World Trade Organization:
U.S. Companies’ Views on China’s Implementation of Its Commitments

GAO-04-508 24mar04

[This file contains excerpts of the full document found at www.gao.gov/cgi-bin/getrpt?GAO-04-508]

Why GAO Did This Study

As the second largest source of foreign direct investment in China, U.S. companies continue their keen interest in China’s implementation of its World Trade Organization (WTO) commitments. China’s 2001 WTO commitments include specific pledges to increase market access, liberalize foreign investment, continue fundamental market reforms, and improve the rule of law. In 2002, GAO reported on selected U.S. companies’ views, finding that many commitment areas, particularly those related to rule of law, were important to U.S. companies. GAO also found that company representatives expected China’s reforms would have a positive impact on their business operations but expected some difficulties during implementation.

In 2003, GAO continued to analyze companies’ views about (1) the extent to which China has implemented its WTO commitments and (2) the impact of China’s implementation of its WTO commitments on U.S. companies’ business operations. GAO collected the views of representatives from 82 U.S. companies with a presence in China. GAO focused on companies in the agriculture, banking, machinery, and pharmaceutical industries. Results reflect a response rate of 60 percent of the study population. These responses may not reflect the views of all U.S. companies with activities in China.

www.gao.gov/cgi-bin/getrpt?GAO-04-508. To view the full product, including the scope and methodology, click on the link above. For more information, contact Loren Yager at (202) 512-4128 or yagerl@gao.gov.

What GAO Found

U.S. company representatives who completed GAO’s 2003 questionnaire thought that China had implemented most of the 26 listed WTO commitment areas on average only to some or little extent. When respondents assessed five areas found to be of greatest importance to their companies overall -- (1) standards, certifications, registration, and testing requirements; (2) customs procedures and inspection practices; (3) intellectual property rights; (4) tariffs, fees, and charges; and (5) consistent application of laws, regulations, and practices – responses were mixed, but they reported that China had taken at least some steps to implement these commitment areas. Our analysis showed that the importance placed on specific areas differed among the agriculture, banking, machinery, and pharmaceutical industries. For example, agricultural respondents identified tariffs as important while banking respondents identified scope of business restrictions for services as important. Few respondents were able to assess all of China’s commitment areas for reasons that varied depending on each company’s experience and operations in China.

More than two thirds of respondents reported that China’s implementation of its WTO commitments had a positive impact on their companies’ ability to do business in China. However, some respondents indicated that China’s reform efforts had created difficulties for their company operations in China. Overall, company representatives reported that company activities, such as volume of production in China and company revenue stream, have increased since China joined the WTO. However, respondents noted that changes in business activities cannot be directly attributed to China’s WTO accession.

Impact of China’s WTO Implementation on GAO Questionnaire Respondents’ Companies

Note: Number of respondents = 80. Two respondents had no basis to judge.

United States General Accounting Office
Washington, D.C. 20548

March 24, 2004

The Honorable Charles Grassley
Chairman
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable William M. Thomas
Chairman
The Honorable Charles B. Rangel
Ranking Minority Member
Committee on Ways and Means
House of Representatives

The 2001 conclusion of 15 years of China’s intense negotiations to join the World Trade Organization (WTO) raised expectations for U.S. companies’ opportunities to trade with and invest in China. In 2002, we reported on selected U.S. companies’ views about their expectations for China’s implementation of its WTO commitments related to their companies doing business in China. The report revealed that a wide range of commitments were important to U.S. companies, their belief that WTO commitments would positively impact their businesses, and their expectation that implementation would include difficulties as well as successes. China’s first two years of WTO membership repeatedly confirmed the accuracy of these expectations.

In continuation of your request that we undertake a long-term body of work regarding China’s membership in the WTO, we again analyzed selected U.S. companies’ views about (1) the extent to which China has implemented its WTO commitments in key industries and (2) the impact of China’s implementation of its WTO commitments on these U.S. companies’ business operations.

To perform our work in 2003, we developed a questionnaire and used it to conduct structured interviews with representatives of U.S. companies with a presence in China. We selected participants from a commercial database listing U.S. companies in China, focusing our company selection on those within four industries: agriculture, banking, machinery, and pharmaceuticals. Out of a study population of 149 companies, we received 79 questionnaires, for an overall adjusted response rate of 60 percent. In addition, we received three questionnaires from companies we interviewed in 2002 and 11 questionnaires from representatives of nonprofit agricultural organizations. Unless otherwise indicated, results include the 79 respondents from the study population plus the three respondents interviewed in 2003 and 2002. We do not generalize results to the larger population of U.S. companies doing business in China. Appendix I contains a more detailed description of our scope and methodology; responses to the questionnaire are included in appendix II. We performed our work from October 2002 to January 2004 in accordance with generally accepted government auditing standards.

Results in Brief

U.S. company representatives we interviewed who did business in China reported that China had made some progress in implementing its WTO commitments. We found that for most of the 26 listed areas in which China had made commitments, respondents reported that China had made reforms on average only to some or little extent when asked to characterize China’s WTO implementation. Respondents noted higher scores in some areas, however, such as reductions in tariffs, fees, and charges. Our analysis found that the five specific commitment areas of greatest importance to respondents were: (1) standards, certifications, registration, and testing requirements; (2) customs procedures and inspection practices; (3) intellectual property rights; (4) tariffs, fees, and charges; and (5) consistent application of laws, regulations, and practices. Respondents had mixed views of China’s implementation of these important commitment areas. Industry-specific views differed in terms of the specific areas identified as most important to respondents based on the nature of their businesses. Overall, many respondents reported that they had no basis to judge certain commitment areas due to respondents’ lack of experience in areas not applicable to their businesses, lack of understanding about specific WTO commitment areas, and/or inability to differentiate between China’s general economic reforms and Chinese government actions taken to implement WTO commitments.

More than two thirds of respondents reported that China’s implementation of its WTO commitments had a positive impact on their companies, for example, by reducing tariffs and increasing transparency (openness) of laws, regulations, and practices, which ultimately furthered business opportunities. A number of respondents also expected that China’s progress in the next 2 years would result in a positive impact on their businesses. However, some company representatives stated that China’s WTO reforms had actually had negative consequences for their business operations to date. Specifically, some respondents stated that China had increased registration and testing requirements, and that provinces and levels of government had varied approaches to WTO implementation. Overall, the majority of respondents reported that specific business activities such as revenue and total investments in China had increased, but they could not directly tie these results to China’s having joined the WTO.

Background

After 15 years of negotiations to join the WTO, on December 11, 2001, China bound itself to open and liberalize its economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules. U.S. investment and trade with China is of substantial interest to U.S. companies and has increased during the past 10 years. Our 2002 survey of U.S. company views revealed companies’ expectation of a positive impact from China’s implementation of WTO commitments as well as anticipation of difficulties during implementation.

China’s WTO Commitments

The results of China’s negotiations to join the WTO are described and documented in China’s final accession agreement, the Protocol on the Accession of the People’s Republic of China, which includes the accompanying Report of the Working Party on the Accession of China, the consolidated market access schedules for goods and services, and other annexes. China’s WTO commitments are complex and broad in scope.1 Some commitments related to reforming China’s trade regime require a specific action from China, such as reporting particular information to the WTO, while others are more general in nature, such as those that affirm China’s adherence to WTO principles.

---

1For more information, see U.S. General Accounting Office, World Trade Organization: Analysis of China’s Commitments to Other Members, GAO-03-4 (Washington, D.C.: Oct. 3, 2002).

The accession agreement includes market access commitments regarding goods and services. These include commitments that will reduce tariffs on products, as well as commitments to reduce or eliminate many other trade barriers such as quotas or licensing requirements on some of these products. Further, China made commitments to allow greater market access in 9 of 12 general service sectors. In the banking sector, for example, China has agreed to reduce licensing requirements and has removed restrictions on foreign currency services.

To improve its trade regime, China has generally agreed to make numerous rule of law-related reforms such as publishing and translating trade-related laws and regulations and applying them uniformly at all levels of government and throughout China. China committed to adhere to internationally accepted norms to protect intellectual property rights and enforce relevant laws and regulations related to patents, trademarks, and copyrights. Moreover, China made a substantial number of other rule of law-related commitments regarding transparency of law, judicial review, and nondiscriminatory treatment of businesses.

U.S.-China Investment and Trade

In the past 10 years, U.S. investment and trade with China have increased significantly. At the end of 2002, U.S. companies had total direct investments of $10.3 billion in China, largely in the manufacturing sector. This amount represents more than 10 times the approximately $900 million invested a decade earlier in 1993. In addition, U.S. goods exports and services to China grew at an average annual rate of 12 percent since 1993, totaling $27 billion in 2002, according to the Department of Commerce. While the United States holds a large bilateral trade deficit with China, it has a bilateral goods surplus in areas such as transportation equipment and agricultural products. Appendix III provides additional details regarding U.S. investment and trade with China.

GAO’s Previous Survey of U.S. Companies

In 2002, we conducted a study of U.S. companies’ views about the importance of, the anticipated effects of, and the prospects for, China’s implementing its WTO commitments.2 Our analysis of responses from 191 of 551 surveyed companies3 revealed that most of China’s WTO commitments were important to the companies, with rule of law-related reforms the most important. Specifically, at least three quarters of the respondents selected intellectual property rights; consistent application of laws, regulations, and practices; and transparency of laws, regulations, and practices as the most important commitment areas for their companies. Other than those related to rule of law, respondents most frequently selected trading rights; tariffs, fees, and charges; and scope of business restrictions as important commitments.

---

2 For additional information on U.S. business views in 2002, see U.S. General Accounting Office, World Trade Organization: Selected U.S. Company Views about China’s Membership, GAO-02-1056 (Washington, D.C.: Sept. 23, 2002).

3 The results of our analysis were based on our survey of a random sample of 551 U.S. companies doing business in China and interviews with 48 judgmentally selected companies in four cities in China.

We also found that most companies expected that China’s implementation of its WTO commitments would have a positive impact on their business operations, although many anticipated impediments to implementation of China’s WTO reforms. More than three quarters of the companies reported that they expected China’s implementation of its WTO commitments would lead to an increase in their companies’ activities in China, including their export volume to China, market share in China, and distribution of products there. However, many respondents also expected that many WTO commitments, particularly in rule of law-related commitment areas regarding consistent application of laws, regulations, and practices, and intellectual property rights, would be difficult for Chinese officials to implement. (See table 1 for 2002 survey respondents’ views on the expected level of difficulty of China’s implementation of commitment areas that were most important to them.)

Concluding Observations

Our analysis of U.S. companies’ responses to our questionnaire provides findings and lessons that have important implications for policymakers who rely on private sector input in order to judge China’s progress in opening its market. As noted in our March 2003 report, the private sector plays an important role in monitoring and enforcement activities. Our results indicate areas where China has made progress in carrying out WTO-related reforms and areas that might need more attention. Our results also show that despite the problems U.S. companies are facing in China’s implementation of specific commitment areas, more than two thirds of respondents indicated that China’s WTO implementation had a positive impact on their companies’ ability to do business in China.

Our work also provides a number of lessons regarding the use of private sector input that could help shape best practices for U.S. government efforts to monitor and enforce China’s compliance with its commitments. First, because company experiences and assessments varied, both overall and among companies in the same industry, policymakers are well advised to seek input from a number of companies with interests in an area of concern and not just a few companies. Doing so increases the representativeness of the information gathered for monitoring purposes, because views are often company-specific and one company in an industry cannot be assumed to speak for all.

Second, we found that the number of company representatives who report they have a basis to judge China’s implementation of specific WTO commitment areas varies greatly. Broad input from a wide range of companies assures policymakers that monitoring is authoritative and complete because relatively few individual companies believed they had a basis to judge all 26 commitment areas. Furthermore, in some cases, like Chinese export restrictions, application of safeguards, and/or subsidies, very few U.S. companies reported they had a basis to judge implementation. This observation raises the question of whether U.S. government officials can rely on private sector input to identify the full range of China’s compliance problems. Instead, for some commitment areas, alternative strategies that reach out to specific companies or that rely on economic or legal information to identify problems, for example, may be needed to monitor China’s implementation.

Finally, we report that respondents cited a number of factors that influence company activities in addition to China’s efforts to implement specific WTO commitments. These results reaffirm the importance of ongoing private sector education about China’s WTO obligations and the market access opportunities that the private sector should expect. Furthermore, it indicates that any monitoring strategy benefits from collecting and reviewing information about what companies may consider solely “commercial problems” but that may actually involve WTO-related issues, where the U.S. government can clearly take action.

Nevertheless, knowledge of U.S. company views remains fundamental for policymakers to judge the degree to which the benefits of China’s WTO membership are being realized. We will consider the implications of this work as we conduct our current review of U.S. government monitoring and enforcement activities.

We are sending copies of this report to interested congressional committees. We will make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-4128. Other GAO contacts and staff acknowledgments are listed in appendix IV.

Loren Yager
Director, International Affairs and Trade

source: www.gao.gov/cgi-bin/getrpt?GAO-04-508 24mar04