO commitments
remains unclear.
Realistically, we can expect some non-compliance as these
internal struggles take place. But, it is also quite possible,
if not probable, that independent of these internal struggles,
China will simply be unwilling to live up to a particular WTO
commitment. As you know, we still have compliance problems with
longstanding WTO trade partners and there is no reason that
China will be different.
Now, the short-term scorecard.
Looking back on the first 6 months of China's WTO
membership, we have seen China take a good faith approach to
its WTO membership and make significant efforts to implement
its commitments. China has made substantial tariff reductions
on industrial and agricultural goods of importance to United
States businesses and farmers. It has begun to take concrete
steps to remove non-tariff trade barriers in virtually every
product sector. It has begun to implement far-reaching services
commitments that have substantially increased market access for
U.S. services suppliers. It has also repealed hundreds of
trade-related laws, regulations, and other measures, and
modified or adopted numerous other ones in an effort to become
WTO-compliant in areas such as import and export
administration, standards, and intellectual property rights,
among many others.
With the aid of the United States and other WTO members and
the private sector, China has also embarked on an extensive
campaign to educate central and local government officials
about both the requirements and the benefits of WTO membership.
This is an important initiative that should help to foster
fuller compliance with China's WTO commitments.
Mr. Chairman and members of the Commission, thank you for
providing me with the opportunity to testify. I look forward to
answering your questions.
[The prepared statement of Mr. Huntsman appears in the
appendix.]
The Chairman. Thank you, Mr. Huntsman.
Now, Secretary Aldonas.
STATEMENT OF GRANT D. ALDONAS, UNDER SECRETARY OF COMMERCE FOR
INTERNATIONAL TRADE, WASHINGTON, DC
Mr. Aldonas. Thank you, Mr. Chairman and members of the
Commission. Thank you for the opportunity to appear before you.
With your permission, I would like to summarize my opening
statement and submit my written testimony for the record.
The Chairman. Without objection.
Mr. Aldonas. First of all, I welcome the Commission's
interest. I agree with Congressman Levin about the importance
of this. Having had the opportunity to work as a staff member
of the Finance Committee with the leadership of the Senators
present, and certainly the other Members of the House present,
it was a remarkable opportunity to reset the foundation, in
many respects, of our relationship with China.
I view Congress' involvement as integral to that process.
One of the reasons for taking a Congressional staff delegation
with me on my recent trip to China was to illustrate for the
Chinese that there was no distance between the Congress and the
Administration with respect to the fundamentals of China's
adherence to its WTO obligations, and the kind of follow-
through that the Chinese could expect to see, both from the
Congress and from the Administration in terms of ensuring the
implementation of their commitments.
I am particularly pleased to be here with Jon Huntsman and
with Susan Westin, who I view as partners in this enterprise of
ensuring compliance. Jon, of course, brings great strengths
with his background in business. We need that kind of
experience, given the level of detail we need to dig into with
the Chinese in terms of their implementation.
Susan, I had the great opportunity to work with when I was
on the Finance Committee and has been at this for a long time
in terms of examining China's compliance. I have tried,
wherever I have gone, to encourage business and non-
governmental organizations to cooperate with Susan's efforts,
because I really do believe that, from the point of view of
keeping Congress involved, GAO's role is critical.
I think that Susan's report is likely to set the effective
benchmark against which we are going to end up judging China's
compliance going forward and I welcome that involvement.
I also welcomed the opportunity to have Susan and the GAO
take a look at how we go about what we are doing, because we
need benchmarks against which we can judge ourselves.
When Secretary Evans and I both traveled to China in April,
we emphasized two points that I would like to return to today.
The first, is that WTO compliance is the key issue in our
bilateral trade relationship and that our commercial
relationship provides the foundation for our broader bilateral
ties.
The second, is what I view as the inescapable link between
WTO compliance and the development of the rule of law in China.
In terms of our monitoring and compliance efforts, from the
perspective of American exporters, of course, China's accession
to the WTO represents the most significant market opening
initiative since the NAFTA and Uruguay Round.
The advantages, however, of China's accession will only
accrue to our exporters with continued vigilance and a
willingness to promote American exporters' exports aggressively
in the Chinese market.
That is why, when Secretary Evans met with President Jiang
and other senior leaders in April, he drove home the message
about the importance of timely and transparent implementation
of each of China's commitments under the WTO.
That was critically important for the Secretary to make
that statement as a part of the first meeting during the Bush
Administration of the Joint Commission on Commerce and Trade to
ensure that that is the benchmark that we will return to every
time the Commission meets going forward.
The subtext, of course, is that it is the benchmark against
which we are going to measure everything. It provides a
foundation. In meeting with Minister Shi and Vice Minister Ma,
of MOFTEC, our counterpart agency, I was impressed by the
intent they brought to continuing to foster change in China and
to implement the WTO obligations.
On the other hand, I would like to do a little take on Zhou
Enlai, who was asked back in the days of President Nixon's
first trip about what he thought of the American Revolution. He
said, ``It is too soon to tell.'' My view, in terms of WTO
compliance, is it is too soon to tell.
I think we have seen the commitment from the leadership in
the central government. That is a very positive note. I think
they have taken steps to undertake the basic implementation.
What we are always looking for is the follow-through. By
that, I mean not only with the central government, but at the
provincial and local level as well. That is really what we are
going to have to test as we move forward as a part of this
process.
One of the issues that the discussions in China raised was
technical assistance. As you said, Mr. Chairman, compliance is
just not the threat of retaliation for the failure to implement
trade agreements, but it is also about how we provide the
assistance that allows the Chinese to move forward?
During our recent visit we heard lots of requests for
technical assistance, including about the development of
commercial law. What concerned me most, actually, was the fact
that many of our trading partners are there already with
programs on the ground about standards, and a variety of other
things.
Of course, that always makes me nervous in terms of our
market access. If the standards are set a certain way or the
regulatory process is developed along the lines of the Japanese
or the European model, I am going to have concerns about the
benefits actually accruing to our exporters, because we have
emphasized to the Chinese we need to see transparency in their
regulatory procedures to have some comfort that, in fact, they
are complying with the WTO.
Let me close by talking just a little bit, which I hope
will respond to Congresswoman Kaptur's question about the link
between WTO compliance and the development of the rule of law.
This may be a lawyer's habit in saying this, but in my view,
observance of the law in any society has to become a habit. It
has to be a part of the fabric of social relationships.
But that really is built through the institutions that we
have. There are some who seem to think that business is
something separate from the sphere of other human rights or
human relations. I do not agree with that. In fact, commerce is
one of the ways in which you build the trust in society and a
foundation for the rule of law.
There are express links, which I know were reflected in the
memo that the Commission staff did for the Commission members,
in the WTO agreement itself that require an independent
judiciary and the review of governmental actions.
One of the first things that we are going to have to look
at as we move forward is whether, in effect, those institutions
are being put in place under Chinese law. We are not there yet.
We are going to have to test whether or not they are
productive and whether they do provide the seeds of political
pluralism which will allow for the protection of basic rights.
That, I think, is the link, but we are a long way from testing
that and feeling secure that that is there.
Thank you very much.
[The prepared statement of Mr. Aldonas appears in the
appendix.]
The Chairman. Thank you very much, Mr. Secretary.
Next, Ms. Susan Westin, who is the Managing Director of the
General Accounting Office.
STATEMENT OF SUSAN S. WESTIN, MANAGING DIRECTOR, GENERAL
ACCOUNTING OFFICE, WASHINGTON, DC
Ms. Westin. Thank you, Mr. Chairman. I also ask that my
entire statement be put in the record, and I will just
summarize my remarks.
Before I start my remarks, I would like to say how much I
welcome the support that you gave in your statement to the
General Accounting Office's efforts, and also the support from
my colleagues here on the panel from the Administration.
I am pleased to have the opportunity today to discuss
China's development of rule of law practices related to the
commitments China made to the WTO when it joined in December
2001.
My observations address three areas: (1) How elements in
China's WTO accession agreement seek to improve the rule of
law; (2) what Chinese officials told us about their reform
efforts; and (3) what the United States business community has
told us about the importance of these efforts, as well as their
views on rule of law implementation in China to date.
My statement today is based on our ongoing work, and
therefore my observations are preliminary in nature. As you
know, both the Senate Finance and House Ways and Means
Committees have asked GAO to conduct a 4-year body of work
relating to China's implementation of its WTO commitments.
Our work to date has included two trips to China, numerous
meetings with United States and Chinese Government officials,
and a mail survey of, and structured interviews with, United
States companies doing business in China. We plan to report on
the first phase of this work in various products by mid-
October.
Turning to my three main observations. First, many elements
in China's WTO accession agreement seek to improve the rule of
law. When China joined the WTO it agreed to ensure that its
legal measures are consistent with its WTO obligations.
In our analysis of China's accession package, we found at
least 60 commitments that specifically obligate China to enact,
repeal, or modify trade-related laws or regulations.
In addition, China has made a substantial number of other
commitments to the WTO in the rule of law areas of
transparency, judicial review, uniform enforcement, and non-
discrimination.
For example, in the area of transparency, China has agreed
to designate an official journal for publishing all trade-
related laws and regulations and to provide a reasonable period
for public comment.
Second, Chinese Government officials have emphasized their
commitment to make reforms that will strengthen the rule of
law. They described to us how their early efforts for reform go
beyond China's WTO commitments and include broad reforms of
laws and regulations at the national and provincial levels, as
well as reforms of judicial and administrative procedures.
Let me give a few examples of these reforms. Provincial
authorities are in the process of reviewing their laws and
regulations to see if they are consistent with national laws.
Some provincial officials estimate this process will take 2 to
3 years.
The Supreme People's Court has issued new regulations to
improve the adjudication of civil and commercial cases
involving foreign parties. In reforming administrative
procedures, Chinese officials told us they are attempting to
reduce the number of layers necessary to approve commercial
activities.
Chinese officials acknowledge the many challenges they face
in completing the necessary reforms in a timely manner. Despite
an extensive training program about WTO-related reforms
throughout the country, officials identified the need for
outside assistance to provide more training because they lacked
the expertise and capacity to meet their needs.
Turning to my third point, what we have learned from the
business community. According to the preliminary results of our
survey, United States businesses in China identified rule of
law commitments to be particularly important to them,
especially the consistent application of laws, regulations, and
practices in China, and enforcement of intellectual property
rights. Most businesses anticipated that these rule of law
commitments would be difficult for the Chinese to implement.
In our interviews with United States businesses in China,
we heard several specific concerns about vague laws and
regulations and lack of transparency. We heard some positive
stories as well. One businessman told us his company had
recently won a judgment against a counterfeiter in a Chinese
court that included an order for the counterfeiter to cease
operations.
U.S. businesses expect WTO reforms, including those related
to rule of law, to be part of a long-term process. Nonetheless,
they believe the Chinese leadership is dedicated to carrying
out WTO commitments.
Let me conclude with one last observation. It is very clear
that China has shown considerable determination in enacting
numerous laws, regulations, and other measures to ensure that
its legal system and institutions, on paper, are WTO-
compatible.
Nevertheless, the real test of China's movement toward a
more rule of law-based commercial system is how China actually
implements its laws and regulations in fulfilling its
commitments. At this point, it is too early for us to make any
definitive judgment about China's actual implementation of its
commitments.
Mr. Chairman, this completes my oral statement.
I would be happy to respond to any questions.
[The prepared statement of Ms. Westin appears in the
appendix.]
The Chairman. Well, thank you all very much.
I take it from listening to you that there is some
progress, not a lot because it is very early, but some, in
adhering to the WTO commitments and, generally, the rule of
law.
My question is this. Have you worked with China's
Government, or has China's Government, on its own, developed a
sequencing of issues and commitments that they are working on?
That is, a timeline on how these issues will be handled?
I am especially concerned about the judicial system and
whether there are certain aspects of the judicial system that
the Chinese Government is working on before other aspects.
Grant.
Mr. Aldonas. Yes. First of all, Mr. Chairman, there is a
sequence within the WTO agreement as to when they stage-in a
number of their obligations. We literally are so early in the
process, that some of the things that we think would work
through the administrative process and into their judicial
procedures have not bubbled up yet.
We are at the point where the sorts of issues we are facing
right now, are, for example, problems with a misvaluation or
misclassification at the docks with a Customs officer in
Shanghai. You find you can resolve that particular issue at a
local level.
It has not become a systemic problem. It has not led to
somebody essentially appealing through their Customs procedures
and into their courts yet. That is why, in some respects, I
feel like we are putting our finger in the stream a little
early in the process with respect to those issues.
I think what the Chinese have done with their rules and
their procedures on paper is consistent with their commitments.
It is the implementation, which we will only be able to see
over time. My sense is that, at the top-most senior levels of
the Chinese Government, in our conversations, that commitment
is there.
But you know, as in our own government, what happens with
implementation really depends on the judge, the administrative
officer, and the Customs port director in places like Shanghai,
and that is where we are trying to put most of our effort at
this point.
On the issue of implementation with respect to the
judiciary, there is no specific timetable. In many respects, I
do not want to say we are not being proactive enough, but we
are waiting to see, as somebody tries to test the system,
whether in fact it works.
The Chairman. All right. Ms. Westin.
Ms. Westin. Yes. As you know, our first effort has been to
take a careful look at the entire accession package and to
divide it down into really understanding, as much as we can,
what the commitments are. That work is not yet completed,
Senator. We expect to report on that in October.
But I can tell you that, as Grant has said, that some of
the commitments have a definite time attached to them. Some of
the commitments are actually phased in over an 8-year period,
and some commitments are a little vague about when they ever
might be implemented completely.
I think that we found a good faith effort, to start. There
seems to be a much greater understanding of the WTO agreement
at the national level than there is down through the provincial
level in China, and that is one of the challenges they face,
moving this information down and making sure that provincial
laws comply as well.
With regard to the judicial system, they are working now to
set up higher level courts that will hear the commercial cases
involving foreign parties. This is a change there.
One of the problems in China that businesses have
complained about, is the judges do not seem to know the rules
too well, so they felt they are not competing on a fair playing
ground if they take a case to court. So there is this effort to
establish mid-level and higher-level courts to hear the
judicial cases.
The Chairman. All right. Thank you.
Ambassador Huntsman, do you have an observation here?
Mr. Huntsman. Just a couple, if I might. I think, on the
timeline, there are some well-established time horizons out
there that are pretty much dictated by the WTO features that
they have signed on to.
There is very good interagency coordination between the
State Department, Commerce Department, USTR, and others in
terms of really defining those issues that are most important.
We get input and feedback from the private sector that will
help assure us, as we move forward, that the issues that we are
focused on are, in fact, those that are most salient.
But I think we always need to remember the significant task
at hand. Every time I consider what we are looking at here, I
am always awed by it. We are only 6 months into this process,
and I think we need to remember that.
I think we also need to remember there is a significant
cultural adjustment that is taking place in China. It has taken
place slowly over the 15 years as they have prepared for WTO
membership, and it continues today.
I think that cultural adjustment also probably impinges
somewhat on their view of transparency and rule of law, even
though of the hundreds of commitments that they have signed on
to, I think 10 percent or so of them deal directly with rule of
law. We are looking at a tremendous cultural adjustment here
that I do not think should be under-played at all.
The Chairman. I appreciate it. My time has expired. I think
it would be appropriate for our Commission, working with GAO
and the Administration, to develop some kind of timeline or
game plan with benchmarks so we know where we are and where we
are not over a certain period of time. Perhaps we can flesh
that out more precisely in the next few days. But at the very
least, let us begin thinking about that.
Our Commission works on the early bird rule. That is, the
early bird gets the worm. Our first arrival is Mr. Cameron
Findlay, to my right.
Mr. Findlay, we are honored to have you here.
Mr. Findlay. Thank you very much, Mr. Chairman. It is an
honor to have my colleagues to torment for once, at least in
public. [Laughter.]
My view as well on the question that Congresswoman Kaptur
raised, is that accession to the WTO and compliance with its
terms are absolutely critical to human rights in China,
especially over the long term.
It seems to me that the historical record shows that market
economies are better at protecting human rights than non-market
economies.
I just wondered if each of the panelists could comment on
that and talk a little bit about what the record shows from
other nations in terms of the nexus between opening up
economies and protecting human rights.
Ambassador Huntsman, do you want to give it a try?
Mr. Huntsman. Let me just take a quick shot at that. I
think we can probably look at the cases of Korea and Taiwan, as
these economies have transformed over the years, and the
improvements that have been made in basic human rights and the
extent to which their economic policies have led to more open
political systems.
But I guess in the case of China--and I have been visiting
there over the last 20 years and with an adopted daughter from
China who I look at every morning and am reminded of some of
their challenges--I have to say that when I step into
manufacturing plants in China as I have over the years, I am
reminded that Western standards are on display, that Chinese
employees, those who are coming into the workforce, are
introduced to standards they probably have not seen or heard
about before, those that deal with an open market economy,
those that deal with manufacturing quality products, those that
deal with interacting with other people from different
countries.
I think that there are some very important lessons that are
learned through all of this. I have seen over the years the
ways in which people have been transformed within the
workplaces as they have embraced some of these Western
standards.
So I would have to say that, over time, at least in my
experience, I have seen the extent to which trade and
investment in China have, in fact, transformed the behavior,
and the recognition and acceptance of outside standards.
Representative Kaptur. Would the gentleman yield?
Would the gentleman yield on that?
Mr. Findlay. Sure.
Representative Kaptur. I would just appreciate, Mr.
Ambassador, if you could provide to our record the list of
firms that you have visited and what the wage level is of the
people working therein, and whether they are Western investment
in China or whether they are Chinese-owned companies, state-
owned or otherwise.
Mr. Huntsman. I would be happy to.
Representative Kaptur. Thank you.
[The information requested appears in the appendix.]
Mr. Aldonas. I was actually going to pick something a
little closer to home. My beat has always been Latin America
and the Western Hemisphere more than Europe or China when I
have been in government. I have to say, I remember when I did
my first tour as a Foreign Service officer in Mexico.
This was in the days of Jose Lopez Portillo, when the
percentage of government ownership in the Mexican economy was
actually higher in Mexico than it was in the former Soviet
Union. What you saw at that time was, essentially, to operate
or to be in business, you had to pay a fee to the ruling party
and that fee was paid, as a practical matter.
One of the things that has come as a benefit out of the
North American Free Trade Agreement [NAFTA] is that a lot of
small businesses in places like Monterey that had continually
resisted paying simply for the right to do business, had a
market. They could sell elsewhere.
I firmly believe, based on my own experience in Mexico,
that a lot of the changes in Mexico economically coming out of
the NAFTA also sowed the seeds of what we have today in the way
of President Fox, and a different outlook and a different
relationship between Mexico and the United States, as a
practical matter.
I would not say that that was a direct cause. Nor would I
say that NAFTA was a sufficient condition. But, I would say
NAFTA was a necessary condition, and it has certainly pushed
Mexico in the right direction.
Ms. Westin. I would only like to add that I think that it
is difficult for human rights to flourish in a society where
there is not rule of law. You see on the first page of my
statement, rule of law does not have a commonly accepted
definition.
But one of the definitions, is a society in which law is
what guides people and government in the conduct of their
activities, rather than by the direction of a single person.
It would seem to me that in China's meeting its WTO
commitments and the other reforms in the areas of judicial
form, transparency, etc., that it has committed to, that it is
going to lay the groundwork for encouraging human rights to
flourish in China.
Mr. Findlay. Thank you very much for your statements. I
will yield the remainder of my time.
The Chairman. Thank you very much, Mr. Findlay.
Next, Congressman Jim Davis from Florida. Congressman.
Representative Davis. Thank you, Mr. Chairman. I have two
very different questions, and the first follows up on
Representative Kaptur's question.
I know there are a lot of existing benchmarks that are used
now to measure the extent of political freedom, religious
freedom in China. Now that we are measuring compliance with the
WTO, should we be thinking about developing another benchmark
to start judging this belief which we are all espousing today
that there are going to be some discernible political and civil
rights benefits to the citizens as we move more to the
commercial rule of law?
Mr. Aldonas. I think, certainly, we ought to be thinking
seriously about the benchmarks of whether or not there is an
independent judiciary and they have followed through on their
obligations to implement the same. But there are specific
provisions of the WTO agreement that require that in different
sectors.
I think the problem that Susan alluded to is one that we
have to test, which is, if you have judges who for a very long
time have tried to read what the Party wanted in terms of
making their decisions and they are now being asked to, in
fact, render a decision based on the law and the facts in front
of them, there is an ability to test whether that system is
working. That is one of the things that we ought to do with
respect to WTO implementation.
I would submit it also has implications for whether or not
you are inculcating that same sort of habit in the judiciary
more broadly, not just in terms of implementing the Customs
rules or what it might be. I think that is a fair way to assess
both WTO compliance and whether you are seeing the knock-on
effect in the rest of the judiciary.
Representative Davis. Is there a recognized system that
someone is already using in other countries that somehow
qualitatively judges the extent to which a country has moved to
an independent judiciary and enforcing the rule of law?
Mr. Aldonas. I do not know of one. One source we might look
to, as I know from my own experience volunteering with them, is
the American Bar Association's Central and East European Law
Initiative. They did a lot of the sort of seminal work in
helping draft constitutions, commercial codes, things like that
in Eastern Europe and the former Soviet Union.
They probably have the most experience of any group in
terms of assessing that, and that might be one source of
information we could turn to to test the proposition.
Representative Davis. I have heard some horror stories
anecdotally about businesses trying to go into China. Do you
think the extent to which businesses in the United States will
actively engage in China depends upon their judgment as to how
much independence and integrity is taking place in developments
of the judiciary and the rule of law there?
Mr. Aldonas. Sure, in part. Although I have to say--and
this is based more on my experience in private practice with
clients investing and exporting to China--you can also test it
by the degree to which they opt out of the Chinese legal
system.
More often as not, as I was counseling clients, my reaction
was, you had better have an arbitration clause. What you do not
want to rely on was the Chinese court system. That is a pretty
easy way to test whether lawyers have confidence in the system.
I think that would be a fair way to look at contracts and a
fair way to look at investments.
Ms. Westin. If I could answer that also. My team was there
interviewing businesses, American businesses that do business
in China, and talked to over 50 companies about 2 weeks ago.
Some of the companies had been in China doing business for
a fair number of years, more than a dozen years, others were
fairly new. The thing that we heard expressed the most was
concerns about these rule of law issues from companies that had
been there for a long time.
In our preliminary look at our total results, they seem to
say we found a way to work within the system. Companies that
had not been there so long seemed to be having more difficulty.
I think that would apply to American companies now that are
thinking of starting to do business there.
I believe that they will look carefully at how they would
be treated in the courts, and I think it is a promising sign
that they are putting in these higher level courts to hear
cases where the judges will be trained in the law that applies.
Representative Davis. The success you are referring to are
people using the judiciary system and not bypassing it through
arbitration or some other basis?
Ms. Westin. No. I did not mean to imply that. They have
learned how to work within the Chinese system, is what they
said, not necessarily that they would go through the judicial
system.
Representative Davis. So, in closing, one of the things we
probably ought to be watching is the extent to which, as people
write these contractual relationships, they are willing to
submit themselves to the Chinese judiciary system, because to
the extent they opt out, it really undermines this argument
that is being made today that promoting the rule of law and the
judiciary are somehow going to have a broader impact on
political and civil rights.
Mr. Aldonas. Congressman Davis, it is one test, and I think
it is a valid one. Now, there are certain instances, I just
want to be clear, where you cannot opt out of the system. When
you are trying to enter your goods and Customs has made a
classification about it, you have got to go through the Chinese
court system. It is not like you can agree to arbitrate that.
So we need to be looking at that as well. We need to make sure
that that system is working.
Just to make one point, which is that lots of times when we
open markets we have a tendency to think that it is all for the
big guys. Generally, the big guys can both export or invest,
depending on how they want to gain access to a market. Where
the rubber really hits the road, is for the small- and medium-
sized enterprises. When the tariffs drop, since they can only
export, they benefit most. But they are also the folks who
depend most on the transparency of the process, both regulatory
and judiciary.
If we are going to see this agreement work out for their
benefit and expand the number of small- and medium-sized
enterprises that play in the Chinese market, this is really
where the rubber hits the road, because they cannot afford the
cost of a difficult system, as a practical matter. Transparency
really is key for that end of the spectrum in our own market.
The Chairman. Thank you. Thank you very much, both you, Mr.
Secretary, and Congressman Davis.
Next, Senator Chuck Hagel.
Senator Hagel. Mr. Chairman, thank you. I want to welcome
the three of you and appreciate, like we all do, your time and
your contributions to our efforts.
Ambassador Huntsman, you and Secretary Aldonas mentioned in
your testimony the importance that the Administration places on
the coordination of interagency work.
I would be interested in your taking that down two or three
levels and explaining some specific examples of that
interagency coordination and how it fits, how it works, how it
is coordinated, who coordinates it. And, Ms. Westin, your
reflections on this would be welcome as well.
So, with that, again, thank you each for your time with us
today. Ambassador Huntsman.
Mr. Huntsman. Thank you for the question. I think it is a
very good one. I think this is a process that we are still
trying to perfect as we move forward.
Essentially, out of the U.S. Trade Representative's Office
we have a Trade Policy Staff Committee [TPSC] that chairs the
review of China's WTO implementation. It is an interagency
process that basically invites all of the relevant agencies,
State Department, Treasury Department, Commerce, Customs, that
would have some stake in the trade discussion.
Since December of last year, they have met on a monthly
basis. It is in those meetings that they review, in
collaboration with those people on the ground working out of
the Embassy in Beijing and the four or five consulates
throughout the country, folks who are involved either as ECON
officers or agricultural officers, or Customs attaches, in
bringing information to this coordinating committee.
It is this committee, as they meet on a monthly basis, that
basically is able to determine what the priorities ought to be
as we go forward, those issues that we ought to be most focused
on in terms of where China might be derelict in terms of its
compliance, and indeed what the Administration's response to
those issues ought to be.
Mr. Aldonas. Senator, it is a terrific question, because
lots of times we find ourselves not being able to sort it out.
I think China is one of those examples. The TPSC process that
Jon referred to is one where there is a monthly meeting. It
really does keep the agenda for everyone.
From the Commerce Department's perspective, we think our
value added is an intake mechanism for that process. We have
our Foreign Commercial Service officers on the ground in China.
It is the single largest representation of what I like to call
commercial diplomats that we have in any single post around the
world.
We also have our China desk, where we have added another
five members in this fiscal year, precisely to provide, again,
that intake mechanism when there are complaints from American
business, so we can table those and get them onto the agenda
for the TPSC.
Now, Secretary Evans, since he demands accountability, has
also asked me to establish something that he calls a ``tiger
team.'' Tiger teams, conventionally, are folks who come in from
the outside and try to break into your computer system just to
test whether your security system works.
What Secretary Evans has wanted us to do, is really have an
alternative look at our own processes. Just by way of sort of
underscoring the level of cooperation, as soon as we were asked
to do that, the first thing I did was call Jon and Charles
Freeman, who is the Deputy Assistant USTR for China, and say
you have got to be a part of our tiger team to test whether or
not our conventional systems are working as a practical matter,
and if they are not, tell us how to improve them as a part of
the process. So, that is sort of the level that we have gotten
to in terms of coordination.
Senator Hagel. Ms. Westin.
Ms. Westin. Yes. We are not part, of course, of this
interagency process, but we have been tasked to look at it as
part of the request from Senate Finance and House Ways and
Means. We determined, with those two committees, that it would
really be fair for GAO to start such a look after they had time
to put together their plans, and started implementation.
So that is really the fourth body of work that we intend to
start, probably late 2002, early 2003, taking a specific look
on how they are monitoring China's enforcement and how the
interagency process is working.
Until then, though, there is information and documents that
we need from all the agencies involved with us to help us
understand how China is implementing its commitments.
Senator Hagel. Thank you.
Representative Bereuter [presiding]. Thank you.
Next on Senator Baucus' list is the gentleman from
Michigan, Mr. Levin.
Representative Levin. Thank you.
One of the provisions inserted in the House into the China
PNTR bill related exactly to this, and that is the review
process. There was a provision inserted that we request,
through the WTO and in the WTO, for an annual review. There was
some skepticism that could be achieved. If it were not, there
was only going to be an every-4-year review. It was achieved,
and resources were appropriated to help you carry that out.
I think it would be helpful, even before the annual report,
if you could give in writing to this Commission an analysis of
what you are doing, how the interagency mechanism works, where
you are with the hiring of additional people to make sure that
this annual review is truly meaningful, so that when GAO
undertakes its first review, it does not give you an E, or even
a D.
[The information requested appears in the appendix.]
But let me pick up, if I might, a question that has been
opened. It was played off of, or taken off of, Grant, your
comment on page 2, ``Accession to the WTO will further
development of an impartial judiciary, neutral regulatory
bodies, transparent legal processes, and regularity in the
administration of law in China.''
Then the important sentence. ``To the extent that entry
into the WTO reinforces the development of the rule of law in
China, it does suggest broader lessons for China's leadership
as they attempt to build a new foundation for Chinese
society.''
One of the issues that tends to divide us in Congress and
about which there are differing perspectives on this Commission
relates just to this. I think we wanted to become a forum, not
for automatically choosing up sides, but trying to be an
effective instrumentality.
You within USTR have a person who is working on worker
rights, and this Commission, I think, has hired, or is about to
hire, somebody to do that. So I want to ask you a question in
that regard.
I do not think there is any automatic process. You
mentioned Mexico. Let us not go into a debate over that.
Someone could say the introduction of further market
principles in Chile certainly did not lead to more freedom, at
least right away, until the people who introduced it were
thrown out. I think that is a fair comment. I do not think Mr.
Pinochet became an instrumentality of freedom.
So let us talk about China, because this is our focus. As
China privatizes--as it moves away from these state-owned
enterprises, we have already seen a lot of volatility in terms
of labor markets. We have seen an immense question arising as
to what is going to happen to the workers who are displaced.
We have seen it best in an immensely uneven pattern.
Sometimes people being able to exercise rights that in other
societies would be, hopefully, easily exercised, in other cases
those rights are just snuffed out, to put it charitably.
So let us talk for a few minutes. Give us your responses to
what you think is your role, what is the role of this
Commission, as China goes through this process that is going to
involve a lot of disruption and a lot of issues about the
rights of workers in a society where there have been, on paper,
some rights, but in reality, essentially none in terms of
exercising, speaking out, defending their rights.
So, there is only a minute left. Who wants to chew on that?
I think the Chairman may give you an extra 30 seconds.
Mr. Aldonas. I will take a shot at it, Congressman. There
are two questions. One, is have they, in fact, fairly
implemented their WTO obligations, which, as you well know, do
not reach your fundamental point about labor law and labor
markets.
The second question is, what is the knock-on effect of
implementing the WTO in terms of loosening up the society? I
think there has been a consensus of economists indicate
recently that what you need is strong government in terms of
setting the rules of a society, but also government restraint
to allow for the full interplay of human freedom which drives
the economic process forward.
Representative Levin. But what is our role, Grant? What is
our role?
Mr. Aldonas. I am going to get there. I am sorry. I think
our role in looking at that is to test both whether they have
implemented their WTO obligations, as well as whether or not
they have put in place the constraints on their own actions
that really do allow for the interplay of market forces.
Those really are two different things, but I would suggest
the Commission has to focus as much on the latter as it does on
the former. There is the traditional process, frankly, of the
Ways and Means and Finance Committee that can provide the
oversight on those specific issues.
The real question, is whether or not you are starting to
see the follow-on effects of economic change and whether the
Chinese have begun to see an interest themselves in ensuring
that there are constraints on the government to not interfere
in people's lives.
That is a longer-term process, not just the 3 to 8 years of
WTO implementation. But that is where I think shining a light
on that part of the process is the most useful role of the
Commission.
Representative Bereuter. Ambassador Huntsman, do you have a
response?
Representative Levin. If you would allow it, I would be
interested.
Mr. Huntsman. I think our role is to monitor and to
encourage. We are very early in this process, as I mentioned
earlier, 6 months into it only. We have got a long way to go. I
think we need to keep our dialog open and alive.
I am simply referring to trips like the one Grant made,
like other Administration officials are making, like Members of
Congress can make, where they can actually articulate some of
our beliefs and the principles on which we stand tall. I think
that, as we keep this dialog open, we are going to have to
realize that so much of the labor problems, the challenges,
deal with the state-owned enterprises, the over 100,000 of them
around the country.
Therein lies a huge challenge, because China is having, I
think, a difficult time articulating the WTO and the provisions
of the WTO to some of the outlying regions. There is some
resistance for all kinds of understandable reasons. This is
going to take some time as the leaders in Beijing continue to
kind of spread the WTO message and try to get various outlying
provinces in compliance. We are going to have to follow this
closely and we are going to have to visit not only Beijing and
Shanghai, but I think some of the outlying provinces and meet
with provincial leaders, and make certain visits where we are
able to articulate a message that is meaningful.
It is going to be a long, iterative process, but it is one
that I think will require us to be engaged on both sides of
this table, and it is one I think we are going to have to
approach with some patience.
Ms. Westin. Can I add something?
Representative Bereuter. Yes.
Ms. Westin. As you know, GAO's role is looking specifically
at the WTO-related commitments. But when we were in China, we
did meet with government officials. I recall a conversation
that I had with the deputy mayor of Shanghai, in which he
expressed one of their concerns in implementing WTO commitments
was throwing a lot of people out of work, frankly. There are a
lot of companies in China, the state-owned enterprises, that
they know are not going to be competitive as foreign companies
come in.
Because GAO had done a body of work on trade adjustment
assistance, I offered to share with him some of those reports,
and said, frankly, it is a problem that the United States has
faced as well in terms of providing support for people who have
lost their jobs because of trade impacts. So, we had a
discussion on that.
But I think it is one of their big concerns as they
implement WTO commitments, what it is going to mean as to the
impact on their labor force.
I might suggest to the Commission that that is one of the
things that you might want to keep a close eye on as China does
implement its WTO commitments, is have they put in some kind of
safety net for workers that are thrown out of work.
Does it mean that rights are lost because they are so
concerned about the unrest, or do human rights, perhaps, start
to build?
Representative Levin. Thank you.
Representative Bereuter. The gentle lady from Ohio, Ms.
Kaptur, is recognized.
Representative Kaptur. As you were talking, I was
thinking, we have not done such a good job of that in our own
country. What is happening in Ohio, is our jobs are being
displaced to China and the workers in Ohio are left behind. It
is very interesting, what is going on here.
The first question I really have, is China is now the
largest holder of United States dollar reserves. Why is that an
advantage? Of what advantage does that serve the United States
in this trading relationship?
Mr. Aldonas. Well, the irony there is that China is
actually an exporter of capital. A lot of those investment
dollars flow back into the United States. That money had been
recently going exclusively into the private sector. We earned a
rate of return on that that allows us not only to fund the
obligations, but to create a lot of wealth in the United
States.
Representative Kaptur. Do you have specific examples of
that?
Mr. Aldonas. I will tell you what. I can come up with some,
to lay them out for you in writing, if that would be helpful.
Representative Kaptur. Is this direct investment?
Mr. Aldonas. There is some Chinese direct investment in the
United States.
Representative Kaptur. Or is this portfolio investment?
Mr. Aldonas. Well, but even portfolio investment, if you
think about it, flows through to the bottom line in terms of
the access of companies in the United States to capital markets
to fund their investments.
My only point in saying that is that I would probably agree
with you at the end of the day, China should not be in the
position of being a surplus country. It is a classic developing
country. It ought to be in deficit, frankly. It ought to be
importing capital, as a practical matter.
The fact that they put themselves in a position with a
mercantilist trade policy to try and ensure that they have
preserved their currency reserves and focus on that to that
extent is perverse in terms of their own development strategy,
to be honest with you.
You think about our history in the United States, we were a
deficit country for a long time as we had tried to attract
capital and tried to expand across the expanse of the western
United States. That is essentially what China is trying to do,
and they are hobbling themselves by maintaining a very, very
large trade surplus.
Representative Kaptur. Well, this is of great concern to
me. At the same time as I see jobs being cashed out in Ohio,
China ends up being the largest holder of our dollar reserves.
I would be very interested in any information you could
provide for the record on what is being done with those
dollars, both inside China or outside China.
Alan Greenspan has said that, overall, the U.S. trade
deficit, which now totals 5 percent of GDP, is unsustainable
and is unwise for our country. China is one of the largest
components of that growing trade deficit. It seems to me we
ought to focus some attention on that.
I wanted to get a sense from any of our witnesses today if
you could give me a feel about the market transition within
China. If one looks at the millions of businesses that must
exist and what percentage of them and their contribution to
their country's economic growth would be defined as state-owned
enterprises today, what percent would be what I would call
oligarchical control, those who would come from the state-owned
enterprises or had political connections in the country and
managed to end up being CEO of whatever?
Third, freestanding, independent companies that operate in
a market sense as we know it in the West. Give us a sense of
the texture there of what is going on.
Mr. Aldonas. I could not quote you the specific figures,
particularly on the middle one, Congresswoman. I think what I
could say, just as a starting point for further reflection and
then we can try and come back with more specifics about that,
trying to match those categories, is if you think about China's
development where you really see the ability to lift people out
of poverty over the last 10, 20 years, has really been on the
coast where you have seen the foreign direct investment, where
you have seen the private investment, and the opening up of
those economies.
That represents between 200 and 300 million people out of
1.2 billion. What that means, is for the 900 million, 800
million on the land, while they can do private farming, a lot
of what goes on out there is still controlled by the state, as
a practical matter.
You still do have State controls over work permits, which
limits labor mobility many times, so the migration to the city
is oftentimes actually illegal under Chinese law. But,
nonetheless, they are drawn by the investment in those sectors.
So I think what you could say based on that is where you
have seen the strongest growth, and in fact in places like
Shanghai the strongest commitment to WTO, because they see the
benefit of liberalization.
It is precisely where you have got private enterprise,
where you see the least movement in the direction I think we
would all like to see, is where you do have that stronger State
control, and that is in the countryside.
Representative Kaptur. Well, we have seen that in
economies that are transitioning from what had been called
Communist to something else. I mean, the traditional pattern
has been oligarchical control, first of the market mechanism
and then of the political system, almost hand-in-hand.
My guess would be, in China, it is no different than in
some of the other countries I am thinking about as I make this
statement.
So I am trying to get a sense from you. Could any of the
witnesses provide kind of a textural feel as to the ownership
of these enterprises, as I have asked?
Ms. Westin. Congresswoman, I do not have that information
at my fingertips. We will certainly try to get back to you.
I did not quite understand your second category, though.
Representative Kaptur. All right. Well, I would say those
who had been known in the former regime as having a great deal
of political power and who then move into control of given
companies.
Ms. Westin. All right.
[The information requested appears in the appendix.]
Mr. Aldonas. Can I come back on that one, Congresswoman? It
is an interesting question. There was a period of time as China
started to open up, from 1979 forward, where there was this
possibility of wearing two hats, literally being a government
official as well as a part of it.
That was part and parcel, frankly, of the run-up, in terms
of the complaints about corruption, to the events in 1989. It
led to changes that divorced the ability of the People's
Liberation Army and a variety of other government officials to
wear those two hats, and you have seen a pretty strong movement
away from that.
The other thing that I think people are finding, is that
you need professional management to create enterprises that can
compete in the world economy, so increasingly you are seeing
not a turn to people who are former Party members and things of
that nature, but if you want to put up a wafer fabrication
plant on the outskirts of Shanghai right now, you are going to
have to import the management from somewhere else because you
need that kind of management and ownership to actually drive
the process in a way that will allow you to compete on the
world scene. The state-owned enterprises simply cannot do that
with the kind of ownership or leadership that you are
describing.
Representative Kaptur. I know my timer has expired, but I
would like to know if any of you could provide for the record
information as to whether the United States is the major
recipient of Chinese exported goods, or are other regions of
the world equally graced. Thank you.
[The information requested appears in the appendix.]
Representative Bereuter. Thank you, gentle lady.
Next, I have on the Senator's list the gentleman from Ohio,
Mr. Brown, followed by the gentleman from Virginia, Mr. Wolf.
So, Mr. Brown, you are up next.
Representative Brown. Thank you, Mr. Chairman. As the
newest member of this Commission, replacing Representative
Pelosi, I wanted to make, within my 5 minutes, a brief couple
minutes' statement, and then have a question for the panel.
During the 10 years or so of MFN [most-favored nation] and
PNTR debates, proponents assured us over and over that
increased trade with China would cause human rights to improve,
labor rights to develop, democracy to flourish.
But each year, as we all know, and this Commission needs to
remind us of that, I think, because of it charge in its first
paragraph, as trade has increased, China's human rights record
has gotten worse. The State Department's recent Human Rights
Report cites crackdowns by China on freedom of speech, on
freedom of belief, on freedom of association.
With continued economic success, as Sandy Levin intimated a
moment ago, the PRC will have an even greater opportunity to
maintain control over a workforce that can neither protest, nor
assemble, nor bargain collectively.
Of course, over the last decade, more Western corporations
have been looking to invest in authoritarian regimes.
Statistics show they have moved from developing democracies to
developing authoritarian regimes, regimes where there is little
regard for, or interest in, the rule of law.
In China's case, many, if not most, decisions are made
about the economy, about the rule of law are made by three
groups. They are made by the Chinese Communist Party, made by
the People's Liberation Army which controls a significant
amount of the businesses, as we know, in China, and are made by
Western investors.
There seems to be little interest from any of these three
major players in China's economy in changing the current
situation. All three, Western investors, the People's
Liberation Army, the Communist Party, profit to much from the
status quo to want human rights and labor rights to markedly
change.
About 6 weeks ago, about a dozen Members of Congress and I
spoke with Zhu Rongji, and one of the first things he told us,
is he receives a report every day on his desk detailing the
outbreaks of labor unrest all over China.
My question is, as China makes changes in its commercial
law that you advocate and many on this panel have advocated,
and it seems likely to happen so as they can better comply with
WTO rules, what sort of changes do each of you foresee in the
area of worker rights and the area of the right to organize?
Mr. Aldonas. I think the first and most important thing is
to recognize that the Chinese themselves treat foreign-owned
enterprises and their state-owned enterprises differently under
their own labor law.
To the extent you see the private sector grow, they are
going to be subject to a set of rules that actually do allow
for labor organization the way the state-owned enterprises are
not.
Most of the times where you see the labor unrest, it
actually relates to state-owned enterprises which are, frankly,
not economic. What they are finding is, as they try and change
to become economic, they are dumping an awful lot of people,
either out of the enterprise, or they are finding that they
simply cannot exist any longer. That is driving a lot of the
labor unrest.
So, again, I never want to try and over-sell that point. It
has got to be the steady accumulation over time, of seeing that
you have shifted that line gradually so that all enterprises
are covered by those sorts of freedom, so that individuals do
have the opportunity to bargain collectively if they so choose.
Representative Brown. Do you probably believe, in those
private, non-state enterprises, that the right to bargain
collectively is markedly enhanced compared to state-owned
enterprises?
Mr. Aldonas. Absolutely. Yes.
Representative Brown. Are the wages different in those? Are
the wages significantly different?
Mr. Aldonas. Absolutely. We will give you the documentation
on that. But I think it is the sort of common-sense notion that
what you have, just for the reasons you state, in a state-owned
enterprise, is the state very clearly with its thumb on the
pulse of everything that goes on in that enterprise in a way
that is not true with respect to private enterprise.
Representative Brown. But do not Western investors choose
China because it is authoritarian and its economic and
political nature that wages are low, that environmental
standards barely exist, that workers' standards, if they exist,
are rarely enforced?
Mr. Aldonas. That has not been my experience.
Representative Brown. So why do corporations, Western
investors, choose authoritarian developing countries over
democratic developing countries?
Mr. Aldonas. I do not think you should confuse cause and
effect. As you have seen China open up over 20 years and allow
private investment, there has been a flow of capital to the
Chinese market.
If you looked at the statistics of where foreign investment
has gone, it has moved in the direction of China. But it is not
necessarily because it was authoritarian, it was because you
have a market of 1.2 billion people opening up.
Most of the investment, in fact, has gone on on the coast
where they have opened up. It has not gone to the interior,
which the Chinese are now trying to encourage. But the point
there is, it has gone into those sectors that are most free,
not into the sectors that are most controlled by the state.
So even under the assumption that the theory was you were
trying to invest in an area that was governed by an
authoritarian government, the experience has been, they have
invested in those parts that the authoritarian government has
expressly said we are going to allow you the maximum amount of
freedom we are willing to tolerate in this system, and that is
where they have invested, not where there is actually State
control of the enterprise.
Representative Brown. In the rare moments of candor that
American CEOs lobbying the Congress during PNTR, they would, in
fact, acknowledge that their interest was less than 1.2 billion
consumers than it was in 1.2 billion potential workers.
Mr. Aldonas. I have to say, that has not been my experience
either in private practice with my clients, or the experience
listening to American business people who are investing there
now.
Representative Bereuter. We need to move on. I think we are
going to have a House vote, and I want to get to our two
colleagues.
The gentleman from Virginia, Mr. Wolf, is recognized.
Representative Wolf. Thank you, Mr. Chairman.
You were representing clients in China before you were
here?
Mr. Aldonas. I was representing clients before I went to
the Senate Finance Committee.
Representative Wolf. All right. Fine. I just wanted to get
that on the record. If you can be relatively brief because of
the time.
I want to share Mr. Levin's comments. I was in Italy last
year, taking my wife on a short trip for our 40th wedding
anniversary. There was a large article about Nestle's and
another company doing business with Nazi Germany right up to
the end of the war, and it really did not bring about a change.
What is the trade deficit today with China?
Mr. Aldonas. I think they are $80 billion in surplus.
Representative Wolf. And what was it 10 years ago?
Mr. Huntsman. It was about $19 or $20 billion.
Mr. Aldonas. I think it was roughly a quarter of what it is
now.
Representative Wolf. A quarter.
Mr. Aldonas. Yes.
Representative Wolf. Can you supply for the record what it
was over the last 20 years, give us each year?
Mr. Aldonas. Yes.
[The information requested appears in the appendix.]
Representative Wolf. Second, we had a briefing by our
security people saying there is a major espionage program by
the Chinese Government against our private sector.
Are you aware of that? Have you had that briefing? Do you
raise that when you are in China?
Mr. Aldonas. I did not raise it when I was in China. I did
not have that briefing. I am aware of that because my clients
faced it when I was in private practice.
Representative Wolf. Can you all three get the briefings
and then just drop a note to the committee that you have had
the briefing?
[The information appears in the appendix.]
Representative Wolf. Do any American companies speak out on
behalf of human rights? Do you have any record? Can you supply
for the record all the companies that have spoken out, if
somebody is dragged out of a factory because he happens to
worship at an evangelical church, that the company has spoken
out for them? Do you have any record, off the top, that you
would know of?
And have any business men who are Catholics spoken out for
Bishop Su who has been in prison for a number of years because
he gave Holy Communion to a Member of the House? Do you know of
any American businessmen that have spoken out on that case?
Mr. Aldonas. No.
Representative Wolf. All right. Do you think it would be a
good idea if the American business community did speak out on
those cases?
Mr. Aldonas. I think it would be a good idea if American
business----
Representative Wolf. Do you know if the American Chamber of
Commerce in Beijing has ever spoken----
Mr. Aldonas. Congressman, do you want me to answer the
question?
Representative Wolf. You did. You said no. You said it
would be a good idea.
Mr. Aldonas. But do you want me to----
Representative Wolf. My time is running out. Do you know if
the American Chamber of Commerce at Beijing has ever spoken out
on those cases?
Mr. Aldonas. Congressman, you know what the American
business community does do in China, is largely what it does in
the United States, which is invest in its community.
Representative Wolf. No. But there are----
Mr. Aldonas. They commit dollars to real projects on the
ground that help the Chinese in the same way they do in their
own neighborhoods here in the United States.
Representative Wolf. But I think you sell the American
businessmen short. American businessmen in the United States
speak out on many important social issues, and they do it
around the world. We just saw the Secretary of Treasury, in
Africa, speaking out on AIDS and speaking out on debt relief.
I think, and I will not have any more questions, frankly,
some of you in the Administration have not listened and read
President Bush's speeches, because I hear him say and speak out
very eloquently and very passionately on this.
Then when it gets down to the second level and the third
level--and I think the more we are speaking out and advocating
on the persecuted, religious freedom, human rights, the better
we will be and the more likely they will change.
Also, I am glad American businessmen are invested in China.
I am glad they are investing. But also, if they were to speak
out, if American business in China were to speak out, they
would carry much more weight than a Member of Congress or
anybody else.
I have seen relative silence when business trips go to
China, almost total silence on behalf of American businesses
operating in China. Not a lot of people in the Department of
Commerce or the trade representatives speak out on behalf of
human rights. I think it would be good if you got the
statements that President Bush made, spoke about, and
advocated.
At the beginning of every meeting, even though we want to
trade and do business--because we do want to trade. I agree
with the gentleman, the more we are trading with people, the
less likely there will be war.
But if we put it at the beginning, we make sure it is a
priority and we publicly stand with, and we also do what
Secretary Baker would do, and Secretary Shultz would do, we
would go meet with the dissidents, go, as the Secretary of
Commerce did, to the churches and worship with the people. We
would send a message a lot more than we are currently doing.
Mr. Aldonas. Well, just for the record, when I was in
Shanghai, I did go to church and it was----
Representative Wolf. But was it an underground house church
or a recognized church?
Mr. Aldonas. Well, in fact, it was a recognized church. And
trust me, there were still Chinese agents sitting outside the
church watching me go in. And I went there----
Representative Wolf. But did you try to go to an
underground house church?
Mr. Aldonas. But I did go to church. [Laughter.]
And part of that was trying to make a statement to the
folks who I knew were following me that I was going to church
in China. I wanted to exercise my rights of freedom while I was
there.
Representative Wolf. Did you speak out for Bishop Su?
Mr. Aldonas. I thought that was, at least at my level, a
fairly eloquent statement about my willingness to try and
exercise my right while I was there, along with other Chinese
and with other foreign citizens who were in Shanghai on a
Sunday.
Representative Wolf. Do you think just going to church
spoke out for Bishop Su? Do you think that that spoke out for
the 200 people that are in Drapchi Prison from Tibet, the
Buddhist monks, the Buddhist nuns, the evangelical house
churches? Your going to church spoke out on that? You should
raise that in every issue and every meeting that you have.
I have no further questions.
Mr. Aldonas. I think, if you are the Under Secretary of
Commerce and you are there on a very public visit, and you go
to church on Sunday, I think that does make a statement,
Congressman.
The Chairman [presiding]. All right.
Representative Bereuter. We have 10 minutes left, Mr.
Chairman, so I must regretfully pass and catch up with you
later.
The Chairman. All right. Congressman Pitts, do you want a
few minutes anyway?
Representative Pitts. Thank you, Mr. Chairman.
The Chairman. Then we will continue.
Representative Pitts. Thank you, Mr. Chairman. Thank you
for your testimony.
And just for general information, I raised the same issue
that Congressman Wolf did in the last hearing, then had a visit
from the Chamber of Commerce. A couple of businessmen told me
that they had privately raised human rights issues with the
government when they were there in China.
I just wanted to ask one thing. Some of you raised the
issue of independence of the courts. I think, Ms. Westin, you
mentioned the lack of independence of the courts.
What were the Chinese officials' responses when you raised
this issue with them? Did it seem that they intended to allow
or to strengthen the independence of the courts? How can our
government encourage further independence of the courts there?
Ms. Westin. Yes. I do not want to leave you with the
impression that, when we met with Chinese officials, we were
raising issues like that. We were talking about what they were
doing to implement the WTO reforms.
So meeting with various officials, including some members
of the Supreme People's Court, they were telling us of the
process they were going through with judicial reform.
Part of it was establishing, as I have mentioned, these
mid-level and higher-level courts to deal with the foreign
companies that bring cases. Part of it is working to make sure
that judges get proper training so that they are making
decisions based on law. So these were the things that they were
telling us that were in process.
Representative Pitts. Would any of the rest of the panel
like to address that issue of independence of the courts?
Mr. Aldonas. Congressman, the same basic experience was
that what they have done and what they have in process looks
good on paper.
The real question, is when people have the opportunity to
test that and whether they can vindicate their rights through
the system. I think only time will tell. We have not really
started to see enough of that bubble up through the system to
be able to get a good measure of it.
Representative Pitts. Thank you.
Mr. Chairman, I am going to submit the rest of my statement
for the record and I am going to go vote.
[The prepared statement of Congressman Pitts appears in the
appendix.]
The Chairman. Thank you, Congressman, very, very much. I
appreciate your taking the time. I know it is often a great
distance to travel over from the other body.
I would like to ask all of you, very briefly, and ask you
to be short in deference to the next panel--the major premise
of this Commission's activities is that the rule of law will
help move China toward protection of civil rights, honoring
human rights, and more toward an independent judicial system,
etc.
But Congressman Wolf raises a good question, basically: Is
it enough? It is a bit presumptuous to say this as Americans,
but nevertheless, that is our goal as human beings morally, as
Americans at a moral level and a human level, where we believe
that human rights should be honored and protected worldwide,
regardless of where.
But the question is, at what point does pushing for
honoring human rights in China become counterproductive? We are
working to help China develop a stronger rule of law, not only
in the commercial area, but in the civil and political area?
Where is that line?
That is, when does the advocacy of human rights, and only
human rights, irrespective of anything else, help, and when
does it start to hurt and detract from our efforts? Some of you
have a lot of experience. Grant.
Ms. Westin. And I can easily defer to the Administration
because GAO does not serve as an advocate, really, on any
position.
The Chairman. All right. Grant.
Mr. Aldonas. Honestly, Mr. Chairman, I think it is when you
start to create a backlash against the very people you are
trying to help. When I think about Ned Graham's work on behalf
of religious freedom in China, Billy Graham's son, what he
would say consistently is that there is a level of pressure in
acting on behalf of your own values that is important as an
example to the Chinese. It is not a direct confrontation to
their question about who runs China so much as an expression of
your own values.
But at the point where you encourage the State to focus
back on the very people you are trying to help, whether it is
in the Christian community or whether it is more broadly than
that, Falun Gong, whatever it might be, I think you have
stepped too far, as a practical part of that.
I do not so much see that as a part of WTO compliance and
the development of the rule of law, as it is really trying to
encourage the Chinese to understand they will succeed at what
they want to do on behalf of their own citizenry, in their
economic sphere where they seem focused, by trying to encourage
the release of human freedom at all its levels. That is
something I think you can say without having to trigger a
backlash against the various people you are trying to help.
The Chairman. Mr. Ambassador.
Mr. Huntsman. I agree completely with what Grant said. I
think what we also need to realize, is that more and more there
are students here in the United States, tens of thousands of
them, and they are not learning Marxism and Leninism, they are
studying Jeffersonian principles. They go back and apply those
in China. I think they realize that we here in the United
States have certain attributes about us. We will be very
competitive in the free market, while at the same time we will
espouse certain principles.
There will always be a balance that comes out of the United
States, and I think increasingly China will understand that and
they will learn how do deal with it without recoiling in horror
whenever we want to talk about certain things.
But I also think we need to see this in the fuller spectrum
of time. That is, the year I was born, China launched the Great
Leap Forward, a disastrous program that left 30 million dead of
starvation. That was then followed up by the great proletarian
cultural revolution, which was a great policy debacle for
China. Then the Open Door policy followed shortly thereafter,
once Deng Xiaoping was able to consolidate his rule in the late
1970s, and you look at the progress that has taken place since
then. So, I tend to look at things based upon how long I have
been around and the progress that has been made.
I tend to think we do not look enough at the transformation
that has occurred when we go back to the late 1950s or early
1960s vis-a-vis where we are today. I think sometimes we need
to take stock of some of those changes as well.
The Chairman. Thank you. Thank you very, very much. This
has been most productive. We will get back to you on a timeline
and benchmarks for adherence to the commitments of the WTO.
Thank you.
Our next panel consists of Chris Murck, chairman of the
American Chamber of Commerce in Beijing and president of APCO
Associates in China; Professor Donald Clarke of the University
of Washington Law School; and Jeff Fiedler, who is former
president of the Food and Allied Services Department of the
AFL-CIO.
First, Chris Murck, chairman of the American Chamber of
Commerce in Beijing. Mr. Murck.
STATEMENT OF CHRISTIAN MURCK, CHAIRMAN, AMERICAN CHAMBER OF
COMMERCE, BEIJING, CHINA
Mr. Murck. Thank you very much, Mr. Chairman. I am honored
to appear before this distinguished body and am pleased to
hear, by your questions to the prior panel, that the American
Chamber of Commerce in China is known to you.
I would ask that my written testimony be submitted for the
record, and I will just make a few remarks.
The Chairman. It will be included for all of the panelists.
Mr. Murck. I have framed my testimony in terms of the rule
of law as it affects the business environment in China rather
than specifically with reference to the World Trade
Organization accession commitments because I think the rule of
law is a broader issue than merely WTO, and cannot really be
discussed solely within that framework.
By rule of law, the business community focuses primarily on
transparency and consistency. By transparency, we mean the
promulgation of laws and regulations that have been developed
with participation by affected parties and the general public,
and which are easily accessible, objective in their terms, and
clearly understandable.
By consistency, the business community refers to fair,
reliable, and non-discriminatory application and enforcement
not only of laws, but also of regulations and contracts.
In 1979 when China began its reform progress, it is a fair
statement that it did not have a legal system. In the years
since then, remarkable progress has been made to draft a large
body of law, to reestablish and improve the court system, to
reestablish the legal profession. As such, there are now 300
law schools in China, where in 1979, there were none.
So, I think we can say today that China does have a legal
system, but it is also clear that that legal system is neither
transparent, nor consistent. We have viewed this as a major
problem and we have been a strong voice of support for
strengthening the rule of law in China on those grounds.
About a year and a half ago, we produced a white paper for
2001 which noted the progress that has been made over the 20-
some years since the current reform process began, but also
said that in our view it had stalled, and with respect to rule
of law, we were even in some sense moving backward.
The WTO accession package in this area, as in others, has
revived somewhat this process by making explicit a series of
new commitments which are extremely important. I would just
like to note two of them. They have been mentioned by the prior
panel. I will just reiterate.
One of them, is to enforce only published laws and
regulations, thus eliminating the legal force of internal
documents, which has been a major problem for the business
community, and to make laws and regulations available before
their effective date, in some cases, for comment by the general
public.
A second major commitment is ``to administer,'' and I am
quoting here from the Protocol, ``in a uniform, impartial, and
reasonable manner all its laws, regulations, and other measures
of the central and local governments governing its trade and
foreign investment regime.''
These commitments are important statements of principle.
They are, however, particularly the commitment with respect to
uniform, impartial, and reasonable enforcement, extremely
difficult to judge. It is not as objective as lowering a tariff
rate or increasing a tariff rate quota.
These criteria will be harder from our point of view and
from the Chinese point of view in terms of assessing whether or
not they have actually lived up to them.
In my own view, this will be a long process. I would view
it as a 10-year effort to establish a legal system which is
transparent and consistent in the terms in which I have
mentioned it above.
I think that process requires diverse approaches, not only
from the business community, but also from governments
involved, from multilateral agencies, from foundations, from
the human rights community, and from many others.
The exact outcome of it cannot be clearly predicted.
Although transparency and consistency are at the core of any
legal system that we would characterize as respecting the rule
of law, it by no means accounts for all of it.
We hope that the United States Government, which has been a
strong spokesman and critic of China with respect to rule of
law, will in the coming years begin to fund in a material way
capacity building efforts, which it has not done to date,
particularly by comparison with the Europeans.
We have not been players in providing technical assistance
and training. That began to change only last year, with a $3
million appropriation, most of which went to one program run by
Temple University in coordination with Qinghua University in
Beijing. We see signs of new commitment and new effort by the
U.S. Government in this respect and we would strongly encourage
that.
I particularly recommend that you examine the Commercial
Law Development Program in the Commerce Department, which is
barred from activity in China because it is funded partially by
AID funds, which are, as you know, restricted.
Mr. Chairman, thank you very much, again, for the
opportunity. I look forward to your questions.
[The prepared statement of Mr. Murck appears in the
appendix.]
The Chairman. Thank you, Mr. Murck.
Next, Professor Clarke.
STATEMENT OF DONALD CLARKE, PROFESSOR OF LAW, UNIVERSITY OF
WASHINGTON, SEATTLE, WA
Mr. Clarke. Thank you, Mr. Chairman and members of the
Commission. I am very pleased to have the chance to come before
you today to offer you some thoughts on WTO implementation in
China and the rule of law.
Since you have my written testimony, I am just going to
highlight a few areas of that right now.
The first issue I want to highlight is the debated issue of
whether China's WTO obligations, to the extent that they call
for enforcement of private rights, are directly and immediately
enforceable within the Chinese legal system. I raise this issue
because Chinese law, remarkably enough, is unclear on this
issue.
Nevertheless, I believe the only realistic position to take
is that they are not. That is, in China, as in the United
States, WTO obligations become part of the Chinese domestic
legal system, enforceable by domestic courts only, when Chinese
Government bodies issue appropriate rules requiring courts and
other government bodies to enforce or implement those
obligations.
That said, however, we should recognize that in some cases
China has already issued the necessary regulations, and where
it has not, it is a relatively simple matter to do so. Those
regulations do not necessarily have to be promulgated by the
National People's Congress after a full legislative process.
In some fields, such as, for example, enforcement of
judgments or procedural rights, it would be possible within the
Chinese system for the Supreme People's Court to issue a
directive instructing lower courts to implement those
obligations. Of course, procedurally, that is a much simpler
matter.
The next issue is that of local government measures. There
is a substantial and legitimate concern that local governments
within China might take measures that are inconsistent with
China's WTO obligations.
I have mentioned in my testimony an example of that in
recent legislation from Zhejiang Province, that at least on its
face seems to grant privileges to Taiwanese investors that are
inconsistent with MFN principles.
Now, China, in this respect, is not like the United States
and other Federal systems. As you know, Chinese local
governments have no legal power to defy the central government.
Because the central government has the legal capacity to
require local governments to conform to WTO obligations, it
therefore, under WTO rules, has the obligation to do so and it
would be in violation if it did not.
As you know, though, to say all this does not solve the
basic problem, which is that local governments do, in fact,
enjoy a considerable amount of de facto autonomy from Beijing
for various institutional reasons that I will not go into here,
so they may in fact come up with inappropriate regulations and
measures, and the central government may be unable, as a
practical matter, to get them abolished.
I just want to make two comments about this. First, the
failure of the central government to get such regulations
abolished is not necessarily an example of its faithlessness in
the WTO context. China is a big and not very well-governed
country, and some things are very hard to do.
The second comment, is that China's trading partners are of
course not helpless in the face of such violations. The dispute
settlement process is a regular part of WTO life, and violative
measures can be identified and sanctioned.
Finally, I want to say a few brief words about prospects
for the rule of law in China. In the United States and in the
West generally, we tend to identify rule of law with rule of
courts. Thus, for example, the Working Party on China's
accession insisted that administrative rulings in China should
be made appealable to the courts.
But this procedure rests on an assumption that courts and
judges are better trained to analyze legal questions and more
likely to be fair and unbiased than administrative agencies.
Chinese courts, I believe, at present simply do not have
the capacity to play the role that is expected of them in the
standard model of the rule of law. Chinese courts are weak.
They are dependent on local government for funding, and are
staffed, by and large, by officials who do not know a lot about
law. Perhaps 10 percent of Chinese judges have undergraduate
degrees in law, and a large number have no college degree in
anything.
Thus, it would be, I think, more realistic to think of them
not as courts, but as something we might call perhaps a legal
adjudication office. Instead of calling their officials judges,
which brings to mind a dignified, black-robed official with a
high degree of legal training, we might better call them
hearing officers or some other name that better reflects their
essentially bureaucratic and administrative role.
Unlike United States courts, Chinese courts have effective
jurisdiction over only a limited class of legal rules, and a
vast part of China's legal system is still under the effective
and sole control of government administrative bodies.
Now, what is the policy consequence of this? I think the
policy consequence is that it would be profoundly unrealistic
at this time--at this time--to keep looking to China's courts
as the best potential source of rule of law values.
Reading the Working Party report and other commentary, I
get the impression that if the process is not ultimately
appealable to courts it is considered, ipso facto, flawed, but
that it is all right to relax and stop worrying once a court
has been given the last word. I think both of these assumptions
are wrong.
I think there is no substitute for an informed
understanding of the particular domestic tribunal that is
proposed as the final arbiter of any question, and that nothing
is gained by looking at whether it is labeled administrative or
judicial.
Since I have about a half a minute left, I want to address
one question which came up in the last panel, which is whether
the use of arbitration by foreign businesses reflects a lack of
confidence in the legal system.
I think it would be a mistake to look at that as a sign of
lack of confidence, whether or not this lack of confidence
exists. First of all, you cannot opt out of the Chinese legal
system by using arbitration because you still need the Chinese
legal system to enforce your arbitration award.
Second, arbitration is a very, very common part of business
agreements all over the place, all over the world, in all
countries. If you look at your credit card agreement, your bank
agreement, your brokerage agreement, you will probably find
that you have agreed to arbitration yourself even in this
country.
So that is all I have to say on that, and I will be very
happy to answer any questions.
[The prepared statement of Professor Clarke appears in the
appendix.]
The Chairman. Well, thank you very much.
Appreciate it.
Next, Mr. Fiedler.
STATEMENT OF JEFFREY L. FIEDLER, CONSULTANT, FOOD AND ALLIED
SERVICE TRADES DEPARTMENT, AFL-CIO, WASHINGTON, DC
Mr. Fiedler. Thank you, Mr. Chairman.
I, too, will enter my statement into the record and will
make some additional comments based on the government's earlier
testimony, and some questions and some statements that folks
have made.
First, though, let me say that I do not think, as a layman,
that China has a legal system. I view it as a system of control
that enables the Party to maintain its power. That is its
purpose. Its purpose is not to adjudicate disputes among
people, it is really to keep control of people.
There was a statement made that transparency is important,
that commercial law may lead to the rule of law or a greater
sense of the rule of law. I was sort of hopeful that, after we
lost the political debates on PNTR and MFN, that we would end
the discussion that capitalism brings democracy, and now it is
commercial law brings the rule of law.
I do not think that that is what it is all about. I think
that a great deal more goes into the building of civil society,
and one of those elements of civil society is a vibrant, free,
and independent labor movement which does not exist even in
China's private enterprises, United States companies, and is
not likely to exist in any United States company.
As a matter of fact, the only thing apparently being
imported into U.S. companies these days is the Party has said
that every foreign-owned enterprise now must have a Communist
Party branch in it. They were more tolerant of that not
existing before, that having been precipitated, I believe,
largely by Falun Gong activity.
The biggest risk to the WTO is worker unrest. I find it
interesting that two of the government witnesses--I do not
consider Ms. Westin to be a government witness in the truest
sense--only answered the question of worker unrest in the
questioning, not in their testimony.
I was part of the Council on Foreign Relations' Task Force
on China and the WTO, where the largest single greatest concern
among those, some eminent, some not so eminent like myself,
members of that task force, was worker unrest. It is the
dismantling of the State enterprises, it is the slowing of the
pace of the dismantling of the state enterprises because of the
prospect of worker unrest that is going to slow compliance. I
believe that to be true.
I also believe that the policy question that should be put
before this Commission and the U.S. Government generally, is
what are we going to do as a government?
What is the Congress going to do, what is the
Administration going to do, when China violently represses
workers when, and if--and I tend to believe when--worker unrest
begins on scale and spreads from city to city? What are we
going to do? That is something I believe this Commission should
address.
By the way, just a couple of comments. I do not favor the
U.S. Government funding any training of any so-called judges or
training anybody in WTO compliance. China has enough hard
currency. It is throwing it all over the United States.
U.S. business that would benefit most directly from it has
plenty of money, too, to conduct that training. Worker
taxpayers should not pay for training of judges who repress
workers in China today. It is just an unacceptable use of U.S.
taxpayers money.
I will stop early.
The Chairman. Save it up for later.
Mr. Fiedler. It does not take much to get me going.
[The prepared statement of Mr. Fiedler appears in the
appendix.]
The Chairman. Thank you very much, Mr. Fiedler.
Let me just take up on that last point about helping China
develop a legal system.
I wonder, Mr. Murck--Mr. Fiedler's point is whether
American workers and companies, and American taxpayers, should
pay to help a country that basically subjects most of its
people to a living standard and political standard which we
would find unacceptable, given the fact that China has got huge
currency reserves.
Mr. Murck. Let me discuss that in a slightly broader
context. Obviously, from my testimony, you can tell that I
disagree with Mr. Fiedler about the policy course that the U.S.
Government should pursue.
Just a point of information. China's foreign reserves are
invested predominantly in United States Government bonds rather
than anything else. If you look at the inflow of foreign direct
investment into China since 1979, and Nicholas Lardy who is
here at Brookings has done this, it is almost exactly matched
by the outflow of Chinese direct investment abroad, plus an
increase in foreign reserves, plus the errors and omissions
line.
That is very interesting because that does show, as Mr.
Fiedler suggests, that China has never needed foreign direct
investment purely for funding. They have a 40 percent savings
rate and they have enormous liquidity in the banking system.
The problem is, they need foreign direct investment, and
have always needed it for the transfer of management
technology, for the allocation of capital to economically
viable enterprises, and for the transfer of technology.
Part of that--and I know Mr. Fiedler will disagree with
me--when American companies come into the market is a higher
level of wages and a very different way of treating workers.
I do believe he is correct in saying that compliance with
WTO in itself, and even the establishment of a broader rule of
law in the sense in which I have outlined it, will not
necessarily lead to the establishment of a free trade union
movement as we know it in the United States.
But the rights of workers, as they experience them, have
been significantly impacted by the fact that there are large
foreign establishments, such as the Shanghai General Motors
plant and others funded by American investment. That has been a
major contribution and a major improvement.
The Chairman. Could you touch a little bit on EU assistance
in China? I think, parenthetically, you mentioned or suggested
that perhaps the EU was more heavily involved than the United
States.
Mr. Murck. The European Union has been active in this field
for almost a decade. Their funding is at the level of
approximately $10 million a year. They are the largest single
player in this area.
The second largest is Germany, acting individually. The
GTZ, the German Technical Assistance agency, has trained
MOFTEC's lawyers in trade law and WTO compliance so that it
should be no surprise to anybody that MOFTEC takes a rather
European view of the recent United States action on steel
tariffs.
The next largest player would be Canada. The Ford
Foundation has been active. After that, it drops way down in
terms of dollars to a couple of small, but effective programs
like Asia Foundation, which has a program of grants.
There is a new program launched by the U.S.-China Business
Council which is funded by grants and by assistance from many
corporations which has been active. The U.S. Government,
however, until last year, was a very strong spokesman, but
actually did very, very little in this area.
The Chairman. Mr. Fiedler, I deeply appreciate your
comments. Certainly, no one questions your integrity, or that
of anyone on the panel here. But my question is, given the
current reality, that is, China is China, there is a WTO, and
China is a member of the WTO, what should this Commission do to
help advance things. You can choose whatever you think makes
sense, either commercial law, rule of law, human rights, a
combination, or whatever. What do we do?
Mr. Fiedler. Well, I certainly accept reality. The WTO
exists. China has gained entrance to it. It has said that it is
going to comply with 600-some-odd different aspects of various
and sundry agreements associated with the WTO.
I am saying to you that in all likelihood they will not,
and never intended to on the schedule everyone else thinks they
are going to, because of what they call social stability.
The changes that are required for them to comply are so
dramatic and so disruptive of significant numbers of people in
urban areas, that it is just not going to happen on time.
The Chairman. So what do we do?
Mr. Fiedler. Well, the Council on Foreign Relations was
talking about alternative dispute mechanisms outside the realm
of the WTO, its fear being that regular WTO dispute mechanisms
are going to be overwhelmed, and therefore the world trading
system undermined. You have to understand, I do not care so
much that the system is undermined by the Chinese or not.
The Chairman. But do you have any recommendations as to
what the Commission should do to advance our goal and be
relevant somehow in the world?
Mr. Fiedler. What, on compliance? I think you are doing
plenty of things on compliance. I do not have any other
suggestions on how you monitor and get compliance. I do not
think you get compliance until and unless the Chinese want to
give it, period. There is nothing you can do. What are you
going to do?
The Chairman. Sometimes you can help influence a result.
Mr. Fiedler. I think that the U.S. administration is trying
to, and the business community is trying to. I particularly
would like to see workers organize so that there is not the
kind of unrest that is likely to disrupt the WTO.
The Chairman. I doubt that we will solve it here today.
Thank you.
Mr. Fiedler. I did not expect to when I came.
The Chairman. Thank you. All right.
Next, Mr. Findlay.
Mr. Findlay. I actually thought your testimony was
fascinating, Mr. Fiedler, very frank and candid. But I sensed
despair in your testimony, as the Chairman did. I took you to
say that, given the reality that China exists and that it has
acceded to the WTO, that nothing can change.
Are there any steps that the U.S. Government can take, not
the Commission, which was Senator Baucus' question? Also,
United States businesses in China. Are there steps that we
could take to enhance labor rights in China?
Mr. Fiedler. The first thing that the Administration could
do, is that the President of the United States, when he spoke
in Miami on Cuba, called for the development of a fully free
and independent labor movement in Cuba. I have never heard the
President of the United States, whether it be this one or the
previous one, do anything similar as regards China.
It is not enough for me or for our government to send you
and the Labor Department over there to teach people how to do
things better in a labor context. We have to speak out for
workers who lead their colleagues in a protest because they
got, they thought, a raw deal.
The deal gets bettered after the workers demonstrate and
after they start to talk to workers in other oil fields. But
the four entrepreneurs, if you will, who suddenly got the
gumption, are in jail today because they organized their peers.
What did the U.S. Government do? Did not hear a word. Did not
hear much out of the Congress either, sir.
So I am sorry if the top of my priority is not how China
lets some product of the United States get into the country in
a timely fashion, when I am much more interested in the fate of
the workers who are producing the products inside China.
Mr. Findlay. And I think that should be all of our concern.
I am grasping for ideas beyond rhetoric that the U.S.
Government can do through any of our programs in our
department, or perhaps through work with the Department of
State.
Mr. Fiedler. Look, the Clinton Administration, in 1994,
when it delinked trade from human rights, talked about a code
of conduct for U.S. corporations, which it could not get
anybody to do.
We went over to the White House at that time and said,
look, codes of conduct are worthless unless the code of conduct
says workers have the right to organize. It is U.S. policy that
we think everybody should have the right to organize. I said,
but if you do that, United States companies would have to leave
China.
So you are asking me what, short of the establishment of
freedom of association, is acceptable in incremental fashion to
make workers' lives better? I am sorry, I do not accept
anything short of freedom of association. And it is not
rhetorical. It is not at all rhetorical. It is a deeply held
belief.
Mr. Findlay. I think the question is, how do we advance
freedom of association?
Mr. Fiedler. Talk about it. The U.S. Government does not
talk about it.
Mr. Findlay. Then what, beyond rhetoric, can the government
do? Is there nothing that we can do?
Mr. Fiedler. Then you are going to get into things which
you have already rejected, which are linkages. We have enough
domestic fights about including labor rights in international
trade agreements. We seem to have lost that fight as well.
So you are asking me again for all of the things that we
have lost, and to come up with something short of that is
acceptable to you when we laid out what we essentially believe
is the minimum necessary.
Mr. Findlay. I am not even asking for ideas that are
acceptable to me, I am just asking for ideas. But it sounds
like----
Mr. Fiedler. I said to you that the United States
Government should impress upon the Chinese that it is matter of
United States policy that it ought to allow the establishment
of free and democratic trade unions. I do not think there is
much more you can do.
Mr. Findlay. Let me ask a question that I think Professor
Clarke raised in his testimony. I am just a little bit
confused. I took you to say that we should not worry too much
about the lack of a judiciary that looks like our judiciary
because the rule of law can be put in place through other means
such as administrative bodies. Is that what you were saying? If
it is, could you explain more what you mean by that?
Mr. Clarke. I am glad you asked the question so I can have
a chance to enlarge. Actually, it was sort of the opposite. I
was trying to say that because the courts and the judiciary are
so weak, I think it would be a mistake to concentrate in a way
that I see people doing a lot, in thinking that the courts are
essentially like U.S. courts or courts in Western countries
except that they lack a little something, they lack, maybe,
some training or something like that, and that therefore, if
they could be made better trained or more powerful, they could
be substantial contributors to the building of the rule of law
in China.
The point I am trying to make, is that courts at the
moment--and it may be sometime in the future they will develop
into that kind of institution--but right now I see them as
essentially a kind of clerical bureaucratic institution, maybe
like administrative law judges within a particular government
department in this government.
Therefore, programs to train, for example, judges, can
serve some purpose. I guess I disagree with Mr. Fiedler in
thinking that these are universally bad ideas. I think one has
to look at the particular programs and make an individualized
assessment.
But one should not, for example--the way I see the Working
Party having done--think that somehow the problem of arbitrary
administrative action will be solved if we merely provide for
an appeal to courts. I do not think that will solve the
problem. I think we have to look further.
But because courts are not necessarily going to solve the
problem, I think one, therefore, has to also look at the other
possibility, which is maybe that there do exist other
mechanisms somewhere other than courts that would be useful to
investigate and to try to support.
The Chairman. Thank you, Mr. Clarke, very much.
One of the unique features of our Commission is that it
sort of merges the separation of powers. We do not have an
Article 3 judge here on our panel, but we do have members of
the Legislative Branch, as well as the executive branch, Mr.
Findlay certainly being one, and now Mr. Aldonas another.
We are very happy to have you here, Mr. Secretary, as a
member of our Commission. The floor is yours.
Mr. Aldonas. Thank you, Mr. Chairman. Of course, obviously,
the first question on my mind is, when was the last time you
were in church in China? [Laughter.]
In all seriousness, the one thing I heard sitting in that
chair a minute ago was both the Commission and the witnesses
struggle with a couple of concepts which I know
I have been trying to give some thought to. This goes to
every one of the panelists, really.
How do you measure that progress in the respective areas,
whether it is on the commercial side, whether it is more
fundamentally throughout the Chinese legal system, or whether
it is in the area of labor rights, in part, so within the
Administration and on the Commission we can establish some
effective benchmarks that would help guide us in determining
not only whether we are making progress, but then where do we
try and reinforce the effort, whether it is through rhetoric or
whether it is through the programs that we develop?
Maybe, Mr. Murck, I can start with you and sort of work my
way through Professor Clarke, and end up with Mr. Fiedler.
Mr. Murck. Well, the answer to the first part of your
question is, 2 weeks ago. However, with respect to benchmarks,
I think it is an extremely difficult thing to do, because much
of what we are talking about is not a simple thing.
It is a question of values and a question of behavior. The
kind of changes we are looking for do imply a reduction in
administrative discretion, and a reduction in special
privilege, and a reduction in arbitrary power.
It will be difficult to evaluate exactly what the progress
is, particularly because we are looking at this across a very
large country with very disparate patterns of enforcement in
local courts.
I think, with respect to the business environment at least,
I would look closely at progress in property rights and
contractual rights. Many of the WTO commitments do run to
protecting these with respect to the foreign trade and
investment regime, so the first step, I would say, is to verify
that that has been accomplished in some way.
It is my personal belief, and I have discussed some of this
in greater detail in my written testimony, that it is not
possible to compartmentalize the rule of law. If you establish,
for example, contractual rights or property rights for foreign
investors and foreign participants in the economy, they
naturally spread to the local competitors and counter parties
as well, and from there spread into other areas.
But I do not think there is a clear, easy way to quantify
this progress. That suggests that the Commission's role as a
forum and as a place where views, data, and information from a
wide variety of observers can be gathered and pondered is a
very important one, not only today, but going forward.
Mr. Aldonas. Professor Clarke.
Mr. Clarke. Thank you. I am pretty much in agreement with
Mr. Murck on that subject. I recently looked pretty closely at
that because I was writing a paper on whether one can figure
out whether all these rule of law assistance programs have
actually done any good. How does one measure whether they have
done any good? I think it is almost impossible to answer,
certainly, in a quantitative sense.
Various economists have tried to do studies where they
figure out some index of rule of law or contract enforcement,
then they measure it against gross domestic product, or
something. But it is never very satisfactory. I think,
ultimately, if one were to take certain raw numbers like
percentage of the population in prison, this country would not
look very good either.
So I think there is really no substitute for highly
informed qualitative studies that may need a special commission
to say what is going on in this particular area, or that
particular area. But I regret to say, I do not have a good
answer to the question. I am not sure there is one.
Mr. Aldonas. Mr. Fiedler.
Mr. Fiedler. A partial answer could be a reduction in
number of people being arrested for doing what the average
human being would think would be something commonsensical, like
getting back pay for me and 3,000 other people and not having
to go to jail when I do.
Mr. Aldonas. That is a fair answer. One of the things that
the China Trade Relations Act propounded or authorized was the
idea of programs to look at the rule of law. There had not been
specific appropriations behind that.
But if you took a look at that authorization and said,
where would you dedicate resources if you had them, what would
top the list of priorities? If I could just sort of go through
the panel again and identify some priorities we might want to
focus on.
Mr. Murck. I would certainly focus on raising the level of
training and education of the judiciary. I would focus on human
rights and I would look at areas such as consumer rights and
women's rights, and at criminal procedure.
I would look at administrative drafting, because so many
Chinese laws are very general and they are implemented by
regulations which are subsequently drafted. So I would
certainly look in that area. I think all of these things
deserve attention and they all, in a certain sense, flow
together.
One of the great steps forward, which was taken very
recently, is that the Chinese Government has now moved to a
single qualifying examination for prosecutors, judges, and the
bar. That implies that in the future we may see a single legal
profession across all of these three sets of people, which we
certainly do not have today.
In the future, we may see better-qualified prosecutors and
better-qualified judges. That will be a long-term process. We
are going to have to wait, I think, until a generation of
people retire and disappear from the judiciary. But there is
thought in China about this issue, as well as thought
elsewhere.
Mr. Clarke. Were you speaking of WTO implementation in
particular or human rights advancement in general?
Mr. Aldonas. In fact, particularly given the ambit of the
panel, I think WTO is a specific focus. But the Commission's
focus is actually broader than that in terms of development of
rule of law.
Mr. Clarke. Yes. I think it is difficult to come up, on the
top of my head, with the best way to spend several million
dollars in 5 minutes.
The Chairman. We do that here all the time.
[Laughter.]
Mr. Clarke. I think, as a general principle, programs that
focus on bottom-up change can often be more effective than
programs that just focus on top-down change.
One example that I might give is, say, legal aid programs
in China. Not only simply money to fund legal aid programs, but
also money to fund training of people who are doing legal aid,
for example, clinics in law schools and things like that. That
is a kind of a bottom-up approach.
I think there is a great thirst for that kind of assistance
and knowledge in China. I think that assistance does not look
too political and would be welcomed by people in China also.
Mr. Fiedler. I share Don's view on legal aid, but I am
fearful that as those folks get more effective, that is being
demonstrated now in rural areas and in some cases with workers,
that they are shut down by the government, that they are
arrested, that they are intimidated.
I think, to step outside the realm of labor stuff for a
moment, it would be enormously helpful if every time a U.S.
businessman were asked for a bribe or to do something illegal,
that they reported it to the Party Disciplinary Committee.
That is the only section of the Party that I might help
these days. The issue of corruption is what is undoing most
everything in that country. It is undoing a great deal of
business, it is undoing people's ordinary lives.
The simple training of judges, the looking at of this,
that, and the other thing, all these technical aspects of legal
systems are insufficient.
Now, the problem is, that requires political will and it
requires power, and apparently even someone as powerful as Zhu
Rongji threw up his hands after a while on this problem.
Mr. Aldonas. Mr. Chairman, if I could just sort of add to
what Mr. Fiedler was saying. I think we may have identified one
of the sorts of things we should do on the trade front, which
is try and encourage China to become part of the WTO Government
Procurement Code, precisely because it forces that level of
transparency on the procurement process.
Thank you very much. I appreciate it.
The Chairman. Yes. That was very informative.
I am a little concerned with the dialog--what the
benchmarks should be and how to measure progress. The basic
answer I got from two of you, is, gee, it is pretty hard, I
don't know if it can be done, and so forth.
It seems to me that we have got to try harder.
It seems to me that with the rule of law, two main precepts
are transparency and consistency, and that there are some
measurements that we can develop. You also mentioned in
response to Secretary Aldonas' questions some areas where more
funds might be useful. That implies, at least, an area that
perhaps can be measured a little bit.
I am just wondering if I can press you both a little bit
more to try to give us ideas of what we might be looking at in
terms of quantifying progress.
Mr. Murck. I think progress can be discernible. The problem
is to quantify it. The way I would look at this, for example,
in my written testimony I discussed at some length the question
of protecting intellectual property rights, which is a major
issue for the business community.
I think, in general, the business community in China has
agreed that extraordinary progress has been made in the last 3
years on this front in terms of----
The Chairman. And it took a lot of work, too.
Mr. Murck. It took a great deal of work.
The Chairman. And a lot of pressure by this committee and
this Congress over the years, and by several Administrations.
Mr. Murck. There has been sustained pressure by several
Administrations. What has happened in the last several years,
is that we are convinced that the senior levels of the Chinese
Government are now fully understanding of the point that
intellectual property rights violations damage their own
economy and their own companies more than they damage foreign
companies and are a major barrier to further economic progress
and economic growth.
That battle has clearly been won. The laws that are now in
place after the recent revisions of the trademark and copyright
laws, and patent laws, still have some defects but are
basically reasonably acceptable.
The problem we have, is driving this down into local levels
and getting it enforced consistently by police and courts
across a very large country.
On that score as well, there has been some progress. For
example, the leading anti-counterfeiting group in China is the
Quality Brands Protection Committee, which this year held a
ceremony in Beijing and made a selection from all of the court
cases, hundreds of them that its members had brought over the
course of the year, and actually selected 10 and brought the
relevant prosecutors to Beijing and gave them a certificate and
a nice weekend in Beijing, and some time on television to
publicize the fact that it is now possible to go to the court
system for recourse and to put violators in jail. So, on that
score, we are doing reasonably well.
There is a great deal more progress to be made on that
front, and we have to fight it out at the local level, training
people in groups of 20 and 30, looking at hot spots, and trying
to make this system work more efficiently.
We poll American companies every year and ask them what the
losses are because of counterfeiting. The answer, today, is 15
or 20 percent of revenue, which is what it was 3 to 5 years
ago. When we see that number start to go down, then I think we
will have one indication, at least in this area, that we have a
more effective legal system.
The Chairman. Right. Right. Right.
What are your thoughts about the next generation? I met
Vice President Hu Jintao when he was here about a month ago. He
struck me as being very direct, forthright, professional.
I am curious whether you think this next generation is any
different or not and what will happen when Hu, presumably,
becomes President of China.
Mr. Murck. I think it is very hard to discern at this point
anything about Mr. Hu personally. In terms of the generations,
the incoming generation of leaders is about 15 years younger.
They are much more technocratic. They are much more
international in their thinking.
There will be basic continuity of policy direction. Whether
or not the policy direction will be accelerated, I think,
remains to be seen. There are those who are hopeful that it
will be and others who feel that it will not be. I cannot
really predict how that will come out.
My biggest worry in China is actually not that incoming
generation of leaders, nor is it the young people. I think the
young people are extraordinary and are very much aware of the
opportunities that the future holds for them.
My worry is the generation that was born in 1950 which
experienced the famine at the age of 7 to 10, which got to the
age of 15 and found the school system closed down, which then
went into a state-owned factory and worked for 25 years or so,
and in their early 50s they are now being laid off because
those enterprises are collapsing.
That generation is not going to benefit from the new growth
that the Chinese reform process is generating. In my view, the
only way to deal with that is to create new social safety net
institutions to take care of them.
That is why WTO and the rest of the shift to the private
sector is, in my view, part of the answer rather than part of
the problem because you are going to have to have a group of
viable companies generating a profit that can be taxed in order
to deal with the huge social problems that arise because of
that generation which, frankly, has had a very bad deal their
entire life.
The Chairman. Thank you. We are going to have to adjourn.
There is a vote going on, and the House Members have informed
me they are unable to come back from their vote.
This has been, by far, the most constructive session of
this Commission, and I thank all six of you panelists for being
a part of that effort and helping to make this such a useful
hearing.
We have a lot of work ahead of us. This was very thought-
provoking and very, very helpful. Thank you very much.
The Commission is adjourned.
[Whereupon, at 4:56 p.m. the hearing was concluded.]
A P P E N D I X
=======================================================================
Prepared Statements
----------
Prepared Statement of Jon M. Huntsman, Jr.
june 6, 2002
Thank you for inviting me to appear before you today to discuss the
Administration's perspectives on the United States' trade relationship
with the People's Republic of China and, in particular, the topic of
China's WTO implementation. It gives me great comfort sharing the stage
with two respected colleagues whom I deem it an honor to be associated
with.
china and its wto commitments
China's accession to the WTO was a decisive victory for reform in
China. China's reformers clearly understand the values and benefits of
openness in the economic sphere, and that is why they pursued WTO
membership. They know that WTO membership will help them transform
China's economy--and many hope and believe China's society generally--
in positive ways.
This Administration, like the previous Administration, worked
closely with China's reformers throughout the many years of WTO
accession negotiations. The result was a comprehensive set of
commitments, with which this Commission is familiar.
With the negotiations now over, we have continued to work with
China's reformers in the next phase of this process, as China embarks
on the enormous task of implementing the numerous WTO commitments it
has made. Clearly, implementation is, and will continue to be, a major
challenge for China and its reformers. They must find ways to ensure
that recalcitrant ministries, State-owned enterprises and provincial
and municipal authorities all act in conformity with China's WTO
commitments.
But, China's leadership appears prepared to take on this challenge.
It is committed to make China competitive in the international economic
arena in the 21st century. It knows that it needs to develop a market
economy compatible with the WTO's rules for this to happen. It also
knows that there will be a price to be paid as this transition takes
place.
The ability of China to meet this challenge and implement its WTO
commitments in full will depend on the outcomes of several sets of
dynamics.
Internal government coordination
As we have anticipated, and as we have seen at times during the
first 6 months of China's WTO membership, there will not always be
agreement among the central government's ministries on WTO compliance
matters. Some of the ministries are reform-minded and generally
understand the benefits of full compliance with WTO rules. The Ministry
of Foreign Trade and Economic Cooperation (MOFTEC), which had the lead
in the WTO negotiations, is one example. But, other ministries,
particularly those with proprietary functions or a domestic focus, may
be less interested in, and even resistant to, full compliance. In
certain circumstances, they will be more inclined to seek ways to
protect their and their constituents' existing rights and privileges,
and so they will present a particular challenge to the implementation
process.
Center versus periphery
We have also anticipated a similar set of dynamics involving the
central government and the localities. While some provincial and
municipal authorities appear to see immediate benefits in complying
with WTO rules, others do not see these benefits or simply do not yet
understand WTO rules. Historically, Beijing's influence has not
extended uniformly over local authorities, and at this point the
breadth and extent of this influence vis-a-vis China's WTO commitments
remains unclear.
Realistically, we can expect some non-compliance as these internal
struggles take place. It is also quite possible, if not probable, that,
independent of these internal struggles, China will simply be unwilling
to live up to a particular WTO commitment. As you know, we still have
compliance problems with longstanding WTO trading partners, and there
is no reason to expect that China will be different.
Short-term score card
Looking back on the first 6 months of China's WTO membership, we
have seen China take a good faith approach to its WTO membership and
make significant efforts to implement its commitments. China has made
substantial tariff reductions on industrial and agricultural goods of
importance to U.S. businesses and farmers. It has begun to take
concrete steps to remove non-tariff trade barriers in virtually every
product sector. It has begun to implement far-reaching services
commitments that should substantially increase market access for U.S.
services suppliers. It has also repealed hundreds of trade-related
laws, regulations and other measures and modified or adopted numerous
other ones in an effort to become WTO-compliant in areas such as import
and export administration, standards and intellectual property rights,
among many others.
With the aid of the United States and other WTO members and the
private sector, China has also embarked on an extensive campaign to
educate central and local government officials about both the
requirements and the benefits of WTO membership. This is an important
initiative that should help to foster fuller compliance with China's
WTO commitments.
There have also been some bumps in the road, such as the delayed
and flawed allocation of tariff-rate quotas, trade-distorting
biotechnology regulations, inadequate adherence to commitments
benefiting foreign insurers, and restrictive measures in the area of
express delivery services. These are important issues, and we have been
using all available and appropriate means to obtain China's full
compliance. Working closely with the affected U.S. industries, we have
been addressing these and other issues vigorously through bilateral
means at all levels of the U.S. Government. We have also
multilateralized these efforts, where possible, by working with like-
minded WTO members on an ad hoc basis, both in Geneva and Beijing,
where particular issues are having an adverse impact beyond the United
States. WTO dispute settlement procedures also remain available as a
tool for resolving these issues.
Finally, we should keep in mind that we are only 6 months into
China's WTO accession. China's WTO implementation is a long-term
process, with major transformations required of China's trade regime
and many important Chinese commitments, such as trading rights and
distribution services, to be phased in over the next few years. We
should continue to be comprehensive in our review of China's
implementation efforts, but we should also realize that implementation
is a complicated and ongoing process.
u.s. inter-agency monitoring process
Now, let me say a word about the U.S. inter-agency monitoring
process.
Given China's importance as a major trading power and the breadth
and complexity of China's WTO commitments, the Administration has set
up a comprehensive inter-agency monitoring effort to determine the
extent to which China is complying with those commitments. USTR's China
Office is coordinating this initiative, which is being formally
overseen by a newly created Trade Policy Staff Committee (TPSC)
subcommittee whose mandate is devoted exclusively to China and the
extent to which it is complying with its WTO commitments.
All TPSC agencies have been invited to participate in this newly
created subcommittee. The subcommittee held its inaugural meeting on
December 4, 2001, and, since then, has met on a monthly basis as it
evaluates and prioritizes the monitoring activities being undertaken,
reviews the steps that China has taken to implement its commitments and
decides on appropriate responses.
The activities being overseen by the subcommittee are taking place
on several fronts, with continual private sector involvement. In China,
State Department economic officers, Foreign Commercial Service
officers, Foreign Agricultural Service officers and Customs attaches
are very active, gathering and analyzing information, maintaining
regular contacts with U.S. industries operating in China, maintaining a
regular dialog with Chinese government officials at key ministries and
agencies, and working with personnel from like-minded Embassies of
other WTO members. In Washington, an inter-agency team of experts,
coordinated by USTR and including principally the Departments of
Commerce, State, Agriculture and Treasury and the U.S. Patent and
Trademark Office, is working closely with personnel from the U.S.
Embassy and Consulates General in China as well as with U.S.-based
trade associations and companies. Finally, at the WTO in Geneva, USTR
has been active in voicing concerns about, and working with other WTO
members to address, problems with China's implementation efforts as
they arise.
USTR and other agencies will also be active participants in the
WTO's annual Transitional Review Mechanism, which I will discuss next.
the wto's transitional review mechanism
Consistent with the terms of China's accession agreement, a unique
multilateral review mechanism known as the ``Transitional Review
Mechanism'' has been created. It calls for a detailed review of China's
WTO compliance annually for the next 8 years, with a final review in
year 10. It requires China to provide detailed information to WTO
members for purposes of this review mechanism. It also gives WTO
members the opportunity to raise questions about how China is complying
with its commitments, and it calls on China to submit responses to
these questions.
Each year, the review will be conducted initially in 16 WTO
committees and councils. Each of those bodies will review
implementation matters within its mandate and then report on the
results of its review. Ultimately, the WTO's highest body, the General
Council, will consider these reports and then make recommendations to
China about its implementation efforts.
The new TPSC subcommittee addressing China's WTO compliance will be
working closely with existing TPSC subcommittees that focus on the
regular work of the WTO bodies to coordinate U.S. participation in the
Transitional Review Mechanism, which this year will begin with meetings
in September. Together, these TPSC subcommittees will solicit input and
advice from industry and actively press U.S. concerns about China's
implementation efforts.
Currently, we are working with China and other WTO members to make
the Transitional Review Mechanism as thorough and meaningful as
possible. It is a new mechanism at the WTO, and we need to resolve
various logistical matters and procedures to implement it properly,
such as the dates of meetings and the time-deadlines for China to
submit relevant information and to respond to other WTO members'
questions. To that end, we have been holding formal and informal
discussions in Geneva. These discussions have not gone as quickly as we
would have liked, in part because the Chinese delegation is still
trying to become familiar with WTO practices and procedures.
Nevertheless, we hope to resolve these matters soon.
conclusion
Mr. Chairman and members of the Commission, thank you for providing
me with the opportunity to testify. I look forward to answering your
questions.
______
Prepared Statement of Grant D. Aldonas
june 6, 2002
Chairman Baucus, Co-Chairman Bereuter, members of the Commission,
thank you for the opportunity to appear before the Congressional-
Executive Commission on the People's Republic of China. I welcome the
Commission's interest in China's compliance with its World Trade
Organization (WTO) obligations, particularly as it relates to the
development of the rule of law in China.
I am pleased to be joined on this panel by Deputy United States
Trade Representative Jon Huntsman and GAO Managing Director Susan
Westin. Jon, of course, brings many years of experience in trade with
China. This is the sort of practical experience that is at a premium at
this critical juncture in our relationship with China, where so much
depends on ensuring that we see the benefits of our bargain. I had the
great pleasure of working with Susan over the last several years, first
during my tenure as Chief International Trade Counsel to the Senate
Finance Committee at the time of Congress' passage of permanent normal
trade relations (PNTR), and now at the Department of Commerce. Susan
and the GAO have become true partners in the effort to ensure both
China's compliance with the WTO and Congress' ability to provide
effective oversight of that process.
Secretary Evans and I both traveled to China in April to observe
firsthand China's implementation of its commitments under the WTO. We
emphasized two points. The first was that our commercial relationship
provides the foundation for our broader bilateral ties. WTO compliance
has become the single most important measure of our bilateral
commercial relationship. In other words, early, transparent, and
measurable progress on compliance is the primary goal in our bilateral
trade relationship. The second point we raised may prove still more
important in the years ahead--that is the inescapable link between WTO
compliance and the development of the rule of law in China.
china's wto compliance and the development of the rule of law
Observance of the law in any society must become a habit--it must
be woven into the fabric of social relationships. Commerce is one of
the primary means by which members of a society build those bonds of
common trust that allow a society to function and provide a guarantee
of freedom and basic human rights.
With language bequeathed to us by a long-dead economist, we tend to
talk about the changes in China as a departure from socialism or the
advent of capitalism. As has often been the case in the long, sad
history of socialism, the language of Marx obscures more than it
reveals. To talk of what has happened in China simply as the advent of
capitalism on the one hand, or ``socialism with Chinese
characteristics'' on the other, misses a more fundamental point. The
point is that, from bitter experience with collectivization, the Great
Leap Forward, and the Cultural Revolution, the Chinese have been forced
to confront the fact that all good things in the economic sphere flow
from one root cause--human freedom.
Therein lies the most important part of the economic equation that
the Chinese are currently trying to solve. To reach a higher standard
of living, the Chinese government has been forced to embrace human
freedom as the engine that drives both economic growth and innovation.
The Chinese leadership has demonstrated a willingness to foster
significant changes in Chinese society in pursuit of a higher standard
of living. Those changes have been under way for over two decades,
during which time China has lifted between 100 to 200 million people
out of poverty.
Significantly, living economists have come around to a very
different view of the role of government in the economy than existed at
the time of either Adam Smith or Karl Marx. Views have changed
regarding the role government plays in contributing to economic growth.
On the one hand, there should be little doubt, given the many examples
we have worldwide, that strong government is essential to a functioning
market economy. On the other hand, what has become equally clear is
that there must also be strong constraints on the government's ability
to intervene in the market and upset the free rein of market forces.
Government's role is to create the environment in which individuals can
pursue their own best interest, not to intervene on the assumption that
the government knows better than individual citizens what is best for
them.
What role then does adherence to the WTO and the development of the
rule of law play in solving that equation? In my view, the Chinese
leadership's willingness to undertake reforms in their country's own
economic interest extends to compliance with China's WTO obligations.
The acid test will, of course, be whether their willingness to
implement China's commitments translates into action.
How that relates ultimately to the development of the rule of law
generally is, in my view, simple and direct. While we should not
oversell the ability of the WTO, in and of itself, to foster
fundamental change in China, we should not, at the same time, overlook
or devalue the positive contribution China's adherence to the WTO can
make. In adhering faithfully to the WTO, the Chinese government will,
in the process, set a profound example for its own citizens about the
benefits that flow from honoring the law.
I fully expect that the WTO principles of transparency, judicial or
administrative review of executive action, and non-discriminatory
treatment will have a direct impact on the development of the law in
China. Accession to the WTO will further the development of an
impartial judiciary, neutral regulatory bodies, transparent legal
processes, and regularity in the administration of law in China. To the
extent that entry into the WTO reinforces the development of the rule
of law in China, it does suggest broader lessons for China's leadership
as they attempt to build a new foundation for Chinese society.
Let there be no doubt that the United States intends to play a
constructive role in that process. It is in both our commercial
interest and our interest in a peaceful, more stable world to see China
succeed in honoring its WTO commitments and in building a stronger
foundation for China's future based on the rule of law.
We can help most at a very practical level. As I said earlier,
observance of the law must become a habit. We can contribute to that
process by ensuring that we raise our commercial problems as quickly as
they surface and ensure that China strengthens its record on WTO
compliance at every opportunity. In the process, we will make three
important contributions. First and foremost, we will vindicate the
bargain we reached with the Chinese at the negotiating table and ensure
that our exporters have access to the market per the WTO agreement.
Second, we will avoid turning every dispute into potential litigation
at the WTO, with all that implies in the way of both politics and delay
in real market access. Third, we will also help by demonstrating that
the habit of observing the law is profoundly in China's interest, as
much as ours.
In practice, both the commercial importance and the broader
significance of WTO compliance has led to a natural emphasis within the
Administration on two different processes. One is the ongoing effort to
monitor China's compliance efforts. The other is developing a program
of technical assistance that contributes both to the goal of compliance
and, consistent with that goal, the development of the rule of law. It
is to those two topics that I would like to turn.
monitoring compliance efforts
From the perspective of American exporters, China's accession to
the WTO represents the most significant market-opening initiative since
the North American Free Trade Agreement (NAFTA) and the Uruguay Round.
But, the advantages of China's accession will only be guaranteed by a
vigilance and a willingness to promote American exports aggressively in
the Chinese market.
I have testified before Congress that our efforts to assist China
in implementing its commitments are guided by two principles: (1)
China's implementation of its WTO obligations is the key issue in our
bilateral trade relations; and (2) early detection and resolution of
problems is necessary to avoid protracted trade disputes.
We emphasized the importance of implementation in April when
Secretary Evans led a business development mission to Beijing and
Shanghai to help American companies take advantage of the opportunities
that China's membership in the WTO will bring. He met with President
Jiang and other senior leaders as well as his Chinese counterpart as
part of the Joint Commission on Commerce and Trade, which he chairs for
the U.S. side, to drive home the message about the importance of timely
and transparent implementation of each of China's commitments under the
WTO.
Three weeks prior to Secretary Evans's trip, I was in China myself
leading a delegation of senior professional staff from the House and
Senate, many of whom worked on the Congressional passage of Permanent
Normal Trade Relations (PNTR) and are experts on trade matters. They
participated in all of my meetings in Beijing and Shanghai. By doing
so, they underscored for the Chinese the important role that Congress
will continue to play throughout the WTO implementation process. The
subtext--and an important point to have made--was that there is no
daylight between the Administration and the Congress when it comes to
China's implementation of its WTO obligations.
At the Ministry of Foreign Trade and Economic Cooperation
(MOFTEC)--our counterpart agency--we met with Minister Shi and Vice
Minister Ma. MOFTEC appears to have the best of intentions for tackling
a very tough job. We need to do what we can to help them--especially in
terms of our work with other central government agencies as well as
with provincial authorities. We met with officials from the State
Development and Planning Commission, the Ministry of Information
Industry, the National People's Congress and local officials in
Shanghai. I also discussed WTO issues with local officials in Guangzhou
and Shenzhen. There is a clear recognition of the enormity of the task
the Chinese leaders want to accomplish. I was impressed by the level of
knowledge and familiarity that our interlocutors had with the WTO
agreements and China's accession commitments.
We also talked with American businesses at functions organized by
the American Chambers of Commerce and the U.S.-China Business Council
and visited U.S. company facilities and one Chinese state-owned
enterprise. We met with representatives of the Shanghai Film Studio,
where we were told that piracy of optical disks was hurting their sales
in China. It was fascinating to discover that we have a new ally in our
work to enhance enforcement of intellectual property rights (IPR)
protection in China and elsewhere. We saw the Shanghai Model Port
Project--an APEC initiative that demonstrates how Customs officials can
use technology to facilitate trade and protect IPR. I thank U.S.
Ambassador to APEC Larry Greenwood for suggesting that we visit this
facility. We went to the WTO Affairs Consultation Center, where Chinese
officials are being trained in different aspects of the requirements of
WTO membership. Members of my delegation and I were invited to come
back and help them teach classes, and I look forward to doing so in the
future. Capacity-building is extremely important, and I'll discuss this
momentarily when I focus on technical assistance.
I took every opportunity to underscore the importance that both we,
in the Administration, and Congress attach to WTO compliance. Bringing
a strong delegation from the professional staff of the Senate Finance
and House Ways and Means Committees helped demonstrate that point for
our Chinese hosts. Our delegation was, in and of itself, a
demonstration for Chinese officials of the importance that both the
executive and legislative branches of our government place on WTO
implementation. I plan to travel to China roughly every 6 months
between now and 2005 to continue that process and I hope to take a
delegation of Members of Congress or staff with me as often as
possible.
Our efforts must, of course, extend beyond high-level attention. We
need to ensure that we have dedicated our resources to the steady, day-
to-day accumulation of successes. Where the rubber meets the road in
that regard is the efforts of our Foreign Commercial Service officers
on the ground in China. The Foreign Commercial Service's representation
in China is the largest delegation of what I like to refer to as our
``commercial diplomats'' of any country in the world. We divide our
staff in mainland China into five sections (Beijing, Shanghai,
Guangzhou, Chengdu, and Shenyang), and have another office in Hong
Kong. The staff in mainland China comprises 18 officers and an
additional 66 foreign service nationals and contractors. In cooperation
with State Department Economic officers, Foreign Agriculture Service
officers, and Customs attaches, Commercial Officers monitor China's WTO
implementation efforts and help organize training programs to educate
Chinese officials and business leaders on China's WTO commitments. In
addition, Commercial Officers continue to provide the export promotion
services of the Commercial Service, including counseling, market
analysis, advocacy, and an array of services chiefly aimed to benefit
small- and medium-sized exporters.
In March 2002, the Department of Commerce opened a Trade
Facilitation Office (TFO) in Beijing to support and coordinate
compliance activities in both Beijing and Washington and to act as an
``early warning'' system. This office will be staffed by two Market
Access and Compliance (MAC) officers and two Import Administration (IA)
officers. Maintaining close contact with American firms doing business
in China and with Chinese officials, these officers will be able to
help resolve commercial disputes before simple misunderstandings can
escalate into a point of principle on one side or another. These
officers will monitor and report on disputes--the primary indicia of
implementation problems. In addition, these officers will serve as on-
the-ground experts to answer technical questions from U.S. and Chinese
government officials and business representatives. The TFO works
closely with the whole China Compliance Team in Beijing and Washington,
and while security clearances and training are being finalized for the
four compliance officers, the office is being staffed by detailees from
the China Compliance Team.
We also have augmented our staff working on China in MAC's Trade
Compliance Center and on the China desk. Just 2 years ago, we had only
five people in MAC's Office of the Chinese Economic Area (OCEA). We
added six new officers to OCEA in fiscal year 2001 and are adding five
more in fiscal year 2002. Combined, the nine officers currently in this
office have approximately 40 years of expertise working on trade
issues. This office is tasked with the job of monitoring China's
compliance with its WTO commitments, coordinating technical assistance
to China, addressing trade problems as early as possible, and promoting
new trade opportunities for U.S. exporters.
As management tools, MAC maintains two important data bases. The
first tracks compliance, market access and commercial disputes in
China. Our staff in Washington and China routinely update the data base
so that we can efficiently track these cases and share real-time
information. The second data base contains information on the training
programs designed to help China implement its WTO obligations that are
offered by the Department of Commerce, other agencies, academia, other
governments, multilateral organizations and non-governmental
organizations. We are monitoring other assistance efforts to avoid
duplication, identify training needs and note other countries' programs
that may favor competing ways of doing business. In addition to sharing
information through data bases, our Washington staff is in daily
contact with our staff in China--through e-mails, phone calls, and
travel. Over the last 3 months, 10 members of our China Team have been
able to visit China for at least 10 days.
IA has established a team dedicated to monitoring compliance with
China's WTO commitments on trade remedies and unfair trade practices.
IA keeps track of China's use of antidumping and countervailing duty
laws, monitors and analyzes its subsidy programs in relation to WTO
disciplines, monitors imports for unusual trends, and provides a point
of contact for U.S. companies that believe they face potential unfair
trade problems arising from the Chinese market. These efforts, led both
by technical experts in Washington and, soon, the overseas-based IA
officers in the TAO, provide in-country support for the administration
of U.S. antidumping and countervailing duty proceedings as well as
close coordination with other offices and agencies to proactively
identify and resolve problems before they develop into unfair trade
disputes. The IA team also provides a point of contact for Chinese
government and business representatives to obtain information and
technical assistance about trade remedies.
ITA's Trade Development (TD) unit has undertaken a thorough review
of China's tariff schedule and continues to work closely with industry
to ensure that all obligations are fully implemented. TD's industry
specialists allow us to follow China's implementation efforts on a
practical level, knowing the day-to-day problems that U.S. companies
might encounter.
To coordinate Commerce's action on China's implementation of its
WTO commitments, the Department of Commerce has developed a China
compliance team that meets internally twice a week. The goal at this
stage is to make judgments as to whether and when we need to raise
issues directly at a political level with our Chinese counterparts to
get appropriate action.
To strengthen the force of our efforts, Commerce works hand-in-hand
with other agencies through the Trade Policy Staff Committee
subcommittee on China WTO Compliance, which meets on a monthly basis to
review China's progress with WTO implementation and potential WTO
compliance issues; to strategically coordinate USG agencies' WTO
implementation and compliance work; and to decide on appropriate
responses when problems arise. We are working closely with USTR and the
State Department to track China's specific WTO commitments and to raise
any potential concerns. We are working closely with industry to ensure
that all obligations are fully implemented.
China has committed itself to a number of major reforms. Of these,
none is more critical than its obligation to allow for public comment
before new laws, regulations or other measures are implemented. By
allowing for input from industry and other affected parties, the
Chinese can achieve regulatory and economic goals in a manner that
facilitates rather than inhibits business. We are watching China's
efforts to revise, create or rescind laws and regulations and are
providing comments on draft regulations. We meet with MOFTEC regularly
and consult with other Chinese Government entities. For instance, we
recently intervened with the State Economic and Trade Commission with
regard to regulations that could have prohibited companies from using
independent contractors to provide a myriad of services in a flexible
manner.
Beyond those standing functions, Secretary Evans has committed to
send one senior Commerce official to China every month for the
foreseeable future to check up on our implementation and trade
promotion efforts. I am leading that effort with help from the
Assistant and Deputy Assistant Secretaries at the Department. The
commitment of those senior resources further reflects the priority we
place on China's implementation of its commitments.
technical assistance
Compliance, of course, is not just the threat of retaliation for
the failure to implement trade agreements. In many instances,
compliance has as much to do with encouraging a greater understanding
of the WTO rules and their purpose. Dr. Supachai, who will begin
serving as the Director General for the WTO in September, has said that
he is concerned that ``the WTO doesn't have the resources to provide
all the know-how that China requires.'' To help fill that gap, we are
working with the WTO as well as with other countries and the private
sector to monitor compliance and to provide technical assistance to
China.
By joining the WTO, a rules-based international trading system,
China has agreed to implement systemic reforms designed to establish a
more transparent and predictable regime for business dealings. Though
China's phased-in implementation of its WTO commitments will make the
market more conducive for U.S. companies, the process will be
challenging. China has begun the process of creating, revising and
eliminating thousands of laws, regulations, and rules at the central,
provincial and local levels.
During my recent visit to China, I heard repeated requests from
Chinese officials for joint cooperation on technical assistance and
training programs. Effective technical assistance programs can help
China better understand what a particular WTO commitment means in
practice, so that compliant legislation and practices are put in place,
not just in Beijing, but throughout China. This will help China comply
with WTO commitments in a timely manner, which should reduce the number
of problems we will have to handle in the future.
Toward that end, in addition to tracking capacity-building
programs, we are, with help from a variety of other agencies,
conducting a series of WTO compliance seminars in China. This technical
training is designed to disseminate as much information as possible
regarding the practical implications of the WTO agreements to Chinese
officials both in the central government and in the provinces. The
seminars to date have focused on those areas, such as intellectual
property and standards, in which we have had particular problems in the
China market in the past.
Even before China became a WTO member, our training team traveled
to Beijing and Shanghai to review China's WTO obligations with Chinese
officials and the resident U.S. business community in important areas
including standards, intellectual property rights and anti-dumping
requirements. In early 2001, a half-dozen sessions were held in
Washington for Chinese officials, on topics ranging from e-commerce
regulation to corporate mergers and acquisitions, to WTO anti-dumping
rules. These sessions have continued through this year.
Last year, our China Team officers traveled to China with the
American National Standards Institute for seminars in Beijing and Xian,
organized IPR Enforcement Training sessions in Shenyang, Hangzhou, and
Xiamen, and conducted seminars on information technology and
telecommunications equipment standards and testing issues in Beijing. A
medical equipment standards program was held jointly with the medical
device Global Harmonization Task Force in Kunming in September.
Now that China has joined the WTO, ITA is sponsoring a series of
more than half-a-dozen technical assistance programs in fiscal year
2002, including training in sector-specific areas, as well as more
general rule of law issues. This year we've already conducted a program
on the Rule of Law for Distribution and Franchising in Beijing,
Shanghai and Guangzhou, an IPR Enforcement Training session in two
Chinese cities to follow up on last year's successful IPR seminar and
program on the impact of WTO on the telecommunications sector in Xian.
In April, Secretary Evans and Minister Shi agreed to enhance our
cooperative training efforts. At the plenary session of the U.S.-China
Joint Commission on Commerce and Trade, the two sides announced plans
for future training programs on the impact of WTO on the semiconductor
industry, pharmaceutical standards and intellectual property
protection, environmental technologies, antidumping procedures and
trade facilitation through logistics improvements. The co-chairs also
announced plans for a potential TDA grant to fund a WTO e-learning
program that will provide guidance to both Chinese government officials
and citizens on WTO implementation. We are also exploring a website in
China for Chinese officials and U.S. businesses, which will provide WTO
implementation and compliance guidance.
Our commercial officers who work in ITA's Foreign and Commercial
Service unit at the U.S. Embassy and our consulates also have a strong
outreach program in place, including a general WTO introduction
seminar, which they have conducted in 12 provinces, and an IPR seminar,
which they have conducted in every province. FCS officers are also
organizing digital video conferences on WTO issues between the Shanghai
WTO Affairs Consultation Center and U.S. experts in different fields.
Many of the IPR programs have been joint efforts between ITA and
the U.S. Patent and Trademark Office (USPTO). Jim Rogan, the Under
Secretary of Commerce for Intellectual Property and Director of the
United States Patent and Trademark Office, and I have worked closely
together these past months on various IP initiatives. For example, last
month USPTO in conjunction with the U.S. Consulate/Hong Kong, hosted a
digital video conference with a group of judges from Jiangsu Province
attending a WTO training program in Hong Kong. USPTO and ITA also are
planning another IPR enforcement training program for September; a
program on technology transfer and intellectual property protection in
the fall, and a program on judicial enforcement of IPR in the fall. Jim
advises me that USPTO has also undertaken a number of other initiatives
in support of U.S. efforts--including hosting a number of digital video
conferences with various U.S. consulates and Chinese counterparts on
timely intellectual property matters, and a planned detail of a USPTO
attorney advisor to the U.S. Embassy in Beijing to advise on
intellectual property matters during July and August 2002. USPTO also
is working closely with other foreign IPR offices, such as the European
Patent Office and Japan Patent Office, in areas where mutual assistance
can make their efforts more effective.
My recent trip helped me assess what more we could be doing and
where we need to focus our training efforts in the future. There is
much more we could do to help China reform its commercial legal system
and to help China implement its WTO commitments. The China PNTR
legislation contained an authorization for the Department of Commerce
to establish a program to conduct rule of law training and technical
assistance related to commercial activities in China, and we are
evaluating how best to employ our resources to satisfy that.
The Commerce Department has demonstrated expertise in assisting
other countries to develop their commercial legal systems. Through our
Commercial Law Development Program (CLDP), we have trained lawyers,
judges, and government officials throughout Eastern Europe, the former
Soviet Union, in Africa and elsewhere in Asia to promote commercial
law. And we would like to do the same in China.
Effective programs can help China efficiently implement its market
opening concessions which means greater market access for U.S. firms.
Other nations--Japan, the EU member states, Canada--all have
substantial programs in place. At this Commission's staff roundtable on
May 24, the Asia Foundation's Vice President and Washington Director
Nancy Yuan testified that it is non-governmental organizations (NGO's),
rather than the U.S. Government, that have taken the lead in conducting
on-the-ground rule of law programs in China. She also noted that the
assistance provided by U.S. NGO's, is ``nowhere on the scale of
assistance provided by European and other donors.'' As a practical
matter, the Chinese are faced with choices: do they adopt a U.S., an
EU, a Japanese, or another approach to regulation and the rule of law?
Though all these systems may be WTO-compliant, China's utilization of
the U.S. approach to matters like standards will benefit U.S. firms.
Just as I regard the CLDP program as one of our ``best practices,''
I would like to call your attention to another. The International Trade
Administration hosts an AID-funded program called the Business
Information Service for the Newly Independent States (BISNIS), which
serves as a resource for U.S. companies which want to do business in
the countries which comprised the former Soviet Union. BISNIS could
serve as a successful model replicated to provide the same services for
China--a larger market with even greater potential for U.S. businesses.
The time to undertake this initiative is now--to ``fill in behind'' our
agreement in order to help U.S. companies gain from our negotiators'
hard work on China's accession to the WTO.
conclusion
China joined the WTO with an awareness that it would be difficult
to fulfill its commitments but with a resolve to do so. The Chinese
leadership pragmatically recognized that WTO membership would be
important for continued economic growth. Let us not forget that China's
economic progress in the last 20 years has been nothing short of
remarkable, and that the World Bank lauds China for accomplishing in
poverty reduction in two decades what has taken other countries two
centuries. Between 100 to 200 million people have been lifted out of
poverty; a country that knew scarcity now has an economy that boasts
surpluses.
Economists at the IMF estimate that, by the time China will have
been in the WTO for 5 years, its economy will have grown to be $26
billion larger than it would have if China had not joined the WTO. And
the IMF was only looking at the effects from tariff cuts. The impact of
new foreign capital flows will be even greater. China's annual average
of $40 billion in foreign direct investment is second only to that of
the United States. This has been one of the most important factors in
the transformation of the Chinese economy. To fully benefit from these
capital flows, China's financial and legal system must continue on the
path of reform. My counterpart at MOFTEC seems to fully understand
this. The WTO's requirements for legal consistency and fairness will
help further develop the rule of law in China--which will benefit our
companies as well as the growing private sector in China.
As President Bush said when he was in Beijing in February, ``China
is on a rising path, and America welcomes the emergence of a strong and
peaceful and prosperous China.'' In a global economy that is just
beginning to improve, we need China to serve as an engine of growth.
Beyond that, China's reforms can create a ``virtuous circle'' of
competitive liberalization in the region--after all, success breeds
success. This will encourage China's neighbors to undertake the hard
steps needed to improve transparency, corporate governance, and their
legal systems. At the end of the day, the rule of law--and the economic
freedoms that it brings--may be our most important export.
Mr. Chairman, Mr. Co-Chairman, to answer your question: Yes, I
believe that China can and will seek to keep its promises, and we
should do whatever we can to help. I thank you for devoting this
hearing to this important issue, and I welcome your questions now or at
any time. It is an honor to serve on this Commission.
______
Prepared Statement of Susan S. Westin
june 6, 2002
Mr. Chairman and Members of the Commission:
I am glad to have the opportunity today to discuss aspects of
China's development of rule of law\1\ practices that are related to the
commitments China made to the World Trade Organization (WTO), which it
joined on December 11, 2001. My observations address three areas: (1)
How elements in China's WTO accession agreement\2\ seek to improve the
rule of law; (2) What Chinese officials told us about their reform
efforts; and (3) What the U.S. business community has told us about the
importance of these efforts and their views on rule of law
implementation in China to date.
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\1\ Definitions of ``rule of law'' are varied. For purposes of this
testimony, we generally use it to describe a society in which law, for
the most part, guides people and the government in the conduct of their
affairs and constitutes the supreme legal authority, in contrast to the
authority of an individual ruler or a political party.
\2\ China's WTO commitments are documented in its (1) Protocol on
the Accession of the People's Republic of China, which contains the
terms of membership that China negotiated and affirms China's adherence
to the WTO agreements; (2) the Report of the Working Party on the
Accession of China, which contains additional commitments as well as
provides a narrative on the results of China's negotiations; and (3)
annexes containing market access commitments, which primarily cover
individual tariff lines for goods and schedules for various service
sectors.
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My statement today is based on our ongoing work; therefore, my
observations are preliminary in nature. As you know, both the Senate
Finance and House Ways and Means committees have asked GAO to conduct a
4-year body of work relating to China's implementation of its WTO
commitments. This includes analyzing China's final WTO commitments,
performing annual business surveys, evaluating China's implementation
of its commitments, and assessing executive branch monitoring and
enforcement activities. Our work to date has included two trips to
China; one trip to Geneva, Switzerland; numerous meetings with U.S. and
Chinese government officials; and an assessment of preliminary results
from a mail survey and structured interviews of U.S. companies doing
business in China. We are finishing our analysis and verifying our
work, and we plan to report the final results of our work in various
products by mid-October.
summary
Many elements in China's WTO accession agreement seek to improve
the rule of law. When China joined the WTO, China agreed to ensure that
its legal measures would be consistent with its WTO obligations. In our
analysis of China's WTO commitments, we found at least 60 commitments
that specifically obligate China to enact, repeal, or modify trade-
related laws or regulations. In addition, China has made a substantial
number of other WTO commitments related to the rule of law areas of
transparency, judicial review, uniform enforcement of laws, and
nondiscriminatory treatment.
Chinese government officials have emphasized their commitment to
make WTO-related reforms that will strengthen the rule of law. They
described how their efforts for reform go beyond China's WTO
commitments and include broad reforms of laws and regulations at the
national and provincial levels, as well as reforms of judicial and
administrative procedures. However, Chinese officials acknowledged the
challenges they face in completing the necessary reforms, including the
capacity of the government to carry out new functions in a timely
manner. In addition, despite an extensive training program about WTO-
related reforms throughout the country, officials identified the need
for outside assistance, because they lacked the expertise and capacity
to meet all their training needs themselves.
According to the preliminary results of our survey, U.S. businesses
in China consider rule of law-related WTO commitments to be important
to them, especially the consistent application of laws, regulations,
and practices in China, and enforcement of intellectual property
rights. However, a majority of businesses answering our survey
anticipated that these rule of law commitments would be difficult for
the Chinese to implement, and they identified some concerns over
specific implementation issues. U.S. businesses told us in interviews
that they expected WTO reforms, including those related to the rule of
law, to be part of a long-term process. Nevertheless, they believe the
Chinese leadership is dedicated to living up to their WTO commitments.
background
Rule of law reform must take place within China's legal and
political system, and any assessment of rule of law development should
be judged in the context of Chinese institutions. China's current legal
system is relatively new and is based, to a great extent, on the civil
law codes of Germany as adopted by Japan, and, to some extent on the
legal institutions of the former Soviet Union and China's traditional
legal system. Two important characteristics of Chinese legal
development since 1949 have been the subordination of law to Communist
Party policy and the lack of independence of the courts. Another
characteristic is the large number of legal measures used to implement
a law, including administrative regulations, rules, circulars,
guidance, Supreme People's Court interpretations, and similar local
government\3\ legal measures. China's central government laws,
regulations, and other measures generally apply throughout China.
Although local governments enact laws and regulations, these must be
consistent with central government measures. In 1996, a number of
China's top leaders emphasized the principle of administering the
country in accordance with law. Several years later, China amended its
constitution to incorporate this principle.
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\3\ Local governments include provinces, autonomous regions,
municipalities directly under the central government, other
municipalities, special economic areas, and counties.
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many elements in china's wto accession agreement seek to improve the
rule of law
A substantial number of the many commitments that China has made to
the WTO can be characterized as related to developing rule of law
practices. In a broad sense, China's WTO commitments suggest that in
its commercial relations China is on the way to becoming a more rules-
based society, contingent on the faithful implementation of its WTO
accession agreement. This agreement is highly detailed and complicated,
running to over 800 pages including annexes and schedules. It is the
most comprehensive accession package for any WTO member. As part of
this package, China agreed to ensure that its legal measures would be
consistent with its WTO obligations. About 10 percent of the more than
600\4\ commitments that we identified in China's accession package
specifically obligate China to enact, repeal, or modify trade-related
laws and regulations. These commitments cover such trade policy areas
as agricultural tariff-rate quotas, export and import regulation,
technical barriers to trade, intellectual property rights, and
nondiscrimination. In addition, by becoming a WTO member, China has
agreed to abide by the underlying WTO agreements, such as the General
Agreement on Tariffs and Trade, the General Agreement on Trade in
Services, the Agreement on Trade-Related Aspects of Intellectual
Property Rights and the Understanding on the Rules and Procedures
Governing the Settlement of Disputes.
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\4\ This number excludes market access commitments contained in
China's tariff and services schedules.
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China also has made a substantial number of important, specific
commitments in the rule of law-related areas of transparency, judicial
review, uniform enforcement of legal measures, and nondiscrimination in
its commercial policy. In the area of transparency, China has agreed to
designate an official journal for publishing trade-related laws and
regulations and to provide a reasonable period for public comment
before implementing them. China has also agreed to designate an enquiry
point where individuals, business enterprises, and WTO members can
request information relating to these published laws and regulations.
Transparency requirements and commitments to report information to the
WTO together represent about a quarter of the commitments we identified
in China's accession package. In the area of judicial review, China has
agreed to establish or designate tribunals to promptly review trade-
related actions of administrative agencies. These tribunals are
required to be impartial and independent of the administrative agencies
taking these actions. In the area of uniform enforcement, China has
agreed that all trade-related laws and regulations shall be applied
uniformly throughout China and that China will establish a mechanism by
which individuals and enterprises can bring complaints to China's
national authorities about cases of nonuniform application of the trade
regime. Finally, in the area of nondiscrimination, China agreed that it
would provide the same treatment to foreign enterprises and individuals
in China as is provided to Chinese enterprises. China also agreed to
eliminate dual pricing practices as well as differences in treatment
provided to goods produced for sale in China and those produced for
export. (See the appendix for examples of rule of law-related
commitments included in China's WTO accession agreement.)
chinese officials cite early reform efforts but recognize challenges to
implementation
Chinese government officials have stated their commitment to make
WTO-related reforms that would strengthen the rule of law. Furthermore,
China's plans for reform go beyond conforming its laws and regulations
to China's WTO commitments and include a broad legal review, as well as
reforms of judicial and administrative procedures. Chinese officials
with whom we spoke discussed the numerous challenges they face in these
areas and said that these reforms will take time to implement. They
also stated their need for outside assistance to help them with their
reform efforts.
Early reform efforts in three areas
First, Chinese government officials are in the midst of a
comprehensive, nationwide review of laws, regulations, and practices at
both the central and provincial levels. This review is to lead to
repeals, changes, or new laws. According to one report, Chinese
officials have identified more than 170 national laws and regulations
and more than 2,500 ministry regulations as being WTO related.
Officials whom we interviewed from the Ministry of Foreign Trade
and Economic Cooperation (MOFTEC) contend that generally China has done
a good job of implementing its WTO obligations to date. MOFTEC
officials said that complete implementation will take time and that
part of their role is to teach other ministries how to achieve reform
according to WTO commitments. They noted the importance of their
efforts to coordinate WTO-related reforms with other ministries because
Chinese laws tend not to be very detailed and, as a result, it is
difficult to incorporate the language of specific WTO commitments into
Chinese laws. Officials said that, consequently, Chinese laws will
sometimes use general, open-ended phrases that refer to WTO
commitments, such as the services annexes, while the detail is set
forth in the implementing regulations.
Provincial authorities are still reviewing their laws and
regulations to see if they are consistent with national laws.
Provincial-level officials told us that in some cases they were still
waiting for the national government to finish its legislative and
regulatory processes. This process will guide their own review of laws
and regulations at their level. Prior to their enforcement, provincial-
level laws, regulations, and other regulatory measures that implement
the central government's legal measures are submitted to the central
government for review. Chinese officials told us that they have found
many provincial regulations that did not conform to national laws and
regulations. MOFTEC officials estimated that it would take a year or
two to complete this entire reform process, while some provincial
officials estimated 2-3 years.
Second, China is undertaking reform of its judicial processes to
ensure that they are compatible with its WTO commitments. The Supreme
People's Court informed us that since China's accession it has been
revising hundreds of judicial interpretations about laws that do not
conform to WTO rules. It has also instructed the judiciary throughout
the country to follow the revised interpretations and to undertake
similar work at their respective levels. Officials told us that the
court is also involved in reforms related to the WTO areas of judicial
independence and uniform application of legal measures. For example,
with regard to judicial independence, in February of this year the
court issued new regulations to improve the adjudication of civil and
commercial cases involving foreign parties. Under these regulations,
mid-level and high-level courts, in contrast to the basic-level courts,
will directly adjudicate cases involving, among other subjects,
international trade, commercial contracts, letters of credit, and
enforcement of international arbitration awards and foreign judgments.
Furthermore, China recently amended its Judges Law to require that new
judges pass a qualifying exam before being appointed to a judicial
position.
Third, China is reforming its administrative procedures and
incorporating the rule of law into decisionmaking. About one third of
the commitments we identified in China's WTO accession agreement relate
to guidance about how a particular commitment should be carried out.
Officials told us that they are attempting to reduce the number of
layers necessary to approve commercial activities and to make these
processes more transparent. These actions can help implement rule of
law practices at the day-to-day level. These reforms are also still
underway at the central and provincial levels. For example, State
Economic and Trade Commission (SETC) officials told us that they have
identified 122 administrative procedures that must be changed to
conform to WTO rules but that 40 percent of these must still be
changed. In Shanghai, officials said that they have eliminated 40
percent of government approvals under their jurisdiction and that they
are working to make the remaining 60 percent more efficient.
Chinese officials acknowledge challenges
Some Chinese officials with whom we spoke acknowledged challenges
in completing all these reforms in a timely manner. These challenges
include insufficient resources, limited knowledge of WTO requirements,
and concerns about the effects on the economy of carrying out
particular WTO commitments. For example, Chinese officials said that
the effects of the changes needed to conform their tariff-rate quota
administration process to WTO requirements were so difficult that they
were unable to allocate the quota and issue certificates in time to
meet the deadlines set forth in China's WTO commitments. A number of
Chinese officials also indicated that it has been very difficult to
fulfill a WTO transparency commitment that requires China to translate
all its trade laws, regulations, and other measures into an official
WTO language-English, French, or Spanish. This difficulty is due in
part to the abundance of the materials to be translated and the highly
technical quality of many legal measures.
Chinese officials identified the need for more technical assistance
Many Chinese officials we interviewed emphasized the importance of
the steps they had taken at both the national and subnational levels to
increase the training of government officials about WTO rules. For
example, the State Economic and Trade Commission and the General
Administration of Customs said they have been holding training sessions
for over a year at the national, provincial, and municipal levels on
general WTO rules and China's WTO obligations. In addition, the
National Judges College plans to train 1,000 judges from local courts
across the country and send others for training abroad. Furthermore,
governments in Shanghai, Guangzhou, and Shenzhen have established WTO
affairs consultation centers that organize training and international
exchange programs for midlevel Chinese officials on implementing WTO
reforms.
Despite these efforts, Chinese officials acknowledged that their
understanding of WTO rules remains limited and that more training is
needed. According to several Chinese government officials we
interviewed, China continues to lack the expertise and the capacity to
provide all the training necessary to implement WTO rules and,
therefore, it has asked for technical assistance both multilaterally
and bilaterally from outside China. As a result, the WTO secretariat,
the European Union, the United States, and other WTO member countries
have either given or plan to give training assistance to China in
numerous areas, including rule of law-related programs. For its part,
the U.S. Government has provided limited training on a range of WTO-
related topics, including standards, services, antidumping
requirements, and intellectual property rights. The U.S. private sector
also has provided technical assistance. In our interviews of U.S.
businesses in China, almost one third of respondents said that they had
given some assistance to China that related to implementation of
China's WTO commitments.
rule of law-related reforms are important for u.s. business, but
difficulties anticipated
Preliminary data from our written survey indicate that China's WTO
commitments related to rule of law reforms are some of the most
important for U.S. businesses with a presence in China.\5\ For example,
more than 90 percent of businesses that have responded to date
indicated that the following reform commitments were important or
somewhat important to their companies:
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\5\ We have surveyed more than 500 U.S. companies with a presence
in China and have received more than 175 usable responses as of the
date of this testimony.
<bullet> Consistent application of laws, regulations, and practices
(within and among national, provincial & local levels);
<bullet> transparency of laws, regulations, and practices;
<bullet> enforcement of contracts and judgments/settlement of
disputes; and
<bullet> enforcement of intellectual property rights.
When asked to identify the three commitments that were most
important to their companies, two WTO rule of law-related areas
received the greatest number of responses in our written survey--
consistent application of laws, regulations, and practices; and
enforcement of intellectual property rights. We will include a more
complete analysis of these and other issues considered in our business
survey in a report to be released this fall.
A majority of businesses answering our survey expected these rule
of law commitments to be difficult for China to implement relative to
its other WTO commitments. Businesses cited a number of reasons for
this relative difficulty, including (1) the cultural ``sea change''
required to increase transparency; (2) a reluctance to crack down on
intellectual property right violations stemming from a fear of
destabilizing the labor force; and (3) the challenge of implementing
laws, rules, and regulations consistently among provinces and within
and among ministries.
Similarly, in our interviews, company officials noted the magnitude
of WTO-related reforms, including those that would strengthen the rule
of law.\6\ They said that successful implementation would require long-
term effort. Commensurate with the expected difficulty in carrying out
reforms, we heard numerous specific individual complaints from U.S.
companies, including concerns about:
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\6\ We interviewed representatives from more than 50 companies in
China as well as representatives from U.S. industry associations.
<bullet> Vague laws and regulations that create uncertainty for
foreign businesses;
<bullet> lack of transparency, which denied foreign companies the
ability to comment on particular draft laws or regulations or to
respond to administrative decisions;
<bullet> conflicting and inconsistent interpretations of existing
laws and regulations from Chinese officials;
<bullet> unfair treatment by, and conflicts of interest, of Chinese
regulators; and
<bullet> uneven or ineffective enforcement of court judgments.
Nevertheless, U.S. businesses in China believe that the Chinese
leadership is strongly committed to reform and that the leadership has
communicated this commitment publicly. Several private sector officials
noted a more open, receptive, and helpful attitude on the part of the
government officials with whom they had contact. Other private sector
officials noted more specific positive actions. For example, officials
noted improvements in intellectual property right protections including
crackdowns against counterfeiters in Shanghai, and a case where a U.S.
company won a judgment against a counterfeiter in a Chinese court that
included an order to cease the operations of the copycat company.
concluding observations
First, it is very clear that China has shown considerable
determination in enacting the numerous laws, regulations, and other
measures to ensure that its legal system and institutions, on paper,
are WTO compatible. Nevertheless, the real test of China's movement
toward a more rule of law-based commercial system is how China actually
implements its laws and regulations in fulfilling its WTO commitments.
At this point, it is still too early for us to make any definitive
judgments about China's actual implementation. Second, as you know, it
has been the hope of U.S. Government officials and others that China's
accession to the WTO would constitute a significant step forward in
China's development toward becoming a more rule of law-oriented
society. It is worth noting that China's reform efforts, which have
been ongoing for more than 20 years, have included substantial legal
developments that could be described as rule of law related. These
include the enactment of numerous laws, regulations, and other measures
that apply to many aspects of Chinese society beyond the WTO, the
recent proliferation of law schools and legal training, and the
recognition of the need for judicial reform. It is still too early to
know where this process will lead, but there is hope that the many
rules-based commitments that China made to become a WTO member will
influence legal developments in other areas.
Mr. Chairman, this completes my prepared statement. I would be
happy to respond to any questions you or other Members of the
Commission may have at this time.
contacts and acknowledgments
For future contacts regarding this testimony, please call Susan
Westin at (202) 512-4128. Adam Cowles, Richard Seldin, Michelle Sager,
Matthew Helm, Simin Ho, Rona Mendelsohn also made key contributions to
this testimony.
Appendix--Examples of Rule of Law-Related Commitments Included in
China's World Trade Organization (WTO) Accession Agreement
------------------------------------------------------------------------
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Transparency
------------------------------------------------------------------------
<bullet> Trade Framework: China shall make available to WTO members,
upon request, all laws, regulations and other measures pertaining to or
affecting trade in goods, services, TRIPS or the control of foreign
exchange, before such measures are implemented or enforced. (Protocol
paragraph 2.C.1)
<bullet> Services: China would publish in the official journal, by
appropriate classification and by service where relevant, a list of all
organizations that were responsible for authorizing, approving or
regulating services activities whether through grant of license or
other approval, including organizations delegated such authority from
the national authorities. (Working Party report paragraph 332)
------------------------------------------------------------------------
Judicial Review
------------------------------------------------------------------------
<bullet> Trade Framework: China shall establish or designate, and
maintain tribunals, contact points and procedures for the prompt review
of all administrative actions relating to implementation of laws,
regulations, judicial decisions and administrative rulings of general
application referred to in Article X:1 of the GATT 1994, Article VI of
the GATS and relevant TRIPS provisions. (Protocol paragraph 2.D.1)
<bullet> Intellectual Property Rights: Appropriate cases, including
those involving repeat offenders and willful piracy and counterfeiting,
would be referred to relevant authorities for prosecution under the
criminal law provisions. (Working Party report paragraph 299)
------------------------------------------------------------------------
Uniform Enforcement
------------------------------------------------------------------------
<bullet> Trade Framework: China shall apply and administer in a uniform,
impartial and reasonable manner all central government laws,
regulations and other measures and local regulations, rules and other
measures issued or applied at the sub-national level. The laws,
regulations and other measures covered are those that pertain to or
affect (1) trade in goods, (2) services, (3) trade-related aspects of
intellectual property rights (TRIPS), and (4) the control of foreign
exchange. (Protocol paragraph 2.A.2)
<bullet> Trade Framework: China would strengthen the uniform enforcement
of taxes, tariffs and non-tariff measures on trade between its special
economic areas and the other parts of China's customs territory.
(Working Party report paragraph 225)
------------------------------------------------------------------------
Nondiscrimination
------------------------------------------------------------------------
<bullet> Import Regulation: China would adopt and apply tariff
reductions and exemptions so as to ensure MFN treatment for imported
goods. (Working Party report paragraph 111)
<bullet> Import/Export Regulation: Except as otherwise provided for in
this Protocol, foreign individuals and enterprises and foreign-funded
enterprises shall be accorded treatment no less favorable than that
accorded to other individuals and enterprises in respect of the
distribution of import and export licenses and quotas. (Protocol
paragraph 8.2)
------------------------------------------------------------------------
Source: Protocol on the Accession of the People's Republic of China and
Report of the Working Party on the Accession of China, World Trade
Organization.
Prepared Statement of Christian Murck
june 6, 2002
Mr. Chairman and Members of the Commission:
Thank you for the opportunity to testify today before this
distinguished body on the rule of law in China. I am here today
representing the American Chamber of Commerce in China, an organization
in Beijing of over seven hundred fifty companies and approximately
1,500 individuals formed to represent the commercial interests of the
American business community in China. There are few subjects of greater
interest to our members than the development, current state, and future
prospects of the Chinese legal system. My personal interest in China
began in 1965 as a teacher at the Chinese University of Hong Kong,
continued through a Ph.D. in Chinese history at Princeton, and
intensified during a business career beginning in 1980. I lived in
Taipei, Taiwan from 1991 to 1996. In 1996 I moved to Beijing, where I
am Managing Director for China of APCO Worldwide.
In my testimony today, which focuses on the rule of law as it
affects business conditions, I will define rule of law in terms of
transparency and consistency. By transparency, I mean the promulgation
of laws and regulations that have been developed with the participation
by affected parties and which are easily accessible, objective, and
clearly understandable. By consistency, I refer to the fair, reliable,
and nondiscriminatory application and enforcement of laws, regulations
and contracts. China is proof that economic growth and social progress
can occur despite a legal system that is manifestly neither transparent
nor consistent. But AmCham China has been an outspoken advocate of the
proposition that economic growth and social progress can only be
sustained and maximized over the medium and long term by establishing
and enhancing the rule of law. A transparent, consistent legal system
is required to treat participants in the economic system fairly and is
one of the foundations of a just society; its absence is a deterrent to
investment and encourages socially damaging recourse to non-legal means
of redress and protection.
The concept of the rule of law outlined above is relatively narrow.
A broader definition might include references to economic systems such
as a market economy, to political institutions such as free and fair
elections, to the balance between liberty and responsibility within
society, and to conceptions of universal human rights. Defined in this
fashion, the rule of law takes many forms. Many would agree, for
example, that the rule of law exists in Canada, the United Kingdom,
Germany, Japan, Taiwan, and Singapore, but it takes quite different
institutional and substantive forms in each. The advantages of a narrow
definition of the rule of law for my purposes today are: there is broad
consensus as to its elements; it is at the core of all legal systems
commonly recognized as embodying rule of law in its broader sense; and
it provides a framework sufficient to encompass most commercial issues,
such as property rights and contractual rights.
In thinking about China, it is always useful to consider trends, as
well as conditions at a particular point in time. When China began its
reform process in 1979, it did so essentially without a legal system.
The legal profession did not exist, there were few published laws, the
courts were political instruments intended to administer substantive
``justice'' defined ideologically and morally rather than legally, and
the National People's Congress functioned as a consultative and
advisory rubber stamp rather than as a legislature. The only constraint
on the power of the government bureaucracy was the overlaid bureaucracy
of the Party, and the only restraint on the Party was the PLA. There
was also the theoretical possibility of popular revolt, but that had
been exhausted in the excesses of the Cultural Revolution and other
mass movements in the thirty years after 1949.
Since 1979, China has made extraordinary progress in drafting laws
and administrative regulations, establishing law schools, training
lawyers, and improving courts. The basic elements of a comprehensive
system of economic and commercial law have now largely been put in
place. Moreover, they are fundamentally consistent with international
practice, though not always US practice. It is a stated goal of China,
enshrined in its constitution, to establish the rule of law, though the
government and Party do not necessarily share our conceptions of the
rule of law. There is an intense public discussion in the press and on
television on this concept and explicating the legal rights of
citizens. But the standards of transparency and consistency are much
more difficult than simply passing adequate laws and regulations with
the expressed intent of establishing rule of law. Just as a financial
center is not simply a group of tall buildings labeled ``Financial
Center'', so too the rule of law depends on the professionalism and
values of many players, on what might be called ``legal system
software'' throughout the society. In particular, the rulemaking
process and the enforcement process are both crucial.
An important corollary of establishing a transparent, consistent
legal system in China is the acceptance by the government and Party of
limits on its authority and a reduction in its administrative
discretion. The Party as an institution and senior leaders as
individuals have assumed the right to act arbitrarily and to enjoy
special privileges in order to achieve goals justified in Marxist
terms. In the reform process since 1979, the National People's Congress
has typically written broad legislation stating general principles to
be later amplified by implementing regulations issued by the relevant
Ministry or other agency. The implementing regulations often contained
not objective standards, but rather subjective standards that could
only be applied to specific facts by recourse to government personnel
on a case-by-case basis. To some extent this was necessary given a
hectic pace of legislation in areas with few precedents in Chinese
practice or law since 1949. It was also deliberately intended to
preserve wide latitude for officials to manage many aspects of the
economy as they wished. In the shift toward a market economy, it has
become widely accepted in China that the Party and government must
reduce their roles as owner and investor in the economy, largely
withdraw from their roles as manager of the economy, and focus
primarily on their functions as a regulator. The rule of law will
facilitate this difficult transition. Establishment of the rule of law,
even in the narrow sense used here, is therefore not trivial, nor is it
irrelevant to broader political and social issues. To the extent it is
successful, it will protect companies and individuals from the exercise
of arbitrary power.
Moreover, the rule of law is not easily compartmentalized or
confined to a single sector, such as commercial transactions of foreign
companies. If, for example, the government wished to encourage
development of the privately owned residential housing market by
allowing foreign banks to issue home mortgages to Chinese individuals,
it must also establish the ability of the foreign bank to take a clear
lien, and in the event of default, seize the home and sell it on the
open market. It will then be obvious that the same rights must be
available to local bank competitors. Perhaps not so obviously though,
the individual homeowner must have clear title to his property in order
to mortgage it. This in turn implies a much greater degree of certainty
in owning such property and may lead as well to a degree of protection
against the arbitrary exercise of eminent domain or failure to pay
legally required compensation by local governments and developers.
To summarize these points, I do not believe that the rule of law
will necessarily or inevitably lead to a particular outcome with
respect to economic system, political institutions or human rights
regime, but I do believe that it will strengthen the accountability of
institutions and generally improve the protection of the rights of
individuals.
In our 2001 White Paper issued almost 18 months ago, AmCham China
noted past progress in legal reform but expressed the view that it had
stalled in recent years. We cited vague, poorly drafted laws and
regulations that depend on subjective interpretations from government
officials; continued reliance on internal regulations formally
considered State secrets but used to regulate the economy;
inconsistent, selective enforcement; lack of independence of the
judiciary; and local protectionism.
Local protectionism is not simply a matter of favoritism. It is
exacerbated by the fact that most judges are not university graduates,
much less lawyers; by the widespread practice of ex parte
communications; by corruption; and by the willingness of local courts
to uphold local regulations inconsistent with higher level government
laws. Lack of independence is often cited as the fundamental weakness
of the Chinese judiciary, a view that AmCham China shares, but given
these other problems, it is not clear that truly independent local
courts would immediately improve the legal system. It will be necessary
to improve the courts and the legal system generally on many fronts
over a long period of time. We have called for independence of the
courts from political direction, trials open to the public, improved
evidentiary rules and procedures, appointment of judges based on
professional merit, and salaries sufficient to discourage corruption.
We were cautiously optimistic in the 2001 White Paper on business
conditions in general, but with respect to rule of law suggested that
lack of progress was outweighing positive developments.
On December 11, 2001, China became a member of the World Trade
Organization. Regarding the rule of law, as in other areas, WTO
accession resulted in new energy, greater political will, and a clearer
sense of direction. China has committed to:
<bullet> Administer in a uniform, impartial and reasonable manner
all its laws, regulations and other measures of the central and local
governments governing its trade and foreign investment regime;
<bullet> To conform central government laws, as well as all
administrative and sub-national government regulations, rules, and
measures to WTO obligations;
<bullet> To establish a mechanism under which both individuals and
enterprises can bring to the attention of the national government cases
of non-uniform application of the trade and foreign investment regime;
<bullet> To enforce only published laws and regulations (thus
eliminating the legal force of internal documents) and to make them
available before they are implemented or enforced;
<bullet> To designate an official journal dedicated to the
publication of all laws, regulations and other measures affecting the
trade regime, and to establish a single enquiry point where information
on all such laws can be obtained;
<bullet> To establish impartial and independent tribunals for the
prompt review of administrative actions, and to provide contact points
with respect to administrative actions.
These commitments are extremely important with respect to
establishing the rule of law in trade and foreign investment and to
encouraging it generally.
Literally thousands of laws, regulations and rules have been
reviewed for consistency with WTO rules and China's commitments and the
process of revising or abolishing those with inconsistencies is
basically complete. It will be some time before the legal and business
communities are able to draw conclusions as to how well this task was
done, but there is no doubt the effort was massive and in good faith.
The promised enquiry points have been established, laws are
increasingly being made available prior to their effective date and in
some cases in draft form for comment, and a study is underway to
establish a publication similar to the Federal Register to bring
together information now published in many separate places.
It is to be hoped the central government will also be able to use
WTO accession to strengthen its control over the provinces. All
provincial Governors have been called to Beijing for WTO training
seminars and told in blunt terms that lack of compliance at provincial
or local level with the WTO framework will be damaging for their
careers. Whether such measures will be sufficient to meet the
commitment to administer laws and regulations in a uniform, impartial
and reasonable manner locally as well as centrally remains to be seen.
Two years ago, a Law on Legislation was passed by the National People's
Congress attempting to rationalize the legislative process and
establish the principle that sub-national jurisdictions may not pass
laws and regulations inconsistent with those of the central government.
This has reportedly had little practical effect and the issue will
undoubtedly be revisited.
The statement of principle provided by the new WTO commitment is
important, but uniformity, impartiality and reasonableness are
subjective criteria difficult to evaluate. Moreover, meeting this
commitment will require significant changes in behavior that will be
perceived as damaging various special or local interests. Our argument,
of course, is that the interests of all stakeholders in the society,
not simply foreign investors and businessmen, will be served by making
this effort.
Reflecting WTO accession, the AmCham China 2002 White Paper
released last month emphasized the great, but uncertain opportunity we
now face. WTO accession has given the reform process new energy, but we
are also aware of the difficulties and constraints. As to the rule of
law specifically, we cite a number of areas of modest progress, while
reiterating the same basic problems with respect to transparency and
consistency (now further distinguished as uniformity and enforcement).
A concrete example of the countervailing pressures at work on the
ground is the vexed area of intellectual property rights.
Intellectual property rights were not recognized in Chinese law in
1979, and a pattern of rampant violations of copyrights, trademarks and
patents soon became a problem for foreign investors. Pressure from the
United States, the European Union and others had some effect in
changing Chinese policy statements, but these were somewhat grudging
and were not reflected in changes on the ground. In the last 3 years,
however, the policy debate on this question has been won. A study by
the Ministry of Information Industry identified copyright violations as
the single biggest obstacle to the development of a Chinese software
industry. This was followed by State Council regulations in 1999
requiring all government offices to use legal software and again in
2000 requiring all entities, including enterprises, to do the same and
demanding enhanced, coordinated enforcement of the law. The Development
Research Center, the leading think tank under the State Council, in
early 2000 issued a report quantifying the economic losses of
counterfeiting to the State in the form of lost revenue, to enterprises
in the form of lost sales and damage to their reputation, and to
consumers in the form of poor quality, even dangerous goods.
Counterfeiting was identified as one of the major targets of the market
rectification campaign launched last year, along with smuggling, fraud,
and other violations of commercial law. Leaders such as Premier Zhu
Rongji and State Councilor Wu Yi provided strong, focused attention to
these problems.
Substantial revisions have been made in copyright, trademark and
patent laws. While further improvements could be suggested, in general
the legal framework is close to international standards and capacity
building continues, often with foreign assistance. The European Union,
for example, has funded a program to develop IPR laws that trains
judges and law professors. Our member companies participate in such
seminars to present case studies, and have also assisted with
additional funding. Foreign companies also regularly hold training
programs for local prosecutors, customs officials and other relevant
authorities. The U.N. Development Program is sponsoring a program to
train local economic planning officials in sustainable development that
includes a substantial focus on how to transition away from
specializing in counterfeiting, as some localities do. Foreign
companies have supported the UNDP with funding as well as direct
participation.
Our member companies have actively fought to protect their
intellectual property. One large consumer products company routinely
gathers evidence and presents it to the authorities, which conduct
raids observed by company personnel, confiscate counterfeit goods and
bring prosecutions. Last year that one company was involved in over
three hundred such raids. In one case, a factory that was about to be
closed because of dropping sales was rescued by putting counterfeiters
out of business. The company invited the police and prosecutors who
worked on the case to tour the factory, where the grateful work force
greeted them with applause. In another case, a company making batteries
saw its sales increase by 135 percent in 1 year by closing down a
single counterfeiter. There have been recent court victories in
copyright cases as well, such as a case involving an internet domain
name squatter where the rights of the foreign company were firmly
upheld.
Unfortunately, however, these positive examples do not reflect the
general situation. China is not a single economy; it is a group of
large, disparate regional economies. Although the central government
can be described as authoritarian, its ability to control what happens
in local areas is limited. Many factors such as those outlined above
weigh against successful litigation for those attempting to protect
their rights. Our members continue to report continued, large economic
losses due to IPR violations. For those selling brand products in the
Chinese market, the general estimate is that 15-20 percent of revenue
is lost due to counterfeiting.
In response, our member companies are shifting their focus from the
content of the laws to problems of enforcement. In many cases, the
dollar value of confiscated goods is low, so violators are dealt with
in administrative procedures and assessed low fines, often never paid.
There are also administrative bottlenecks in effectively transferring
cases from civil to criminal authorities. Foreign companies are thus
emphasizing criminal proceedings with modest success in the last year.
One of the unanticipated consequences of WTO accession is likely to
be an increase in the export of counterfeit goods manufactured in China
to the rest of the world. China committed in the WTO protocol to give
trading rights, presently restricted, to all legal entities in China.
This means it will be much easier to import and export goods, and is a
major improvement for US exporters and their customers in China. WTO
will bring increased trade and the Customs will improve its efficiency
in order to move a larger volume of goods across the borders of China
in both directions. This is also a good thing, but unfortunately these
developments will also make it easier for counterfeiters to export and
increased enforcement in China will lead them to do so. If the fakes
are sold in Latin America, Eastern Europe or the United States, it is
more difficult to gather evidence and prosecute in China.
We thus see a mixed picture: progress with respect to IPR law and
policy, but continued failure to make enforcement effective. AmCham
China is convinced that this problem will eventually be brought under
control, because there are strong local interests in doing so. Chinese
companies are damaged more than foreign companies by IPR violations and
they know it. The Chinese government finds its economic ambitions
hindered by its IPR environment and it is trying to change it. Our
members will continue to defend their legal rights and assist further
development of the legal system.
The IPR case can stand as representative of the status of
commercial aspects of rule of law in China. Given this situation, what
approach should we take to encourage further progress toward
transparency and consistency in the legal system generally?
First, we should recognize that despite a rapid pace of social
change since 1979, likely to be accelerated by WTO accession and a new
generation of leaders, capacity building is a long-term enterprise
dependent on institutional and cultural change in many sectors. In my
opinion, it is a reasonable goal to strive for the rule of law as
defined above with respect to property rights and contractual rights
during the anticipated 10 years in power of the next generation of
leaders, that is, roughly 2003-2013. Full establishment of the rule of
law will probably take longer.
Second, given the complexity of the process, we should encourage a
multiplicity of players to pursue diverse avenues of institutional
change, preferably in partnership with Chinese counterparts. The most
active and important supporters of development of rule of law have been
the European Union through the EU-China Legal and Judicial Cooperative
Program, the Ford Foundation, the Canadian International Development
Agency, the German government through the German Technical and
Cooperation Corporation (GTZ) program to train MOFTEC lawyers.
The Asia Foundation and The US-China Legal Cooperation Fund, a
program of the education and research arm of the US-China Business
Council also have small, but effective grant programs. The Fund has
attracted support from approximately forty corporate donors. To quote
the Fund, ``Contributors . . . share the belief that the people and
the economies of the United States and China will benefit from further
development of strong, transparent, impartial and equitable legal
institutions. . . .'' Grants are made is such areas as training of
judges and lawyers, legal protection of human rights, administrative
law, commercial law and arbitration, and legal aid for the poor and
special focus is on projects that demonstrate support from both US and
Chinese sources. We strongly encourage member companies with sufficient
resources to consider support for this Fund as part of their corporate
social responsibility programs in China.
Academic cooperation between American universities such as
Columbia, Harvard, Stanford, and Yale and various Chinese universities
in research and legal education is well established and productive.
The American government, though it takes an active public role of
advocating improvements in the rule of law in China, has been
conspicuous by its absence. Recently a three million dollar
appropriation was made, primarily to support a legal education program
of Temple University Law School. Though a welcome beginning, this is a
meager record compared with that of the European Union, individual
European countries and American private sector donors such as the Ford
Foundation. Furthermore, while we welcome the sustained effort of the
EU to improve the rule of law in China, I should parenthetically note
that the adoption of European legal concepts and practices tends to
favor the commercial interests of European companies familiar with
them. AmCham member companies would welcome a material effort by the
United States to balance this influence.
Another way in which the US government can assist the development
of rule in law in China and at the same time assist American economic
interests is to support the efforts of US law firms to be permitted to
hire PRC qualified lawyers to practice PRC law. If permitted to hire
PRC lawyers to practice PRC law, the US firms can have a significant
positive impact on the sophistication and professionalism of the PRC
lawyers and judges through their internal training programs, the impact
of their corporate cultures, and the increased competition they will
foster in the legal arena. They will also be able to provide better
service to their clients, including many of our members. China made no
WTO commitments on this point, highlighting the need for continued
bilateral discussion on the economic reform process beyond the WTO
framework.
Third, we should not assume that we can know the outcome or that
there is only one satisfactory result. Forces such as economic
development, modernization, and globalization have not led to
convergence among nations in the past, and will probably not do so in
the future. The Chinese are a very large nation, with a well-honed
sensitivity to foreign pressure. As has been the case with smaller
nations, the Chinese legal system will reflect the interplay of its own
social, cultural and institutional forces much more than standards
suggested from abroad.
We should recognize, but not be discouraged by the fact that our
goals for Chinese legal reform are not those of the current leadership.
China has stated it is attempting to build a socialist market economy
governed by rule of law. Whatever the term ``socialist'' may mean, it
does suggest a greater degree of State ownership of major enterprises
than in the United States. Moreover, the Chinese government has
articulated a conception of human rights placing more emphasis on
responsibility to the community than individual rights, in which the
right to subsistence is more important than personal liberty. Finally,
the Communist Party intends to continue its rule. But if one reviews
the history of such stated goals since 1949, and particularly since
1979, it is apparent that they have changed frequently and
dramatically. If the past is any guide, China's stated goals today will
not necessarily be her goals in the future.
If a legal system is established that protects property and
contractual rights by promulgating accessible, objective and
understandable laws with participation by affected parties, and
enforcing them in a fair, reliable, and nondiscriminatory manner, the
continued existence of the special, extra-legal privileges of the
apparatus of the Party and government and of senior cadres and their
families personally will be more and more anomalous. I personally do
believe that establishment of the rule of law in the narrow sense
defined here will inevitably and positively impact broader social and
political trends. It is therefore to be desired that the rule of law be
expanded as rapidly as possible.
Considering actions that this Commission might recommend to the
Congress and the Executive branch in support of this process, I would
like to call to your attention the Commercial Law Development Program
(CLDP) of the Office of the General Counsel in the Department of
Commerce. CLDP provides training and consultative services seeking help
in guiding the evolution of legal systems. It specifically focuses on
``international economic agreements, foreign investment laws, project
and trade finance, export controls, intellectual property rights, and
government ethics''. All of these areas are currently under development
in China, important to implementation of its WTO accession commitments,
and key building blocks of commercial rule of law. CLDP has not been
able to work in China, despite our strong national interest in having
it do so, because it is partially funded by the Agency for
International Development (AID). As you know, the Congress has barred
AID from China since 1989 in reaction to the Tiananmen Square incident.
In order to bring the CLDP to China, where it is badly needed and could
make a contribution in the interest of both countries, AmChina China
supports either removing the ban on AID funds in China, or finding
another acceptable way to fund the program.
We also encourage the Congress to appropriate a material level of
funding for the Department of Labor and the Department of State to
develop their own programs to assist development of the rule of law in
China.
Thank you very much. I look forward to your questions.
______
Prepared Statement of Donald C. Clarke
june 6, 2002
Mr. Chairman, Mr. Co-Chairman, and Members of the Commission:
I am very pleased to have the opportunity to address the Commission
today on issues of the commercial rule of law and WTO implementation in
China. I have been involved in Chinese studies in one way or another
since the early 1970's and have been interested in Chinese law for over
20 years. I have taught Chinese law since 1985, first at the University
of London and now at the University of Washington, and have also spent
time in practice advising companies doing business in China.
background
It is well understood both inside and outside of China that the
task of making China's laws and regulations conform to WTO requirements
is a huge one. But a key feature of China's accession to the WTO that
sets it apart from most other countries is not the size of the task,
but the fact that accession is part of a larger strategy of massive and
fundamental economic reform.
China's economic reform era is now over 20 years old. The scope of
the planned economy has been steadily shrinking, and few state-owned
enterprises can afford to ignore market principles. Tariffs and non-
tariff trade barriers had been steadily dropping prior to WTO entry,
while rules on foreign investment were gradually liberalized. The
Chinese government has embarked on this strategy for its own sake, not
to fulfill treaty commitments to foreigners, and Chinese leaders have
sought WTO membership not simply because they believe that it will open
more markets to Chinese products, but because they see membership as
giving them extra leverage to force through difficult changes in the
domestic economic system. Many in the leadership understand that
China's WTO commitments, while labeled ``concessions'' in the language
of international trade negotiations, are not really ``concessions'' to
be reluctantly yielded at all, but rather sound policies that China
would be wise to adopt even without WTO membership.\1\ Reforms simply
imposed from outside are unlikely to go beyond surface compliance--if
they get even that far--and truly take root. But many of the reforms
required by China's WTO accession, from market opening to greater
transparency in administrative procedures, have a strong domestic
constituency as well as a foreign one. The influential ``Legal System
Daily,'' for example, last November published no fewer than three
commentaries by prominent law professors welcoming the pressures that
WTO membership would impose in the direction of limited government and
increased transparency.\2\ Thus, although China's trading partners may
encounter rules and practices inconsistent with China's commitments and
delays in curing these inconsistencies, it is not necessarily due to
bad faith and foot-dragging by the central government (although of
course that is a possibility). In many cases it will be due simply to
the normal and well-documented difficulty the central government faces
in getting many things done.
---------------------------------------------------------------------------
\1\ See, for example, the remarks of Kong Xiangjun, a judge in the
administrative tribunal of the Supreme People's Court:
[W]e should not . . . conclude that [China's commitments
regarding judicial review] are some kind of price or sacrifice that had
to be made for China to enter the WTO. This kind of provision reflects
the serious attitude and commitment of China to promoting the
advancement of the rule of law . . . . It is completely in accord
with China's strategy of governing the country according to law and
will advance China's progress in establishing the rule of law. The
beneficiary in the end will be China.
Kong Xiangjun, ``Jianli yu WTO yaoqiu xiang shiying de sifa shencha
zhidu'' (Establish a System of Judicial Review that Meets the
Requirements of the WTO), Zhongguo Faxue (Chinese Jurisprudence), no.
6, 2001, p. 8.
\2\ See Yuan Chengben, ``Ru Shi wei sifa gaige tian dongli''
(Joining the WTO Pushes Forward Judicial Reform), Fazhi Ribao (Legal
System Daily), Internet edition, Nov. 30, 2001 (interviewing Professor
Li Shuguang); Ma Huaide, ``WTO yu zhengfu zhizheng linian'' (The WTO
and the Guiding Concept of Government), Fazhi Ribao (Legal System
Daily), Internet edition, Nov. 26, 2001; Wang Feng ``'Ru Shi' yaoqiu
zhengfu juese zhuanbian'' (Entry into the WTO Requires a Change in the
Role of Government), Fazhi Ribao (Legal System Daily), Internet
edition, Nov. 12, 2001; see also Nan Xianghong, ``WTO: fa de chongxin
goujia'' (WTO: The Restructuring of Law), Nanfang Zhoumo (Southern
Weekend), Internet edition, Oct. 25, 2001 and Guo Guosong, ``Wei sifa
gongzheng jianli zhidu bingzhang'' (Establish Institutional Protections
for Judicial Justice), Nanfang Zhoumo (Southern Weekend), Internet
edition, Oct. 25, 2001 (addressing the need for better court
procedures, from improving the quality of judges to achieving greater
transparency). For Chinese language sources, I have placed the author's
surname before the given name in accordance with Chinese usage.
---------------------------------------------------------------------------
This is by no means a counsel of inaction and infinite patience in
the face of a failure by China to live up to its commitments in certain
areas. As I have noted, part of the whole point of joining the WTO--a
central government decision essentially imposed on local governments--
was to add foreign pressure to existing domestic pressures for reform.
It does nobody any favors to pretend that specific and binding
obligations do not exist. But it is necessary to bear in mind that not
all violations will be deliberate, and that not all delay is
obstruction.
domestic applicability within china of wto norms
One issue that has been the subject of some debate both inside and
outside of China is that of the effect within the Chinese legal system
of China's WTO obligations. In my view, as a practical matter, China's
WTO obligations will not become part of its domestic law, binding on
courts and government bodies, until appropriate domestic legislation
and regulations incorporating those obligations are promulgated.
China became a WTO member through its internal procedures for the
signing and ratification of treaties.\3\ There are three ways in which
China's treaty obligations might become part of its domestic law.
First, they can be embodied in domestic legislation--a term I use here
to include all authoritative sources of State norms in China, including
``interpretations'' and other documents issued by the Supreme People's
Court and other bodies. This approach is known as ``transformation,''
and it is one that China has adopted on many occasions.\4\ Second, they
can be incorporated through specific reference in domestic legislation.
This approach, which I shall call ``mediated incorporation,'' can be
seen in Article 142 of the General Principles of Civil Law and Article
238 of the Law on Civil Procedure, each of which directs courts, in
cases involving foreigners, to apply the provisions of international
treaties to which China is a signatory when such provisions conflict
with relevant provisions of the law in question.\5\ This approach has
also been taken in directives issued to lower courts by the Supreme
People's Court. In 1987, for example, the court issued a notice to
lower courts instructing them to give priority to the provisions of the
Convention on the Recognition and Enforcement of Foreign Arbitral
Awards in cases where the Convention applied and domestic law contained
contrary provisions.\6\ While the mediated incorporation approach
requires Chinese courts and government bodies ultimately to look
directly to treaty texts instead of the texts of domestic law, it is
domestic law that tells them to do so.
---------------------------------------------------------------------------
\3\ Prof. Bing Ling of the City University of Hong Kong makes a
persuasive argument that the ratification procedure was defective in
that the National People's Congress Standing Committee granted a
before-the-fact authorization (on August 25, 2000, long before the
accession protocol had taken its final form and been signed by the
Chinese government's representative), not an after-the-fact
ratification. Prof. Ling's argument is available in full at <http://
personal.cityu.edu.hk/?lwbing/Research/WTO.pdf>, last visited June 3,
2002; see also James Kynge, ``Academics hit at procedure to join WTO,''
Financial Times, Nov. 20, 2001, p. 14. As Prof. Ling points out, the
validity of China's accession in spite of any procedural defects seems
unquestionable as a matter of international law under Articles 45 and
46 of the Vienna Convention on the Law of Treaties. I would argue
further that as a practical matter it is unquestionable--or at least,
will not be questioned--as a matter of Chinese domestic law as well.
\4\ In 1986, for example, the Standing Committee of the National
People's Congress adopted the Regulations of the People's Republic of
China on Diplomatic Privileges and Immunities, thereby tranforming into
domestic law China's obligations under the Vienna Convention on
Diplomatic Relations.
\5\ Similar provisions can be found in Article 72 of the
Administrative Litigation Law (applying to foreign-related
administrative litigation), Article 24 of the Frontier Health and
Quarantine Law, Article 42 of the Postal Law, Article 51 of the Water
Law, Article 28 of the Law on Taxation of Foreign Enterprises and
Enteprises with Foreign Investment, Article 59 of the Tax
Administration Law, Article 268 of the Maritime Commerce Law (applying
to foreign-related matters), and Article 96 of the Negotiable
Instruments Law (applying to foreign-related matters).
\6\ See Supreme People's Court, ``Guanyu zhixing woguo jiaru de
'Chengren ji zhixing waiguo zhongcai caijue gongyue' de tongzhi''
(Notice on the Implementation of the ``Convention on the Recognition
and Enforcement of Foreign Arbitral Awards'' of Which China Is a
Member), April 10, 1987, Art. 1.
---------------------------------------------------------------------------
While the above two methods of making treaty obligations part of
domestic law are not controversial, real debate revolves around the
issue of whether bare treaty obligations, without more, can or should
be considered a source of binding norms by legal decisionmakers. While
academic views on this question are divided, the views of government
officials are fairly consistently in the negative: specific
transformation or mediated incorporation is necessary. This was
certainly the view China presented in the meetings of the WTO Working
Party. In Para. 67 of the Working Party Report, for example, China
undertakes to meet its WTO commitments ``through revising its existing
laws and enacting new ones fully in compliance with the WTO
Agreement.''
Whether treaty obligations can become part of domestic law without
further mediation (a theory I shall call ``unmediated incorporation'')
is a subject for debate because both the constitution and China's
legislation are silent on the issue. Many years ago Prof. Wang Tieya, a
noted international law scholar, laid down the view that China had a
system in which its international law obligations automatically became
part of domestic law, and this view has carried considerable weight in
Chinese academic circles. This view was formed, however, in an era when
China's international law obligations were all State obligations, and
private rights were not implicated. Thus, China had essentially no
international law obligations about which court enforcement in private
litigation might be an issue. Its obligations were obligations of the
government to do or not to do things with respect to other governments
and their officials. Hence, it was possible for Wang and others to hold
that there was and could be no conflict between international law and
China's domestic law, because the government would always do what
international law required of it.
Once one begins talking about private rights being recognized,
however, the argument becomes more difficult to support. Wang and
others support their argument by noting the existence of some statutes
providing that where the provisions of the statute conflict with
China's international treaty obligations, China's international treaty
obligations shall override the provisions of the statute.\7\ But surely
this shows precisely that a specific rule in a domestic statute is
necessary to give domestic legal effect to a treaty obligation; the
very fact that the rule needs to be stated in a domestic statute or
other official norm contradicts their position.
---------------------------------------------------------------------------
\7\ See, e.g., the examples cited above in footnote 5 and the
accompanying text. This argument is made in Tieya Wang, ``The Status of
Treaties in the Chinese Legal System,'' Journal of Chinese and
Comparative Law, vol. 1, no. 1 (July 1995), pp. 1-18, and Meng
Xianggang, ``Woguo shiyong WTO guoji guize de liang wenti'' (Two Issues
in the Application in China of the International Rules of the WTO),
Renmin Fayuan Bao (People's Court News), Internet edition, March 29,
2001. It appears in many other sources as well. The strongest argument
I have seen from a court or government official appears in Sun Nanshen,
``Cong Zhongguo ru Shi kan WTO xieyi zai Zhongguo fayuan de shiyong''
(Viewing the Application of the WTO Agreements in Chinese Courts from
China's Accession to the WTO), Falu Shiyong (Application of Law), no.
9, 2000, pp. 2-5, 20 (the author is a vice president of the Jiangsu
Province Higher Level People's Court, only one level below the Supreme
People's Court). In addition to the argument from incorporation favored
by Wang Tieya, Sun argues (as do others) that the similarity in
procedure for national legislation and treaty ratification means that
they should have equal legal validity.
---------------------------------------------------------------------------
The key proof of the theory of unmediated incorporation would be a
case where a court, in the absence of an authoritative instruction to
refer to treaty provisions, nevertheless applied such provisions
although the rules of domestic dictated a different result. I know of
no such cases.\8\
---------------------------------------------------------------------------
\8\ Qingjiang Kong, a professor at the Hangzhou Institute of
Commerce, cites two cases that he believes demonstrate the direct and
unmediated application of treaty provisions by Chinese courts. See
Qingjiang Kong, ``Enforcement of WTO Agreements in China: Illusion or
Reality?'', Journal of World Trade, vol. 35, no. 6 (Dec. 2001), p.
1208. In both cases, Chinese courts purported to apply the
International Convention for the Unification of Certain Rules of Law
Relating to Bills of Lading (the ``Hague Rules''). A reading of the
cases reveals that they did so, however, because the parties had agreed
contractually to apply the Hague Rules to their disputes. Indeed, China
is not even a signatory to the Hague Rules, and thus there was no
treaty obligation in the first place. The cases in question are China
Material Supply Corp. of Xiamen Special Economic Zone of Fujian
Province v. Europe-Overseas Steamship Lines NV Belgium, in Priscilla
Leung Mei-fun (ed.), China Law Reports, 1991, vol. 3 (Singapore:
Butterworths Asia, 1995), pp. 740-744, and Japan (Taisho) Sea Fire
Insurance Co. Ltd. v. Tianjin Branch of China General Foreign Trade
Transportation Company, in ibid., pp. 745-748.
---------------------------------------------------------------------------
Whatever academic views might be,\9\ I believe the views that
count, from the standpoint of China's trading partners and those doing
business in China, are those of government officials, and in particular
court officials. As noted above, I believe the statement of China's
representative to the WTO Working Party constitutes a denial of the
doctrine of unmediated incorporation. Equally important, however, are
statements from senior officials of the Supreme People's Court (which
has authority over the court system) and academics published in
official or semi-official sources. Prof. Jiang Guoqing, for example,
states in a lecture posted on a website administered by the Office of
the National People's Congress Standing Committee that treaty norms do
not apply in domestic law unless there is a specific domestic law norm
making them apply.\10\ Similar views are voiced by Kong Xiangjun of the
Administrative Chamber of the Supreme People's Court\11\ and Cao
Shouye, also a judge in the Supreme People's Court.\12\ Finally, the
President of the Supreme People's Court recently declared:
---------------------------------------------------------------------------
\9\ A good statement in English of the position against unmediated
incorporation is Zhaojie Li , ``The Effect of Treaties in the Municipal
Law of the People's Republic of China: Practice and Problems,'' Asian
Yearbook of International Law, vol. 4 (London: Kluwer Law
International, 1994).
\10\ Jiang Guoqing, ``Guoji fa yu guoji tiaoyue de jige wenti''
(Some Issues of International Law and International Treaties), Quanguo
Renda Changweihui Fazhi Jiangzuo Jianggao Zhi Shisi (National People's
Congress Standing Committee Lectures on the Legal System, No. 14), July
4, 2001, available at <http://www.npcnews.com.cn> (website administered
by the Office of the National People's Congress Standing Committee,
News Bureau, Information Center).
\11\ See Kong Xiangjun, ``Tongyi jieshi yuanze yu WTO falu de sifa
shiyong'' (The Doctrine of Consistent Interpretation and the Use in
Adjudication of WTO Law), Fazhi Ribao (Legal System Daily), Oct. 14,
2001, p. 3; Kong Xiangjun, ``WTO falu de guonei shiyong'' (The Domestic
Application of WTO Law), Fazhi Ribao (Legal System Daily), Internet
edition, Dec. 16, 2001; Kong Xiangjun, ``Jianli yu WTO yaoqiu xiang
shiying de sifa shencha zhidu'' (Establish a System of Judicial Review
that Meets the Requirements of the WTO), Zhongguo Faxue (Chinese
Jurisprudence), no. 6, 2001, pp. 3-14.
\12\ See Cao Shouye & Wang Fei, ``Zhongguo fayuan shiyong WTO
guize'' (The Application of WTO Rules by Chinese Courts), Renmin Fayuan
Bao (People's Court Daily), Internet edition, October 15, 2001 and Cao
Shouye, ``Zhongguo ru shi dui renmin fayuan de yingxiang'' (The Effect
Upon People's Courts of China's Entry Into the WTO), Renmin Fayuan Bao
(People's Court Daily), Internet edition, October 15, 2001.
In the course of adjudication, People's Courts must be
knowledgeable about both domestic law and WTO rules; they must
both grasp the technique of application of international treaty
through transformation into domestic law, and do a good job in
making judicial interpretations in accordance with the
provisions of domestic law; they must both ensure the correct
implementation of international treaties in China, and pay
attention to upholding State judicial sovereignty and the
dignity of law.\13\
---------------------------------------------------------------------------
\13\ Quoted in Xu Lai, ``Xiao Yang zai renmin fayuan 'ru shi' hou
shenpan gongzuo zuotanhui shang tichu zhuanbian sifa guannian tigong
sifa baozhang'' (Xiao Yang Suggests Transforming Judicial Concepts and
Providing Judicial Protections at Roundtable Discussion on People's
Court Adjudication Work After Accession to the WTO), Fazhi Ribao (Legal
System Daily), Nov. 21, 2001, p. 1.
While this statement is not as resolutely unambiguous as one might
wish, it seems, with its constant references to domestic law and State
sovereignty, to put the Supreme People's Court in the camp of the anti-
unmediated incorporation school. Certainly this is consistent with what
we know of the operation of Chinese courts already. As I have discussed
elsewhere,\14\ the hierarchy of rules Chinese courts follow tends to be
the opposite of the putative hierarchy set forth in the constitution:
while National People's Congress legislation should take priority over
conflicting State Council regulations, for example, in reality it is
usually the other way around. It is hard, therefore, to imagine that
Chinese courts, which would uphold a State Council rule against a
contrary, and theoretically higher, National People's Congress statute,
and a National People's Congress statute against a contrary, and
theoretically higher, provision in the constitution, would override a
very clear provision in an authoritative Chinese regulation in favor of
a claim based solely on a right allegedly granted in one of the WTO
agreements.
---------------------------------------------------------------------------
\14\ Donald C. Clarke, ``State Council Notice Nullifies Statutory
Rights of Creditors,'' East Asian Executive Reports, vol. 19, no. 4
(April 15, 1997), pp. 9-15.
---------------------------------------------------------------------------
The practical import of this discussion is twofold. First, the fact
that such an important issue--whether or not courts can or should
directly apply the provisions of China's treaty obligations without
further domestic legal authority--could go unresolved for so long shows
the limited role traditionally played by courts and the legal system in
the Chinese polity. This question has not been answered because it has
never been a very important question before. Second, assuming that the
dominant official view is the one that will actually be adopted by
courts and government institutions, this need not be a source of great
alarm to foreign governments and traders. It is no more than the
position taken by the United States respecting its own WTO obligations,
and in any case the number of private lawsuits before Chinese courts
potentially implicating private rights granted under the WTO agreements
is likely to be small.\15\
---------------------------------------------------------------------------
\15\ The main areas where rights under WTO agreements might be
directly asserted are (1) administrative litigation against Chinese
government departments for (for example) failure to grant permits on a
most-favored-nation basis, to reduce tariffs, or to take other actions
promised in China's accession protocol, and (2) proceedings to enforce
intellectual property rights, in which the substantive and especially
the procedural protections of the Agreement on Trade-Related Aspects of
Intellectual Property Rights (the ``TRIPS Agreement'') could be
attractive to plaintiffs.
---------------------------------------------------------------------------
china's ability to comply with wto commitments and procedures
This section will look at China's ability to comply with WTO
commitments and procedures with respect to its legal system in general,
my particular area of expertise. I will not be attempting to predict
whether China will indeed fulfill its commitments regarding, say,
customs valuation procedures (see Para. 143 of the Working Party
Report).
In assessing China's ability to fulfill its commitments and to
comply with WTO procedures in such matters as the Transitional Review
Mechanism and dispute resolution, we need both to look backward and to
look forward. Looking back, one cannot fail to be impressed by the
amount of work that has been done so far in identifying, and revising
or abolishing where necessary, laws and regulations inconsistent with
China's WTO obligations.\16\ This work began, of course, long before
China's formal accession last November. The scope of the effort can be
appreciated by seeing what the Ministry of Foreign Trade and Economic
Cooperation is reported to have achieved by the end of 2000 in
anticipation of WTO membership: the review of over 1400 laws,
regulations, and similar documents, including six statutes (of which
five were revised), 164 State Council regulations (of which 114 were to
be repealed and 25 amended), 887 of its own ministry regulations (of
which 459 were to be repealed and 95 amended), 191 bilateral trade
agreements, 72 bilateral investment treaties, and 93 tax treaties.\17\
In the first 2 months of the year 2001, the various ministries and
commissions of the State Council are reported to have reviewed some
2300 laws and regulations, of which 830 were identified as in need of
repeal and 325 as in need of revision.\18\
---------------------------------------------------------------------------
\16\ As this statement is intended to be largely forward-looking,
it is not the place to canvass in detail what China has already
accomplished in terms of WTO implementation. The United States-China
Business Council has compiled useful summaries that can be found at
<http://www.uschina.org/prcwtocompliance.pdf> (dated June 2001) and on
page 14 of the January-February 2002 issue of the China Business Review
(dated September 2001).
\17\ Nan Xianghong, ``WTO: fa de chongxin goujia'' (WTO: The
Restructuring of Law), Nanfang Zhoumo (Southern Weekend), Oct. 25,
2001.
\18\ Ibid.
---------------------------------------------------------------------------
Needless to say, the process of trying to identify inconsistent
regulations in the abstract is bound to miss many problem areas.
Identifying inconsistency is sometimes easy, but at other times takes a
high level of expertise and a full hearing by a dispute settlement
panel in the context of a particular set of facts. Thus, we should not
be surprised if many inconsistencies remain despite the government's
efforts. Nevertheless, I believe that the government has so far shown a
great deal of energy in addressing problems of legislative
inconsistency.
Outside of the field of legislative revision there has also been a
great deal of activity. The last several months have seen a flood of
new regulations designed to implement China's commitments. There have
also been countless training sessions for Chinese officials, many with
foreign financial support.\19\ The government has begun restructuring
to facilitate the meeting of WTO requirements. For example, the
Ministry of Foreign Trade and Economic Cooperation (MOFTEC) has
established a Department of WTO Affairs to handle implementation and
litigation, and a ``China WTO Notification and Enquiry Center'' in
order to help implement its transparency commitments.\20\ It has also
established a Fair Trade Bureau for Import and Export to handle issues
relating to unfair trade practices.\21\ The courts, for their part,
have also undertaken training and other activities, such as review for
WTO-compatibility of existing Supreme People's Court interpretations
and other directives, designed to meet the requirements of WTO
accession.\22\
---------------------------------------------------------------------------
\19\ A partial, but nevertheless very long, list of such programs
can be found in Brian L. Goldstein & Stephen J. Anderson, ``Foreign
Contributions to China's WTO Capacity Building,'' China Business
Review, vol. 29, no. 1 (Jan.-Feb. 2002), pp. 10-11.
\20\ See Ministry of Foreign Trade and Economic Cooperation,
``Guanyu Zhongguo zhengfu WTO zixun dian zixun banfa (zanxing)''
(Measures Regarding the Making of Inquiries at the Government of
China's WTO Inquiry Point (Temporary)), issued Jan. 1, 2002, effective
Jan. 14, 2002. This document provides the inquiry point with the
official English name of ``China WTO Notification and Enquiry Center.''
A report dated April 11, 2002 stated that as of that time the Center
had received over 300 inquiries. See Xinhua Wang (New China Net),
``Jiangqiu chengxin! Woguo qieshi luxing jiaru shimao zuzhi de gexiang
chengnuo'' (Stress Sincerity! China Conscientiously Implements Each
Commitment Made Upon WTO Entry), April 11, 2002, available at <http://
www.exin.net/economic/itemview1.jsp?id=334638>, last visited June 3,
2002.
\21\ See Xianwu Zeng,''Trading Rights After China's WTO Entry,''
China Business Review, vol. 29, no. 1 (Jan.-Feb. 2002), p. 19.
\22\ For a general account of activities within the court system,
see Guoguang Li , ``To WTO Accession, Chinese Courts Think Ahead,''
China Law, February 2002, pp. 58-59.
---------------------------------------------------------------------------
While much work remains to be done, then, there can be little doubt
of the energy and commitment shown so far by the government. And this
is to say nothing of the enthusiasm for knowledge about the WTO
displayed outside of government. Almost any lecture or presentation
with the word ``WTO'' in it is guaranteed to draw a large audience, and
indeed among urban Chinese the English abbreviation is probably as
common as, if not more common than, the original (and shorter) Chinese
abbreviation (shi mao).
Looking forward, I am generally sanguine about the prospect of
China's compliance with its commitments and its willingness and ability
to modify its rules if it loses a WTO dispute settlement proceeding.
But there will be disappointments, and it is necessary to understand
and anticipate them in order to put them in proper perspective and
distinguish real and pressing problems from temporary and minor ones.
As noted earlier, China undertook in Para. 67 of the Working Party
Report to meet its WTO commitments ``through revising its existing laws
and enacting new ones fully in compliance with the WTO Agreement.'' The
extent to which China revises its existing laws and promulgates new
ones is something that can be monitored with relative ease. But clearly
it is not enough simply to promulgate new regulations. They must be
applied and enforced. Here, there are at least two major issues worthy
of discussion.
The first is the extent to which local governments will engage in
WTO-inconsistent practices that the central government is unable or
unwilling to stop. We should be clear about one thing: there is no
question that, as a legal matter under China's constitutional system,
local governments may not do what the central government forbids them
to do, and must do what the central government requires them to do.
Because the central government has the legal capacity to require local
governments to conform to WTO obligations, it has the obligation to do
so.
Some members of the WTO Working Party on China's accession were
reported to have expressed concern that subnational governments in
China might take measures inconsistent with China's WTO obligations,
and that the central government would not or could not remove such
measures. The representative of China assured them (see Para. 70 of the
Working Party Report) that local governments had no autonomous
authority over trade-related matters, and that the central government
would ``ensure'' (not merely take the ``reasonable measures'' called
for by Art. XXIV:12 of the General Agreement on Tariffs and Trade (the
``GATT'') 1994) that local government regulations conformed to China's
WTO obligations. This assurance is one of China's formal commitments.
Art. XXIV:12 of the GATT 1994, which presupposes a degree of
independence on the part of local governments, simply does not apply.
Obviously, however, the real question is not quite so simple as the
legal question. Subnational governments in China can enjoy considerable
de facto autonomy from Beijing; this is a fact, not simply a convenient
excuse for inaction cooked up by the Chinese central government. China
suffers from numerous internal trade barriers that the central
government is continually struggling, often unsuccessfully, to remove.
We should not be surprised if, with the best will in the world, it has
at least as much difficulty removing barriers to foreign goods and
services.
The phenomenon of local protectionism is one that has attracted the
attention and concern of academics and policymakers in China for some
time. Internal trade barriers are just one aspect of it; favoritism to
local parties in courts is another. But it is important to understand
that it is not just foreigners who want to get rid of it. It is
generally in the interest of the central government to expand its own
sphere of actual authority and to reduce such local protectionism, and
it is practical considerations more than ideological ones that have
stood in the way of progress in this area. It has been proposed for
years, for example, that judges in local courts should be appointed and
salaried by the central government instead of the local government. So
far, however, the central government has not been willing to expend the
political and financial resources necessary to put this reform into
practice. But pressure for such reform is building, as shown by the
recent appearance in Jingji Yaocan, the internal (non-public) journal
of the State Council's think tank on development issues, of an article
advocating precisely such a reform.\23\
---------------------------------------------------------------------------
\23\ See Wang Xu, ``Tuijin sifa tizhi gaige, ezhi sifaquan
difanghua qingxiang'' (Push Forward Reform of the Judicial System,
Block the Trend Toward Localization of Judicial Power), Jingji Yaocan
(Economic Reference), no. 74, 2001 (Nov. 31), pp. 11-22.
---------------------------------------------------------------------------
The main factor behind local economic protectionism is the
dependence of local government upon local enterprises for revenues. To
the extent a government takes revenues, whether in the form of taxes or
profits, from an enterprise, it is of course not unlike an owner and
has the same interest in protecting those revenues. When the owner of
an enterprise can control the conditions under which that enterprise
competes, the results are utterly predictable. With the further
progress of economic reform in China, one might expect to see a
widening of the tax base and a reduction of the dependence of local
governments upon specific enterprises for revenues. Needless to say,
however, the influence of powerful local businesses seeking protection
will not disappear in China any more than it has disappeared in China's
trading partners.
The second issue I wish to raise here is that of the capacity of
China's courts to handle a substantial workload of reasonably complex
cases. Here the news is neither especially good nor especially news,
since it has been widely known for some time that China's courts are
weak and its judges, on the whole, poorly qualified. China's courts
will continue to present difficulties in the years ahead. On the other
hand, as in many other areas of Chinese legal and political life, we
can expect the most reform in areas where there is a solid domestic
constituency for it, and court reform is undoubtedly one of those
areas. The key issues in court reform from the standpoint of China's
fellow WTO members are the qualifications of judges, the willingness
and capacity of courts to render fair judgments free of corruption and
pressure from local government, and the ability of courts to execute
those judgments once rendered.
The low qualifications of China's judges are no secret, and indeed
are a regular subject of discussion by high government officials,
including the President of the Supreme People's Court.\24\ As of 1995,
for example, only 5 percent of China's judges nationwide had a 4-year
college degree in any subject (let alone in law),\25\ and it is
currently estimated that about 10 percent of judges have 4-year college
degrees in law.\26\ A 1998 study of nine basic-level courts (the lowest
level) in a major provincial city revealed that only 3 percent of the
judges had a bachelor's degree in law and that the ``great majority''
had had other types of jobs in the court administration such as
bailiff, clerk, or driver before being promoted to the rank of
judge.\27\
---------------------------------------------------------------------------
\24\ See the remarks of Xiao Yang reported in ``Xiao Yang zai
renmin fayuan 'ru shi' hou shenpan gongzuo huiyi shang tichu zhuanbian
sifa guannian tigong sifa baozhang'' (Xiao Yang Proposes to Change
Judicial Concepts, Supply Judicial Guarantees at Conference on
Adjudication Work of People's Courts Following WTO Accession), Fazhi
Ribao (Legal System Daily), Internet edition, Nov. 21, 2001. Two other
senior Supreme People's Court officials comment to the same effect in
Guoguang Li , supra note 22, pp. 55-60, and Cao Shouye, supra note 12.
However accurate the comments, one must wonder about morale among lower
court officials constantly held up for contempt by their superiors.
\25\ See Deng Ke, ``Sifa gaige: xianshi yu keneng'' (Judicial
Reform: Reality and Possibilities), Nanfang Zhoumo (Southern Weekend),
Internet edition, Oct. 25, 2001.
\26\ Author's interview with members of Beijing University Faculty
of Law, March 2001.
\27\ See Li Xiaobin, ``Shenpan xiaolu ruhe neng you da fudu tigao''
(How Can There Be a Large Increase in the Efficiency of Adjudication?),
Faxue (Jurisprudence), no. 10, 1998, pp. 52-54.
---------------------------------------------------------------------------
The frequency with which situations such as this are reported
suggests strongly that there is no political difficulty with advocating
reform and that such advocacy is supported in important sectors of the
central government. China has in fact recently taken solid steps toward
improving the qualifications of judges. Last March, for example, saw
the first administration of a new unified judicial examination for
lawyers, prosecutors, and judges. Although sitting judges will not be
required to take or pass the examination, to require this of judges
going forward is already a very far-reaching (indeed, surprisingly so)
reform at this stage of China's legal development--so far-reaching,
indeed, that one wonders whether the pool of those who pass and are
willing to serve as judges will be big enough to serve the needs of the
court system. In any case, however, this reform--and the political
difficulties that must have been overcome to effect it--is solid
evidence of the potential for significant reform to occur where there
is a domestic constituency for it. Fortunately, there is a domestic
constituency for significant further reforms in the judicial system.
In addition to the problem of the quality of judges, China's courts
are at present not fully reliable as enforcers of statutorily
guaranteed rights. This is true for a number of reasons. First, while
statutes are superior to regulations issued by government ministries in
China's formal constitutional structure, a ministry regulation that is
directly on point will generally be considered in fact to be directly
applicable rule by both government officials and court officials. This
is simply a matter of what might be called customary legal culture; it
has been both noted and criticized in China as well as abroad,\28\ and
among many critics WTO accession was viewed as a helpful spur to
change. Nevertheless, change will not come quickly. Second, there is
the well known problem of corruption in the judiciary. This problem is
not of course unique to China. Third, Chinese courts often have
difficulty enforcing their judgments. As this problem is also well
known and has been the subject of considerable commentary elsewhere by
myself and others,\29\ I will not go further into it here.
---------------------------------------------------------------------------
\28\ See, for example, Donald C. Clarke, ``State Council Notice
Nullifies Statutory Rights of Creditors,'' East Asian Executive
Reports, vol. 19, no. 4 (April 15, 1997), pp. 9-15.
\29\ See Randall Peerenboom, ``Seek Truth from Facts: An Empirical
Study of the Enforcement of Arbitral Awards in the People's Republic of
China,'' American Journal of Comparative Law. vol. 49, no. 2 (2001),
pp. 249-327, and Donald C. Clarke, ``Power and Politics in the Chinese
Court System: The Execution of Civil Judgments,'' Columbia Journal of
Asian Law, vol. 10, no. 1 (Spring 1996), pp. 1-125.
---------------------------------------------------------------------------
Fourth, and less well known, is the tendency of Chinese courts not
to aggressively seek jurisdiction over cases, but on the contrary to
fear it and often go to great lengths to avoid taking difficult or
sensitive cases. Courts in China have the choice of accepting or not
accepting a case. This is somewhat akin to the institution of summary
judgment in its gatekeeping function, but very much unlike it in that
it is not governed by any consistent set of principles other than the
court's general sense of whether the case seems meritorious and
deserving of further proceedings. Courts can use this power simply to
decline to hear, and thus avoid ruling on the merits of, cases that
look troublesome and likely to cause serious offense to powerful
interests no matter how the court decides.
Most recently, the Supreme People's Court of China stirred up a
major controversy when it instructed lower courts simply to stop
accepting shareholder suits for damages based on certain violations of
China's Securities Law.\30\ This instruction, it is important to note,
was not based upon a theory that the shareholders had no legal right of
action under the Securities Law. It was explicitly based on the grounds
that adequate procedures had not yet been worked out for hearing such
suits, and that they would therefore have to wait.\31\ The real reason
was simply that the courts were terrified of a number of looming
actions in which shareholders were bringing, or about to bring, suit in
several courts around the country, and the specter of overloaded
judicial resources and inconsistent decisions on similar facts was too
much to contemplate.
---------------------------------------------------------------------------
\30\ See Supreme People's Court, ``Guanyu she zhengquan minshi
peichang anjian zan bu shouli de tongzhi'' (Notice on Temporarily Not
Accepting Securities Cases Involving Civil Suits for Damages), Sept.
21, 2001.
\31\ See ``Gao yuan biaoshi shenli zhengquan jiufen an jiang zhubu
tuikai'' (Supreme Court Indicates that the Hearing of Cases Involving
Securities Disputes Will Gradually Be Increased), Zhongguo Zhengquan
Wang (China Securities Net), Oct. 11, 2001, available at <http://
www.cnstock.com> (reporting remarks of Supreme People's Court official
Cao Shouye).
---------------------------------------------------------------------------
Just a few months ago, on January 15, the Supreme People's Court
finally announced that investors would be allowed to proceed with
actions based on claims of false disclosures in securities trading, but
only where China's Securities Regulatory Commission had established the
existence of such false disclosures.\32\ While this is no doubt welcome
news to investors, it underscores the casual attitude toward
statutorily granted rights taken not only by government agencies, but
by the courts themselves. The Court apparently agrees with the
plaintiffs that they State a valid claim under the Securities Law, but
has interposed, without any statutory foundation whatsoever, the CSRC
as a gatekeeper in order to ensure that claims not approved by the
government will not come before the courts. (And all other claims
remain barred for at least the time being.)
---------------------------------------------------------------------------
\32\ See Richard McGregor, ``China to Allow Investors to Sue Listed
Companies,'' Financial Times, Internet edition, Jan. 15, 2002.
---------------------------------------------------------------------------
what kind of legal system does the wto require?
Despite the problems discussed above, it must be recalled that the
WTO does not mandate a perfect legal system, or even a basically fair
one, outside of a few specific areas. At times, according to some of
the more ambitious claims, it seems that China must utterly revamp its
legal and political system--in short, stop being China--or risk being
found in violation of its WTO commitments. One analyst goes so far as
to State that the national treatment and transparency requirements of
the GATT require China to amend its constitution to eliminate any
special position for the Communist Party and to delete or amend the
word ``socialism'' to the extent that it implies or authorizes Party
control over the operation of the legal system.\33\
---------------------------------------------------------------------------
\33\ Pitman Potter, ``The Legal Implications of China's Accession
to the WTO,'' China Quarterly, no. 167 (Sept. 2001), p. 603.
---------------------------------------------------------------------------
This is going too far. First, the requirements of the WTO
agreements for fairness and transparency are in fact surprisingly
limited. The only WTO agreement that comes close to a general
requirement of fairness in the operation of the legal system is the
TRIPS Agreement. This agreement does indeed set forth in Part III
(``Enforcement of Intellectual Property Rights'') a number of
requirements for fair judicial proceedings for the protection of
intellectual property rights.\34\ However, it is worth noting that
Article 41.5 specifically states that this Part [III] does not create
any obligation to put in place a judicial system for the enforcement of
intellectual property rights distinct from that for the enforcement of
law in general, nor does it affect the capacity of Members to enforce
their law in general. Nothing in the Part creates any obligation with
respect to the distribution of resources as between enforcement of
intellectual property rights and the enforcement of law in general.
---------------------------------------------------------------------------
\34\ See generally Part III of the TRIPS Agreement, Articles 41 to
50.
---------------------------------------------------------------------------
Once this disclaimer of obligation is taken into account, there is
not much left of the Part III obligations beyond the obligation to pass
appropriate legislation. It is hard to see a strong mandate here for
institutional reforms.
Moreover, the very fact that the requirements of Part III are
specifically listed in the TRIPS Agreement suggests that those
requirements do not apply to the other WTO agreements and do not attach
to WTO membership generally; they could almost be read as a list of
things a country's judicial system does not need to have outside the
realm of intellectual property. Finally, of course, the TRIPS
Agreement's obligations apply only to proceedings for the protection of
intellectual property rights. These are a small part of the legal
system's activity.
Other WTO agreements such at the GATT and the General Agreement on
Trade in Services (the ``GATS'') also have provisions spelling out
transparency requirements, but once again the obligation is more
limited than generally assumed. Article X of the GATT contains
requirements respecting transparency and the impartial administration
of law, but these apply only to a limited subset of China's laws: those
affecting trade in goods. Similarly, the corresponding provision of the
GATS applies only to scheduled sectors--those that China has agreed to
open up at least partially.
In short, there is no general obligation under the WTO agreements
to have a fair and well functioning legal system. That obligation
applies only to specific actions in specific sectors. Of course, it is
unlikely that a State could produce a fair and well functioning legal
system in those sectors and be unable or unwilling to produce it in
others. Thus, a good legal system is likely to be an all-or-nothing
proposition. Nevertheless, it is important to bear in mind that the
undoubted problems of China's legal system cannot uniformly be
condemned as violations of its WTO commitments. Many members of the WTO
have or have had legal systems of questionable fairness, and nobody has
ever suggested that that disqualified them from WTO membership. The
fact that China happens to be a major actor in the world trading
system, whereas these members may not have been, does not change the
argument.
A second answer to the claims that accession requires major
revisions to China's entire legal system is to note that the WTO system
cares much less about what you say than about what you do. The
constitutions of the WTO member states contain any number of vague
provisions susceptible of various interpretations, many of which might
be WTO-unfriendly. But the issue for China's trading partners is not
whether its constitution gives primacy to the Communist Party in
judicial proceedings. It is not even whether the Communist Party in
practice controls judicial proceedings. It is whether those proceedings
as actually conducted meet the GATT, GATS, and TRIPS Agreement tests of
fairness and transparency.
The area of the Chinese legal system that will probably cause the
most difficulty is its present inability to provide, at least on a
consistent basis, truly independent review of administrative actions.
The financial dependence of courts on local government is compounded
first by the lower political status of judges relative to many of the
officials whose actions they will be called upon to judge, and second
simply by the tradition of judicial deference to administration. This
tradition is reinforced in a very concrete way by the structure of
courts, which are at every level part of the so-called ``political-
legal'' system at the same level, a vehicle of Party control that
coordinates the activities of courts, police, and prosecutors. Parties
may be justly dubious of receiving an impartial hearing in an
environment where ex parte contacts are common, corruption is
widespread, and courts are allowed and even encouraged to contact
superior courts (without notice to the parties) for their advice on
specific cases before rendering a judgment.
Future reform is not, of course, out of the question. As I have
noted earlier, the problems were diagnosed in China long ago and the
solutions to at least some of them are there on the table: among them,
for example, putting power over staffing and financing of courts to the
central government, raising judicial salaries in order to attract a
higher calibre of personnel, and ending the use of courts as a dumping
ground for demobilized army officers.
Bearing in mind the problems outlined above, I shall now turn to a
few specific commitments relating to China's legal system (I am not
addressing here any of China's commitments respecting specific trade
matters such as tariff levels, quotas, etc.) where I see potential
difficulties in compliance. Three relate to transparency. In Para. 334
of the Working Party Report, China promised to make available in one or
more of the official WTO languages all laws, regulations, and other
measures pertaining to or affecting trade in goods or services, TRIPS,
or foreign exchange control not less than 90 days following their
implementation. Considering the vast array of potential sources of
relevant measures, including central ministries, local governments and
people's congresses, and even the court system, this is an
astonishingly ambitious commitment. It is worth noting that despite the
great thirst in the private sector for such translations, not a single
service, commercial or otherwise, exists today that can truly say that
it provides translations of all such laws and regulations. The universe
is simply too vast.
China has undertaken a similarly vast commitment in Para. 336 of
the Working Party Report. It has promised to designate one or more
enquiry points where information about all laws, regulations, and other
measures pertaining to or affecting trade in goods or services, TRIPS,
or foreign exchange control, as well as texts, can be obtained. To
fulfill this promise completely, the enquiry point will have to be
fully informed as to all relevant provincial and local regulations from
all parts of China. One wonders whether any country could carry this
out successfully.
Finally, in Para. I.2.C.3 of the Accession Protocol, China has
promised that any individual, enterprise, or WTO member can get
information about any measure required to be published under the
Accession Protocol at a designated enquiry point, and that a response
must be forthcoming within 30 or at most 45 days. Although China has
promised an ``authoritative'' reply only to fellow WTO members, it has
nevertheless promised an ``accurate and reliable'' reply to individuals
and enterprises. Even this standard could prove difficult to meet if
the enquiry point is flooded with questions. In short, these three
provisions all seem to promise to make available a kind of knowledge
that does not currently exist, and which it will be very burdensome to
provide.
Similar problems are likely to afflict the Transitional Review
Mechanism, which on China's part consists primarily of the obligation
to supply information. It seems inevitable that China will interpret
the requirements for information narrowly, given the vast range of
information called for. While procuring the statistical information
called for is merely a question of requiring the relevant authorities
to collect it, it will be more difficult to provide the complete lists
of relevant regulations and administrative measures that are called
for, since it will not always be obvious that a particular regulation
may have an impact on, for example, trade in goods or services.
In addition to the specific problems indicated above, the Working
Party Report and the Accession Protocol also pose somewhat
contradictory demands both at the conceptual level and at the concrete
level. They generally promote the strengthening of legal institutions
in China, but in some places seem to promote the opposite and to
encourage China to continue its tradition of administrative
omnipotence. More generally, China's government is paradoxically being
asked to exercise central power to further decentralization, and to
exercise administrative power to strengthen judicial power.
Consider, for example, Para. 68 of the Working Party Report: China
promised that administrative regulations, departmental rules and other
central government measures would be implemented in a timely manner,
and that if they were not changed in time, the government would still
honor China's WTO commitments. Presumably China made this promise at
the behest of the members of the Working Party, but it is tantamount to
saying that the government may decide at any time simply to ignore its
own duly promulgated regulations and to operate according to some other
set of standards. Fortunately for the rule of law in China, the Chinese
government was apparently not asked to promise to ignore ``laws,''
i.e., legal requirements issued by a constitutionally superior body,
the National People's Congress or its Standing Committee.
Perhaps more troublesome is the fact that apparently not only is
the government to ignore its own regulations if they cannot be changed
in time, but so also are the courts. Here, the issue is how courts are
to be notified, other than through the normal process of formal repeal
and replacement, that duly promulgated State Council regulations they
would normally be bound to implement have lost their effectiveness. The
only method would seem to be one that China's trading partners are in
other arenas encouraging her to move away from: the unofficial note or
telephone call from a senior official instructing courts how to operate
in a way that is both arbitrary and opaque.
Similarly, Para. 203 of the Working Party Report contains a promise
not to enforce the terms of contracts containing foreign exchange
balancing, local content, or export requirements. The demise of such
obligations will cause few tears among foreign investors. If the
government is saying that as a regulator, it will decline to exercise
its discretionary authority to seek sanctions against those who do not
fulfill those terms of their joint venture contracts, that is one
thing. But if it is claiming the power to order courts not to enforce,
between parties, contract rights arising under laws passed by the
National People's Congress or its Standing Committee (both
constitutionally superior bodies), that is quite another. It may indeed
have such power as a matter of fact, but whether China's trading
partners should be encouraging its exercise is questionable.
conclusion
China is a large country in which the central government has a
serious problem in making its writ run in a number of sectors of
activity. Moreover, it is just emerging from a period of extensive, and
perhaps WTO-inconsistent, government control over economic activity.
Even assuming the utmost good faith on the part of the central
government, therefore, there are bound to be WTO-inconsistent measures
and practices--quite possibly a good number of them--that persist after
China's accession. Those who predict problems are not wrong to point
this out. What is unlikely, however, is that these problems will amount
to more than routine frictions, and will bring either China or the
world trading system crashing down, or will require major changes in
the way China is governed, such as removal of the Communist Party from
its traditional spheres of influence.
First of all, any dispute settlement proceedings that are
undertaken will take time. This is insufficiently realized by many
Chinese commentators, who are afflicted perhaps by too strong a sense
of urgency. It is commonly said, for example, that the need to identify
and revise inconsistent regulations is pressing because if
inconsistencies are found once China is in the WTO, its trading
partners can impose trade sanctions. In fact, of course, the process is
not nearly so fast. The complaining State would first have to notify
China of its complaint and enter into discussions with it; only if it
were dissatisfied with the results might it bring a proceeding under
the WTO's dispute settlement procedures, and if China ultimately lost
it would then still have a reasonable time (Article 21.1(c) of the
Dispute Settlement Understanding suggests 15 months as a general
guideline) within which to modify the offending regulations.
Second, it has become clear even in the very short time since
China's accession that its trading partners have no intention of
flooding the Dispute Settlement Body with complaints. Individual
companies cannot bring complaints in this forum against WTO members;
only other member governments can. The trade authorities of those
member governments have limited resources and must pick and choose the
cases they want to bring. Moreover, they are limited by diplomatic
considerations. Thus, there is no evidence of a hurry on anyone's part
to bring large numbers of complaints.\35\
---------------------------------------------------------------------------
\35\ See, e.g., Reuters, ``US Business Says [sic] Patient on China
WTO Commitments,'' Feb. 8, 2002.
---------------------------------------------------------------------------
I would like to end with a few words on potential United States
assistance with compliance and capacity-building. Because of China's
relative lack of experience with a market economy, it is inevitable
that despite the government's efforts to identify and weed out WTO-
inconsistent legislation, some inconsistent rules and practices will
remain, and new ones will crop up. It is in fact likely that many such
inconsistent rules will be discovered over time. As I have discussed,
the government has already devoted considerable energy to making
Chinese laws and regulations consistent with its WTO obligations. As in
any country, there may be rules the government wishes to retain that
its trading partners view as questionable under WTO principles, like
the E.U.'s rules on bananas or the U.S. rules on Foreign Sales
Corporations. And there may be rules that displease China's trading
partners that do not in fact run afoul of the WTO agreements. But there
is no reason to doubt that the government is in principle genuinely
committed to getting rid of many of the old rules that shackled the
economy and has seized WTO accession as an opportune moment to do it.
There is no reason to think that the Chinese government is committed to
defending every WTO-inconsistent rule to the bitter end.
The United States is now very much involved, both at the
governmental and the non-governmental level, in activities aimed at
promoting compliance and building capacity. These activities should
continue. Considering the volume of trade at stake, the required
expenditure is probably quite modest.
The United States should work with China to develop formal
mechanisms--some of which are already in existence--that can identify
questionable rules and practices, hear arguments from affected parties,
and deliver advice to the appropriate governmental body on the WTO-
consistency of the rule. This would give the Chinese government the
opportunity to continue, in a structured and unified way, its review of
its own regulations, and could serve to obviate the need for formal WTO
dispute resolution procedures in many cases.
In particular, compliance and capacity-building efforts should be
directed at local governments. The degree of local government
commitment to reform and receptivity to WTO standards and principles
varies. But almost all local governments have one thing in common: they
are drastically less informed than the central government about the WTO
in general and about China's specific commitments in particular. Only
recently have the WTO accession documents been available in Chinese
(they can now be downloaded from MOFTEC's web site), and even so it is
no more realistic to expect Chinese local officials to understand their
details than to expect American local officials to understand the WTO.
There is a great need at the local level for seminars and workshops
that will explain the basic principles of non-discrimination and
transparency. Local governments need to be encouraged to set up their
own offices for hearing and resolving complaints about WTO-inconsistent
measures so that recourse need not be had to Beijing or, failing that,
the WTO Dispute Settlement Body.
It is important, however, to pay some attention to the target
audience. It may make a great deal of sense to train judicial officials
in the principles of transparency and due process, for example, but
they have very little need to be acquainted with China's substantive
commitments under the WTO. Those commitments mean little to courts
until they have been translated into domestic law. On the other hand,
it is probably a good idea to train local government officials in the
principles of non-discrimination and national treatment, since the
granting of special breaks and favors on an ad hoc basis is a deeply
rooted government practice as natural and unremarkable as
breathing.\36\
---------------------------------------------------------------------------
\36\ In its 2002 National Trade Estimate Report on Foreign Trade
Barriers--China (March 29, 2002), p. 48, the Office of the United
States Trade Representative reflected concerns that local officials
``do not understand China's WTO commitments.'' These concerns seems
well founded. See, for example, the (barely) post-accession Zhejiang
Province Regulations on Protecting the Investment of Taiwanese
Compatriots (Zhejiang sheng Taiwan tongbao touzi baozhang tiaoli)
passed by the Zhejiang Provincial People's Congress Standing Committee
on Dec. 28, 2001 and effective January 11, 2002. These regulations
promise special benefits for Taiwanese investors, thus apparently
violating most-favored-nation principles to the extent that the
investment is in a sector covered by, for example, the GATS, and
further specifically encourage investment in projects that will produce
for export. To the extent that the ``encouragement'' constitutes an
export subsidy, it will of course violate the GATT.
---------------------------------------------------------------------------
I sometimes think of the Chinese legal system as an aircraft
carrier, and of foreign assistance projects as rowboats attempting to
change its course. To a very large extent, the path of that aircraft
carrier will be determined by what goes on in the engine room and on
the bridge. This is a counsel not of despair but of humility, patience,
and thoughtfulness. Effective compliance and capacity-building programs
must be designed to work over the long term and to build relationships
with specific institutions. They must strike the balance between asking
too much and asking too little, either of which will lead to nothing
being done. And the U.S. must be willing to work with and through non-
governmental organizations, other WTO members, and multilateral
organizations in order first to demonstrate that WTO compliance is not
simply a narrow American political interest, and second to avoid having
discussions about Chinese compliance with multilateral standards turn
into possibly contentious, and certainly fruitless, discussions about
U.S. trade practices vis-a-vis China.
______
Prepared Statement of Jeffrey L. Fiedler
june 6, 2002
Thank you Mr. Chairman for this opportunity to appear before the
Commission.
I would like to offer some thoughts on the commercial rule of law
and the WTO and raise what I believe is a policy question that must be
addressed by the United States government in its dealing with the PRC
over the next few years.
There is widespread and legitimate concern within the Congress, the
executive branch and the business community about whether China will
fully comply with WTO rules and the agreements it made when it gained
entrance. This concern has roots in three concerns: one, Chinese
government officials and business executives do not understand the
complex maze of rules and agreements; two, China has a dismal record of
compliance with bilateral and international agreements; and three, the
concern that domestic unrest will cause the Chinese government to
ignore or, at a minimum, postpone compliance with its agreements. These
concerns are further complicated by the prospect that compliance is
expected under the tutelage of a new group of little known and untested
national leaders about to assume power.
Permit me, as a non-lawyer, to make a few comments on the rule of
law generally and commercial law specifically. All discussion of the
law in China must be had with the understanding that there is no rule
of law as we know it in China. Legal concepts of any variety or
derivation do not guide government officials, business executives or
ordinary citizens in their daily lives. It is power, specifically the
power of the Communist Party, which guides most decisions of
consequence in China. That is not to say that everything is simple, it
is not. The complex web of power relationships is ever changing. There
are various dynamics of power at work, but none of them are rooted in
the participants' desire to comply with one law or another.
During the various debates in the Congress over the past decade we
have heard much about the power of free trade and capitalism to bring
about change in China. Now that the principal debate is over, we are
hearing less about it. But, what we are now hearing more about is the
rule of law, and the how commercial law can help change China. I hope
we don't have to hear too much about this for just as capitalism
doesn't bring democracy, commercial law does not give birth to the rule
of law. Commercial law was pretty well developed in Mississippi and
elsewhere in the 1960's, but respect for the rule of law left much to
be desired.
If the US government and the business community want to experiment
with developing a system of functioning commercial law within the
context of authoritarian political rule so that American corporations
can do business in China with some measure of what they perceive to be
equity and predictability, so be it. But, we should be spared the
rationalizations about how much this contributes to the development of
civil society.
If the US government wants to spend taxpayer money training Chinese
``judges'' so they can better understand contract law, so be it. Just
do it without pretending that this somehow advances the development of
civil society. The problem with the Chinese legal system is not
untrained judges. The problem is that it is not a legal system. It is a
system designed primarily to maintain the power of the Communist Party,
and only secondarily to govern the conduct of individuals within
society. It certainly has no significant function in governing the
relationship between the government and its citizens.
Training lawyers and judges absent systematic change is analogous
to training the officials of the All Chinese Confederation of Labor
(ACFTU) to be better labor leaders. Certainly safety and health
training for staff at all levels of this phony union structure is
intrinsically a good thing. It might even save a few people their arms
and legs. But in the end, the ACFTU will still be a phony union, albeit
with some staff who now know better what they are not doing.
The central concern of the Chinese government and the ruling
Communist Party is so-called ``social stability.'' It is also the
primary concern of the United States government, and of US
corporations. The US government expresses its concern slightly
differently. At various times, mostly during political debates, the
specter of ``chaos'' has been held up for all to consider--a billion
something people running amok. The net result has been a conscious
decision among Members of Congress and various Administrations, both
Democratic and Republican, to support efforts of the so-called
``reformers'' within the Communist Party. It has helped everyone
rationalize this action knowing that few if any members of the
Communist Party actually believe in communism any more.
The leaders of the Party believe in their own power. They believe
that they can cobble together a new foundation of power based on
economic growth. Foreign investment and trade is crucial to generating
this growth. To the extent that it is necessary and in its interests,
the Party is willing to share the fruits of this growth with foreign
corporations. Both the Party and the US government viewed China's
entrance into the WTO as lubricant for this continuing economic
relationship. Furthermore, both view it as a catalyst for continued
change. The US views it as getting the Chinese used to complying with
international rules, and the ruling Party views it is a convenient
justification for such moves as dismantling its State enterprise
system.
The question of continued ``social stability'' remains wide open.
The critical issue is not whether China develops a deeply rooted system
of commercial law, or even whether its various actors understand WTO
rules and regulations. The real issue is what will the Party do when
WTO implementation clashes with its own view of what is in its
interests, i.e. threatens its continuing ability to rule.
It is in dismantling the State enterprises system that all of the
many conflicts in China come together. No one outside China disputes
the necessity of this. In the first instance, the Chinese financial
system depends upon it. In any other country, the banking system would
have already collapsed under the weight of the bad loans made to the
State enterprises.
Despite foreign investment and various ``economic reform''
policies, the State enterprise sector still employs a majority of the
industrialized work force in China. That it does so unproductively is
beside the point. The destruction of this economic and social system
creates a political reality. This political reality is further
complicated by a pervasive corruption at all levels of politics and
society. The corruption has produced a deep seated and widespread
resentment among ordinary people, especially workers.
They do not trust their factory managers. Many of the managers have
looted the enterprises. They do not trust their Party-controlled
``unions'', the local leader of which is usually the deputy plant
manager. No real labor leader, or lawyer for that matter, needs further
training to know that workers expect to be paid for their labor. And
yet, one of the most common reasons for worker unrest is the owing of
back wages.
The Party greatest fear is that workers will revolt on scale. They
believe that allowing the existence of independent trade unions is
tantamount to giving up power. A number of US government officials I
have spoken to over the years agree with them.
The Chinese government without the slightest hint of embarrassment
entered a ``reservation'' on the clause concerning independent trade
unions when it signed in 1998 the International Covenant on Economic,
Social and Cultural Rights. The US business community, also without a
hint of embarrassment, remained silent. I did not notice any noteworthy
comment from proponents within the United States for the rule of law in
China.
As a matter of policy both the United States and the ruling Party
in China have bet worker unrest can be managed successfully. To be sure
it has been ``managed'' successfully thus far. Workers are allowed to
protest about legitimate grievances such as back pay so long as these
protests are largely confined to the workplace, and so long as the
workers don't ask why the government let it happen. They are even
allowed to engage in some disruption such as blocking traffic. The
government moves relatively quickly to settle the dispute, usually by
paying the workers a portion of what they are due. During the dispute,
the security services usually determine who the leaders are.
Afterwards, they are arrested, threatened, fired, or punished in some
other way. These leaders are particularly dangerous in the minds of
security officials. They have risen naturally out of the circumstances,
and they have organized their peers. Rarely are they arrested in the
workplace. Usually it happens at home and at night. It is a time-tested
way of dealing with workers who display their entrepreneurial talent
for organizing.
When the government believes a protest is getting out of hand or
must be stopped it uses the People's Armed Police. This is a force of
some 1.4 million, whose growth from 300,000 in the early 1980's mirrors
remarkably the Party's increasing concern with the impact of economic
change. These troops are used primarily to deal with worker and farmer
protests.
The key question for US policymakers is what will the United States
government do if the increased pace of State enterprise
``restructuring'' results in the violent repression of workers on a
mass scale? The Chinese government, in my view, is prepared to use
force to suppress workers. One of the key determinants of the decision
to use force in 1989 was the increased activity of workers in support
of the students. It fears them.
It is somewhat ironic that compliance with WTO requirements is the
justification most likely to be used by the Chinese government for
repressing workers. The reality is that workers are faced with no
choice but to take to the streets in order to secure a modicum of what
they deserve. Should they instead be allowed to organize independent
unions to give strength to their aspirations, there would be many
alternatives. All of these certainly would involve real power sharing,
a concept that is found in most countries respecting the rule of law.
It is not that Chinese government and Party officials are stupid and do
not understand the meaning of power sharing. It is simply still true
that the Party is uninterested in sharing power with anyone. Its
leaders think they can ``manage'' repression and maintain ``social
stability''. As far I can tell, the US government and business
community think they are right, and have, at the very least, tacitly
endorsed the Party's policies. I think this is a grave mistake.
Thank you.
______
Prepared Statement of Hon. Max Baucus, a U.S. Senator From Montana,
Chairman, Congressional-Executive Commission on China
june 6, 2002
Last December, we ushered in a new era with China's formal entry
into the World Trade Organization. Our task now is two-fold. First, to
ensure that the Chinese government complies with the terms of accession
and with the global standards of action embedded in the WTO. Second, to
encourage continued progress in the development of commercial rule of
law in China, both as a means to ensure WTO disciplines are being met,
and as a means to a broader development of the rule of law in that
country.
As China's economy grew through the 1990's, and its role as a major
trading Nation became more significant, the need for China to be
subject to WTO disciplines became increasingly urgent. Bilateral and
multilateral negotiations took over a decade. We spent a year in the
Congress on passage of PNTR. Now we turn to Chinese implementation of
the commitments they undertook. The monitoring of China's performance
is a major task--for the United States, for China's other trading
partners, for the WTO, and for the Chinese themselves.
Chinese compliance is critical--to the United States, to the global
economy, and to China's own economic development. Compliance is one of
America's top trade priorities. We are talking about changes that will
impact us now, not at some indefinite time in the future. It must be on
the top of our agenda.
Why is this so important to the United States? First, total trade
between the U.S. and China increased from $5 billion in 1980 to $122
billion in 2001, and China is now our fourth largest trading partner.
Likewise, U.S. investment in China has grown astronomically. The United
States is China's largest source of foreign investment outside of Hong
Kong, with $34.4 billion invested in China between 1979 and 2001, and
$4.4 billion in 2001 alone. China is also the country with which the
U.S. has the largest trade deficit. In 2001, our merchandise trade
deficit with China was almost $83 billion. We must have clear and
understandable rules governing these relationships, along with far
greater access to China's markets.
China's accession to the WTO should provide greater opportunities
and predictability for American businesses operating there. Some of the
changes China must make were to be implemented immediately upon
accession; others are to be phased in over time under special
transition rules. These were the terms of China's accession, and they
were the terms under which we granted China PNTR status.
The second reason WTO accession is so important to the United
States involves the potential broader impact of the reforms China must
undergo. Development of commercial rule of law will likely accelerate
change in governance inside China. For example, one WTO requirement is
the prompt publication of all laws, regulations, judicial decisions and
administrative rulings relating to trade. WTO members must agree not to
enforce those measures before they are officially published. And once
those measures are published, they must be applied in a uniform,
impartial and reasonable manner. This is a process far different than
exists at present.
Another example is that WTO members must establish and maintain
judicial, arbitral, or administrative mechanisms to review trade-
related actions by government agencies. These must be able to operate
independently of the agencies that carried out the actions in question.
If implemented, this should contribute to the development of a more
open, market-oriented society in which not only are the people bound by
the laws and regulations, but so will be the government. China's
membership in the WTO can be an important force driving the development
of the rule of law. That is a priority goal of this Commission, and of
the United States.
We are at an early stage in China's process of WTO adherence and
commercial law transformation. Clearly, senior Chinese leaders are
committed. National bodies have begun to reform and adjust thousands of
laws, regulations, and judicial decisions that are not WTO-compliant.
The Chinese government has welcomed assistance from foreign
governments, as well as non-governmental and private organizations in
conducting extensive training sessions on WTO requirements,
administrative law, judicial reform, and a myriad of other topics.
Chinese government officials, at all levels, have been eager to learn
about the steps needed to ensure that it is complying with its
commitments.
Yet, there have been mixed signals as to whether the Chinese
government is willing, or able, to adhere to all of the commitments it
has made. For example, while tariffs have been reduced and quotas have
been eliminated in some industries, there are reports that equally
protective non-tariff barriers have been erected in their place.
Sanitary and phyto-sanitary standards have still been used in some
areas with no scientific basis. Regulations that were supposed to be in
effect at accession have not been promulgated.
There are also questions about the capacity of the Chinese
government to implement the vast changes needed in so many areas. We
need to explore this closely and see if there are ways that our
government can assist more in capacity-building. Finally, although I
have confidence in the commitment and determination of the senior
leadership in Beijing to effect the required changes, questions exist
about Beijing's ability to force provincial and local levels of
government to change policies and practices. This will require
continuing and close scrutiny.
We have embarked on a long and ongoing process. That is why the
Senate Finance Committee tasked the General Accounting Office with a
long-term investigation into China's WTO compliance. This study
includes an examination of the legal and regulatory changes China is
making, the actual effects in the marketplace on American business, and
the activities of executive branch agencies in monitoring Chinese
actions. We will hear more about this from our first panel of
witnesses. Let me just note now that this GAO study can only proceed
with full cooperation from the executive branch, and I expect all
agencies to be cooperative and forthcoming with information, documents,
and other assistance.
The task of the Congressional-Executive Commission on China will be
to monitor the process, to watch how China implements its commitments,
to gain an understand of how developments in the commercial rule of law
are unfolding, and to assess the implications for broader rule of law
developments, public participation, transparency in rulemaking, and
administrative and legal accountability in China.
As we scrutinize China's WTO implementation closely, we must also
remind ourselves that this is one step, albeit a major one, in a
process of economic reform that began over two decades ago. We must
evaluate the WTO process by looking both at a snapshot of the current
reality and at the full video that incorporates trends over a 20-year
period.
Today's hearing is the third held this year by the Congressional-
Executive Commission on China. We have two distinguished panels to help
us examine China's accession to the WTO, the commercial impact on
American firms, and implications for legal reform and the rule of law
in China. I look forward to their remarks.
Prepared Statement of Hon. Joseph R. Pitts, a U.S. Representative in
Congress From Pennsylvania
june 6, 2002
Mr. Chairman, thank you for holding this important hearing on WTO:
Will China Keep its Promises? Can It?
Some might believe that China's entry into WTO will help resolve
many of the problems in China's economy and society, particularly as
member nations must comply with WTO regulations. WTO entry should help
raise the standard of living for the Chinese people. However, Chinese
leadership does not have a history of following international norms if
those norms do not fit with the aim of the Chinese leadership: keeping
control over the Chinese people.
In October 1998, China became a signatory to the International
Covenant on Civil and Political Rights. However, China still has not
ratified this Covenant. Unfortunately, contrary to the Covenant's clear
statements about protection of freedom of religion, freedom of speech,
freedom of assembly, freedom of worship, violations of those
fundamental rights and others abound.
China's lack of compliance with the International Covenant on Civil
and Political Rights does not bode well for compliance with WTO norms.
However, unlike the Covenants, the WTO does have accountability
measures that can be imposed if member nations fail to comply with WTO
standards. That, and that alone, may force the Chinese government to
keep its promises.
I look forward to hearing from our distinguished witnesses.
______
Prepared Statement of Hon. Marcy Kaptur, a U.S. Representative in
Congress From Ohio
june 6, 2002
I would like to thank Congressman Bereuter and Senator Baucus for
convening a third hearing for Commission Members. I understand that the
staff-led roundtable discussions have been continuing and the future
schedule holds some potential.
Today's hearing on World Trade Organization (WTO) regulation
implementation is an interesting choice for a hearing topic. As we all
know, our Commission was charged with examining and monitoring human
rights and the rule of law in China. It is my sincere wish that China
will live up to its commitments on implementation. To say that I am
skeptical, however, may be an understatement.
Nevertheless, for the purposes of this hearing, I will grant China
great leeway. Let us suppose that China diligently works to come into
compliance with WTO obligations. Will this lead to a new world of
rights and freedoms for the Chinese people? I am doubtful.
Many proponents of Permanent Normal Trade Relations (PNTR) for
China purported that China's entry into the WTO would lead to great
reforms within Chinese society, creating a near utopia. I did not
support unconditional PNTR and I don't support this naive, if not
misleading, future-look. Let's be frank: rarely does commercial law
lead to an expansion of human, labor and environmental rights.
I think it is safe to say that we all agree that any improvement in
China's rule of law is a step in the right direction. Chinese officials
must realize that rule of law means that all--including government
officials--are held accountable and that the law can be used to
protect, not just punish. Until now, the Chinese have been less than
willing to keep their promises when it come to commercial trade
agreements. If that Nation truly wants to be a world player, I
encourage them to prove us wrong, to live well beyond the pessimistic
predictions.
Commercial transactions may have logic, but they have no ethic.
Most importantly, the people of China deserve a sincere effort by their
leaders to uphold internationally recognized human rights--not as a
condition of a trade agreement, but as a moral right.
Questions and Answers
------
Response of Jon M. Huntsman, Jr. to a Question From Representative Wolf
Question. [W]e had a briefing by our security people saying there
is a major espionage program by the Chinese government against our
private sector . . . . Have you had that briefing? . . . [If you
have not had that briefing,] can you . . . get the briefings and then
just drop a note to the [Commission] that you had the briefing?
Answer. I have contacted USTR's security personnel and have asked
them to provide me with the briefing to which you refer.
______
Response of Jon M. Huntsman, Jr. to a Question From Representative
Levin
Question. I think it would be helpful, even before the annual
report, if you could give us in writing to this Commission an analysis
of what you are doing, how the inter-agency mechanism works, where you
are with the hiring of additional people to make sure that this annual
review is truly meaningful, so that GAO undertakes its first review, it
does not give you an E, or even a D.
Answer. Given China's importance as a major trading power and the
breadth and complexity of China's WTO commitments, the Administration
has set up a comprehensive inter-agency monitoring effort to determine
the extent to which China is complying with those commitments. USTR's
China Office is coordinating this initiative, which is being formally
overseen by a newly created Trade Policy Staff Committee (TPSC)
subcommittee whose mandate is devoted exclusively to China and the
extent to which it is complying with its WTO commitments.
All TPSC agencies have been invited to participate in this newly
created subcommittee. The subcommittee held its inaugural meeting on
December 4, 2001, and, since then, has met on a monthly basis as it
evaluates and prioritizes the monitoring activities being undertaken,
reviews the steps that China has taken to implement its commitments and
decides on appropriate responses.
The activities being overseen by the subcommittee are taking place
on several fronts, with continual private sector involvement. In China,
State Department economic officers, Foreign Commercial Service
officers, Foreign Agricultural Service officers and Customs attaches
are very active, gathering and analyzing information, maintaining
regular contacts with U.S. industries operating in China, maintaining a
regular dialog with Chinese government officials at key ministries and
agencies, and working with personnel from like-minded Embassies of
other WTO members. In Washington, an inter-agency team of experts,
coordinated by USTR and including principally the Departments of
Commerce, State, Agriculture and Treasury and the U.S. Patent and
Trademark Office, is working closely with personnel from the U.S.
Embassy and Consulates General in China as well as with U.S.-based
trade associations and companies. Finally, at the WTO in Geneva, USTR
has been active in voicing concerns about, and working with other WTO
members to address, problems with China's implementation efforts as
they arise.
At USTR, we currently have 4 persons in the China Office and 2
persons in the General Counsel's Office who devote most of their time
to China WTO compliance matters. In addition, we will soon be adding
one other person (in the China Office), who will assist in these
efforts.
Many others at USTR also participate in monitoring China compliance
matters as the need arises. They include USTR policy and legal experts
on issues such as intellectual property rights, services, investment,
technical barriers to trade, customs administration, import licensing,
rules of origin, information technology, tariffs, subsidies,
agriculture, and sanitary and phytosanitary measures. In addition,
USTR's representatives in Geneva participate in various WTO meetings
and reviews addressing China's compliance efforts.
______
Responses of Jon M. Huntsman, Jr. to Questions From Representative
Kaptur
Question 1. I would just appreciate, Mr. Ambassador, if you could
provide to our record the list of firms that you have visited and what
the wage level is of the people working therein, and whether they are
Western investment in China or whether they are Chinese-owned
companies, State-owned or otherwise.
Answer 1. I have visited numerous firms in China over the years.
Here is an illustrative list of the foreign-owned enterprises and
foreign-Chinese joint ventures that I have visited:
Continental Grain Corporation--A joint venture with a Ministry of
Agriculture state-owned enterprise, this venture is a grain and poultry
processing facility in Tianjin, where Western management and free
market principles positively impacted the culture of local employees.
Owens Corning Corporation--An insulation manufacturing facility in
Shanghai, this venture is an example of a U.S. firm promoting Western
management standards, practices and training to the local workforce.
ICI--The Imperial Chemical Company of England is a specialty
chemical manufacturing facility in Shanghai which trained many
qualified local employees in the practices of international marketing
and management.
Foxburough--One of the pioneering U.S.-China joint ventures in
Shanghai, which specialized in process control technology and
equipment, this venture is famous for its early contribution to the
U.S.-China commercial relationship and the creation of high-tech jobs.
These examples are in stark contrast to the State-run plants which
I have visited, such as Number One Shanghai Television Factory, Gaochao
Petrochemical Complex in Shanghai and Ningbo Chemical Works in
Zhejiang, which typically had factories that were ineffective,
antiquated and completely uncompetitive. In addition, based on my
conversations with officials at the various firms that I visited, it is
my understanding that the wages at the State-run firms were lower than
those at the Western firms since there was no concept of incentive or
competitive pay scales introduced by private industry.
Question 2. I would like to know if any of you could provide for
the record information as to whether the United States is the major
recipient of Chinese exported goods, or are other regions of the world
equally graced?
Answer 2. Yes. The United States is China's largest export market.
For calendar year 2001, the United States imported $102.3 billion of
goods from China.
______
Responses of Grant D. Aldonas to Questions From Senator Baucus
Question 1. At one of the roundtables the Commission staff held
recently, several witnesses noted that the United States was at a
disadvantage in China because others, especially the European Union,
were putting many more financial resources into training programs in
the area of commercial law and training than the United States was. The
concern was that legal developments and standards would then be more in
tune with European ways of doing things, and that European companies
would benefit at the expense of American business. Do you have any
thoughts about this? Also, there are Commerce Department programs in
other countries to promote commercial legal reform. What is the
situation in China?
Answer 1. Other countries have invested significant amounts of
money in WTO implementation programs for China. The European Union,
Australia, Japan, and Canada all have aggressive WTO technical
assistance programs, with substantially more funding than the United
States. One estimate holds that the EU has spent over $100 million on
these kinds of programs in the last few years.
To the extent that other countries' technical assistance improves
the transparency and predictability of China's trading regime, these
programs are in everyone's interest. The Commerce Department is seeking
joint opportunities with other countries to cosponsor training sessions
with China. For example, our standards training in medical devices last
August included a speaker from the EU. However, as you suggested in
your question, should China adopt standards that are more compatible
with those of other countries, for example European or Japanese
standards, as a result of technical assistance sponsored by those
countries, U.S. companies could be at a competitive disadvantage.
Regarding commercial legal reform, the Department has a long
history of cooperation in the area of commercial law with our Chinese
counterparts under the U.S.-China Joint Commission on Commerce and
Trade Commercial Law Working Group. This cooperation is continuing
under our recently announced legal exchange program. However, there is
much more we could do to help China reform its commercial legal system
and to help China implement its WTO commitments.
As you mentioned in your written question, the Commerce Department
has demonstrated expertise in assisting other countries to develop
their commercial legal systems. Through our Commercial Law Development
Program (CLDP), we have used funding from the Agency for International
Development to train lawyers, judges, and government officials
throughout Eastern Europe, the former Soviet Union, in Africa and
elsewhere in Asia to promote commercial law. And we would like to do
the same in China, as we believe this type of assistance would be
welcomed by the Chinese and would provide benefits both to U.S.
companies doing business in China and to the Chinese people, but we
have not done so to date due to funding concerns.
Question 2. Much of our interest in trade with China seems to be
focused on large multinational American corporations. Could you talk
about the opportunities for small and medium size enterprises in the
China market and how the U.S. Government assists them?
Answer 2. China has been and will continue to be an important and
growing market for U.S. small- and medium-sized enterprises (SMEs).
China's large consumer market and recent developments such as its
accession to the WTO make China a promising market for SMEs. The
Department has actively sought to promote the interests of small
business in China. We have a number of activities planned or underway
including:
<bullet> A medical device trade mission to China is scheduled for
September 15-24, 2002. The recruitment process for this mission
includes a strong outreach effort to SMEs. The mission will focus on
identifying opportunities for sales of medical and dental devices,
clinical laboratory products and related supplies.
<bullet> We organized a Franchising Trade Mission to Beijing,
Shanghai and Hong Kong in June 2002. China offers tremendous business
opportunities for U.S. franchisors which are keen to expand their
businesses into this market.
<bullet> A Department team recently visited Shanghai, Beijing,
Chengdu, Guangzhou, and Hong Kong to gather information for an ExportIT
report on China which should be published in the next few months. This
study will cover the telecommunications, IT, Internet, and electronic
commerce industries and is aimed at helping SMEs expand into overseas
markets.
<bullet> As a result of current and past Market Development
Cooperator Program (MDCP) grants, numerous trade associations have
established offices in China to assist SMEs. These offices help SMEs
establish themselves in the China market, provide trade leads, and
conduct market research.
<bullet> Through our China Virtual Trade Mission to China's
Computerworld Expo we enabled 15 small- and medium-sized U.S.
information technology companies to introduce their products to Chinese
end-users. We also recruited SME representatives for Secretary Evans's
trade mission to China in April of this year.
Additionally, ITA's Advocacy Center has assisted several small and
medium-sized companies as they sought to secure contracts in China.
Currently, the Advocacy Center is working with three small business
companies on projects totaling $245 million. These projects cover a
broad range of sectors that include aerospace, coal liquefaction and
aluminum products.
A California-based SME has, for example, signed a $5 million
contract to provide China with air monitoring and related services.
This firm faced strong international competition but won the contract
with extensive assistance provided by the Department of Commerce.
During June 2002, a SME signed a contract to provide China with process
design and other services that pave the way to the world's first direct
coal-to-liquid fuel plant. The USG provided extensive support for this
firm through the Trade Promotion Coordinating Committee.
Our Foreign Commercial Service in China, with offices in Beijing,
Shanghai, Chengdu, Shenyang, and Guangzhou, has provided export
assistance to approximately 225 small and 90 medium-sized U.S.
companies since mid-2000. Extensive trade-related information on China
is also available through websites, including the Trade Information
Center site (www.export.gov) and the China Gateway site
(www.mac.doc.gov/china) which contains a statistical profile of SME
exports to China.
In 1999 (the most recent year for which detailed numbers are
available), 10,086 SMEs exported merchandise to China--which is 83
percent of the total number of U.S. firms exporting goods to China--and
accounted for $3.3 billion in exports to China. The number of small and
medium-sized firms participating in the Chinese market has grown at a
rapid rate: between 1992 and 1999, the number of SMEs exporting
merchandise to China rose by 221 percent. Over the same period, SME
exports to China increased 85 percent, making China the seventh-ranking
growth market for SMEs among the major U.S. markets.
China's recent accession to the WTO will provide many benefits for
SMEs. China's accession to the WTO has improved the environment for
trade, making it a more transparent and predictable place to conduct
business. China's agreement to lower tariffs includes products of
interest to SMEs like medical devices and building products. China has
also agreed to open access to its telecommunications market by
increasing foreign participation and investment. In addition, China has
made commitments in the areas of pollution control. ITA has produced
over 40 specific industrial goods and services sector reports that
summarize China's WTO commitments.
In closing, I would like to reaffirm my commitment to working with
both you and with the Commission to encourage respect for human rights
in China, particularly as regards the practice of one's religious
beliefs. I look forward to working with you toward that end. If there
is anything else I can provide you in the way of information in the
meantime, please do not hesitate to let me know directly.
______
Responses of Grant D. Aldonas to Questions From Representative Wolf
Question 1. Have you received U.S. intelligence briefings on
China's espionage against U.S. companies that is occurring both in the
U.S. and in China?
Answer 1. I have received briefings regarding commercial espionage.
I intend to continue to follow the issue closely.
Question 2. Do any American companies speak out on behalf of human
rights? Do you have any record?
Answer 2. The Department of Commerce maintains close contact with
U.S. companies doing business in China and with U.S. associations
involved in U.S.-China trade issues, but does not keep a formal record
of companies that have spoken out on human rights. As a general rule,
American ethical and managerial practices help shape the way U.S. firms
run their factories, relate to their employees, and contribute to local
community activities. Through these practices, U.S. companies set a
positive example of corporate citizenship and contribute to the
evolution of norms within China and a more open Chinese society.
Most U.S. companies conducting business in China make positive
contributions to the country's social, labor, and environmental
conditions by exporting to China not only products and services, but
also their operating standards, best business practices, values, and
principles. For example, the Beijing AmCham has recently established
its Corporate Responsibility Committee and since 1998 the U.S.-China
Business Council has been doing important work through its U.S.-China
Legal Cooperation Fund. Other specific examples of how U.S. companies
promote worker rights and worker well-being in China can be found in
the 57-page report, ``Corporate Social Responsibility in China'' from
The Business Roundtable, which is also available online at www.brt.org.
______
Response of Grant D. Aldonas to a Question From Representatives Wolf
and Kaptur
Question 2. Is the United States the major recipient of Chinese
exported goods? What is the trade deficit today with China, and what
was it over the last 20 years?
Answer 2. The United States is China's largest export market. For
calendar year 2001, the United States imported $102.3 billion of goods
from China and had a bilateral deficit of roughly $83 billion. Both
U.S. exports to and imports from China have grown over the last 20
years as the Chinese opened their economy. The Chinese trade surplus
has grown significantly during that period. I have attached the
requested data (please see Attachment A).
ATTACHMENT A.--Trade Balance with China 1983-2001
(In US dollars)
----------------------------------------------------------------------------------------------------------------
General Imports CUSTOMS
Trade Balance Exports Total Fas Value Value
----------------------------------------------------------------------------------------------------------------
1983 (72,021,915) 2,172,071,017 2,244,092,932
1984 (60,776,999) 3,004,029,667 3,064,806,666
1985 (9,927,450) 3,851,738,104 3,861,665,554
1986 (1,665,517,101) 3,105,402,963 4,770,920,064
1987 (2,805,103,905) 3,488,357,323 6,293,461,228
1988 (3,479,280,774) 5,032,945,267 8,512,226,041
1989 (6,181,164,282) 5,807,371,217 11,988,535,499
1990 (10,416,554,934) 4,807,332,470 15,223,887,404
1991 (12,688,964,907) 6,286,832,744 18,975,797,651
1992 (18,205,935,594) 7,469,573,056 25,675,508,650
1993 (22,767,730,198) 8,767,103,939 31,534,834,137
1994 (29,494,383,467) 9,286,759,231 38,781,142,698
1995 (33,806,985,282) 11,748,446,559 45,555,431,841
1996 (39,517,355,520) 11,977,920,628 51,495,276,148
1997 (49,746,517,782) 12,805,416,498 62,551,934,280
1998 (56,897,907,649) 14,257,952,774 71,155,860,423
1999 (68,668,252,218) 13,117,677,381 81,785,929,599
2000 (83,809,928,735) 16,253,029,349 100,062,958,084
2001 (83,045,656,308) 19,234,827,272 102,280,483,580
----------------------------------------------------------------------------------------------------------------
Source: US Trade Statistics
According to the official Chinese statistics, the United States was the largest recipient of goods shipped from
China in 2001. Hong Kong was second, and Japan was third.
------
Responses of Grant D. Aldonas to Questions From Representative Kaptur
Question 1. Provide examples of how China exports capital to the
United States. What is China doing with its dollar reserves?
Answer 1. China has the world's second largest foreign exchange
reserves (after Japan), totaling $228 billion at the end of March 2002,
according to official reports, and China's foreign currency reserves
have more than doubled in the past 5 years, according to China's State
Administration for Foreign Exchange. These foreign reserves help China
to maintain a stable currency, which benefits both the U.S. and global
economy.
While the exact amount of China's reserves denominated in dollars
is not known, it is estimated that U.S. dollar reserves make up
anywhere from 40 to 60 percent of the $228 billion total. The bulk
(approximately $92 billion) of China's surplus foreign currency
liquidity is believed to have been invested in U.S. securities, in the
form of U.S. Treasury bonds and U.S. agency debt, according to Treasury
and Federal Reserve statistics (March 2000). This benefits the United
States as these kinds of foreign holdings keep the cost of borrowing
low for the U.S. Government, and at the same time make more capital
available, at lower interest rates, for U.S. companies to finance their
operations and thus create wealth here.
Direct investment from China in the U.S. has been much smaller than
its portfolio investment. At the end of 2001, China had $306 million in
direct investment in the United States, according to statistics from
the Department of Commerce's Bureau of Economic Analysis. More
information on foreign portfolio and direct investment in the U.S. can
be found in the following reports: http://www.ustreas.gov/tic/mfh.txt,
http://www.ustreas.gov/fpis/shl2000r.pdf, and http://www.bea.gov/bea/
di1.htm.
By way of context, Japan is the largest holder of U.S. Treasury and
agency securities, and China ranks fourth after Japan, the United
Kingdom and Germany. If China's and Hong Kong's holdings were counted
together, they would rank third, accounting for about 10 percent of the
total Treasury securities held by foreign governments. By comparison,
Japan has 27 percent of the total.
Top Five Foreign Holders of Treasury Securities
(In billions of dollars)
----------------------------------------------------------------------------------------------------------------
Country 2002 Mar 2001 Dec 2000 Dec 1999 Dec 1998 Dec
----------------------------------------------------------------------------------------------------------------
Japan.......................................... 333.0 337.8 335.9 320.0 276.1
UK............................................. 210.8 202.3 207.3 242.9 264.0
Germany........................................ 85.0 87.4 88.6 96.8 95.1
Mainland China................................. 72.5 66.6 48.3 51.8 46.4
Hong Kong...................................... 52.1 53.8 44.7 46.7 44.2
----------------------------------------------------------------------------------------------------------------
Total.................................. 1227.7 1231.0 1203.6 1283.8 1273.8
----------------------------------------------------------------------------------------------------------------
Source: Department of the Treasury/Federal Reserve Board
Value of Foreign Holdings of U.S. Long-term Securities By Major Country and Type
(As of March 31, 2000 in billions of dollars)
----------------------------------------------------------------------------------------------------------------
Corporate/
Rank Country Total Common Other US Treasury USG agency municipal
stock equities securities debt debt
----------------------------------------------------------------------------------------------------------------
1 UK.................. 534 288 34 73 30 109
2 Japan............... 431 128 16 221 43 22
3 Canada.............. 209 151 22 14 9 13
4 Germany............. 207 94 15 55 8 35
5 Switzerland......... 187 131 17 18 5 17
10 PR China............ 92 1 0 71 20 0
----------------------------------------------------------------------------------------------------------------
Tota .................. 3,558 1,474 235 884 261 703
l
----------------------------------------------------------------------------------------------------------------
* Greater than zero but less than 0.5.
Source: Department of the Treasury/Federal Reserves Board
______
Response of Grant D. Aldonas to a Question from Representative Brown
Question. In private, non-state enterprises, is the right to
collectively bargain markedly enhanced compared to state-owned
enterprises? Are the wages significantly different?
Answer. Collective bargaining does not exist in China in the sense
that we know it in this country since labor unions in China must be
affiliated with the All-China Federation of Trade Unions (ACFTU), which
is a state-controlled entity, and independent unions are banned. U.S.
companies have been, on the whole, more supportive of worker
participation than many other foreign investors, and some labor
activists see activities of this sort as a positive step in the right
direction. For example, an open union election in a Reebok factory in
Shenzhen has resulted in a union committee that proportionally
represents the factory's line workers, supervisors, and office workers.
This union, while nominally associated with ACFTU (so that may legally
operate), has been able to maintain functional autonomy. Reebok and
Kong Tai Shoes Ltd. (Reebok's Hong Kong contract company), in
coordination with Hong Kong non-governmental organizations, have
actively supported both the election process and the subsequent
training of the new union committee. Labor activists have praised this
election, in which factory workers freely chose their union
representatives using internationally accepted standards of candidate
nomination, election campaigning and voting procedure.
There is a difference in wages. According to China's Ministry of
Labor and Social Security and the State Statistics Bureau, the national
average yearly urban employee wage in China is 10,870 yuan or about
$1,310. This can be subdivided into:
<bullet> State units average wage: 11,178 yuan ($1,350)
<bullet> Urban collective units average wage: 6,867 yuan ($830)
<bullet> Average wage of other urban employees (includes self-
employed and privately employed workers in foreign and domestic
companies): 12,140 yuan ($1,470)
I believe that this will be aided by a trend that is going in the
right direction--namely, the size of China's State sector has fallen in
the past couple of decades and private ownership has grown.
______
Response of Susan S. Westin to a Question From Representative Wolf
Question. We had a briefing by our security people saying there is
a major espionage program by the Chinese government against our private
sector. Are you aware of that? Have you had that briefing? Do you raise
that when you are in China? Can all three get the briefings and then
just drop a note to the committee that you had the briefing?
Answer. We are generally aware of the problem, based on our
discussions with various U.S. officials before and during our travel to
China, as well as our own security program. However, we have not had
the specific briefing(s) you mention, and we are in the process of
arranging to receive them, after which we will notify you through the
Commission.
______
Responses of Susan S. Westin to Questions From Representative Kaptur
Question 1. Could any of the witnesses provide kind of a textural
feel as to the ownership of these enterprises, as I have asked?
Answer 1. Chinese state-owned enterprises provide employment for
almost 4 out of 10 urban workers (81 million employees out of 213
million total) in 2000. About 10 percent (21 million) of urban workers
were self-employed. The rest were employed by entities with other forms
of ownership, including private enterprises, foreign-funded
enterprises, and cooperative units.
In terms of production, figure 1 shows that the share of state-
owned enterprises was about a quarter of gross industrial output in
2000.
[GRAPHIC] [TIFF OMITTED] TUE66.001
Figure 2 shows that the share of state-owned and state-holding
enterprises in gross industrial output has been falling over time. By
1999, the industrial output share of state-owned and state-holding
enterprises was only around 28 percent, and the remaining 72 percent
was accounted for by enterprises of other types of ownership.
[GRAPHIC] [TIFF OMITTED] TUE66.003
Question 2. I would like to know if any of you could provide for
the record information as to whether the United States is the major
recipient of Chinese exported goods, or are other regions of the world
equally graced?
Answer 2. The United States was the largest destination for Chinese
exports in 2001, according to Chinese trade data. Table 1 shows the top
five destinations for Chinese exports. It is important to note that
U.S. and Chinese trade data differ significantly.\1\ For 2001, Chinese
trade statistics reported that $54 billion (20 percent) of China's
exports went to the United States. However, U.S. Customs statistics
reported that China exported $102 billion (38 percent of China's total
U.S. imports) to the United States in 2001. In either case, the United
States was the primary destination for Chinese exports.
---------------------------------------------------------------------------
\1\ China's trade data often differ significantly from those of
China's major trading partners. One factor affecting this discrepancy
is that a large share of China's trade passes through Hong Kong. China
treats a large share of its exports that go through Hong Kong as
Chinese exports to Hong Kong for statistical purposes, while many
countries that import Chinese products through Hong Kong generally
attribute their origin to China (instead of Hong Kong) for statistical
purposes.
---------------------------------------------------------------------------
China was the fifth largest supplier of imports to the U.S. market
in 2001 at $102 billion (9 percent of total U.S. imports), according to
U.S. trade data. The European Union, Canada, Mexico, and Japan were
larger suppliers than China. China was the seventh largest export
destination for U.S. goods in 2001 at $18 billion (3 percent of total
U.S. exports). (See the Congressional Research Report, China's Economic
Conditions, May 29, 2002, by Wayne Morrison (Issue Brief: IB98014) for
a more detailed description of U.S.-China trade patterns.)
Table 1.--Top Five Trading Partners to Which China Exported, 1999-2001
----------------------------------------------------------------------------------------------------------------
Exports (US$ in Percent of total Chinese
billions) exports
Rank Country -----------------------------------------------------
1999 2000 2001 1999 2000 2001
----------------------------------------------------------------------------------------------------------------
0 World........................... $195 $249 $267 100 100 100
1 United States................... 42 52 54 22 21 20
2 Hong Kong....................... 37 45 47 19 18 17
3 Japan........................... 32 42 45 17 17 17
4 European Union.................. 30 38 41 16 15 15
5 Korea, South.................... 78 11 13 4 5 5
----------------------------------------------------------------------------------------------------------------
Note: China's trade data often differ significantly from those of its major trading partners (see footnote 1).
For example, the U.S. Customs Bureau valued Chinese imports in 2001 at $102 billion.
Source: China's General Administration of Customs.
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