October 07,2003

Grassley Urges China to Comply With Its Trade Obligations

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, with jurisdiction over international trade, today sent a letter to the Minister of Commerce for the People’s Republic of China (China) requesting that China make a serious effort to improve its compliance with its World Trade Organization obligations.

“There’s a lot of pressure in Congress and the Administration to take action,” Grassley said. “I don’t see that ending until China takes some concrete steps and moves quickly to assure the American public that it’s keeping its promises.

“I want American farmers and factory workers to know we’re holding China accountable. Wehave to make sure they get the full measure of benefits on which our trade partners agreed. And China needs to do more, especially in agriculture. Iowa’s farmers and workers are letting me know that Chinais still using unreasonable scientific standards for agricultural biotech products, is still not fulfilling itsagricultural quota commitments, and is manipulating its taxes to distort international trade.

“Transparency is also a big problem. When China makes decisions behind closed doors,businesses lose their voice. That ends up hurting China just as much as U.S. companies. China also hasto address stronger intellectual property rights enforcement. It’s time for China to abide fully by itsinternational trade commitments.”

The text of Grassley’s letter follows.

October 7, 2003

His Excellency
Lu Fuyuan
Minister of Commerce of the People’s Republic of China,

Dear Mr. Minister:

As a strong advocate for the expansion of global free trade, I have long supported an open trade agenda that provides growth opportunities for America’s farmers, ranchers, and workers. That is especially true in the context of U.S.-China trade relations. For many years, I supported annual renewalof normal trade relations for the People’s Republic of China (China). My support for annual renewaldid not waiver, even during difficult times in our bilateral relationship.

I also strongly supported permanent normal trade relations for China, as well as China’s accession to the World Trade Organization (WTO). I believed these steps were critical to both our bilateral trade relations and as a way of bringing China closer into the community of nations. In givingmy full support to these endeavors, I had great faith in China’s commitment to the WTO and to the ruleof law. I hope my faith was not misplaced.

China will not reap the full economic and political benefits of WTO membership unless China faithfully and fully abides by its WTO accession agreement. At the same time, U.S. farmers and workers will not receive the full measure of benefits from our trade agreements unless a serious effort is madeto ensure that our trading partners abide by their international trade commitments and free marketprinciples.

China’s accession to the WTO offers enormous market potential for U.S. exporters, especiallyin agriculture. However, there are multiple reports stating that China is failing to fulfill its WTOobligations, including: in its use of insufficient regulatory transparency; by utilizing unreasonablestandards for agricultural biotech products; in its application of agricultural and industrial quotas andtariff-rate quotas (TRQs); through its use of export subsidies; by utilizing discriminatory tax policies onimports; by failing to provide protection for U.S. intellectual property rights; and, in maintaining highcapital requirements for establishing service businesses. It is time to take more action.

Transparency. China’s uneven implementation of its commitments regarding transparency continues to be a disappointment. Although some Chinese government agencies are making good progress with transparency, others are not. By throwing up hidden obstacles, these agencies are defeatingthe purpose of negotiated agreements to the detriment of U.S. businesses and farmers. Specifically,certain Chinese agencies are selectively choosing who they will bring in for consultations on rule-makingissues, are providing short and ineffective comment periods for new regulations, and are making theirfinal decisions in a black box. This is ironic behavior given China’s firm anti-corruption policy. China’slack of transparency only creates conditions for more corruption, not less. This has been especially truewhere it concerns agricultural issues.

Non-tariff barriers. Recently, U.S. Treasury Secretary John Snow visited China and was givenassurances that China would make improvements to its handling of sanitary and phytosanitary (SPS) andbiotech issues. I welcome these assurances as there is reason to be concerned that China has beenerecting non-tariff barriers to soybean trade. China’s quarantine agency, AQSIQ, created a list of foreignsoybean exporters, which includes four U.S. companies, that have allegedly violated SPS standards.Shipments from these listed companies could potentially be barred from entering China, but the Chinesegovernment has given no official confirmation of the list or its significance.

In addition, recent developments with China’s proposed biotechnology regulations continue to threaten U.S. soy product exports. Last year, exports of soybeans and soy products to China were muchless than what they should have been. This was due in large part because China’s regulations createdunfair burdens that effectively blocked soybean trade from January to March 2002. Although our tradeofficials were able to reach an interim solution, and China agreed to issue temporary certificates to allowU.S. soybean exports to resume, we still have not resolved the underlying unfairness in the originalregulations. And even though U.S. soybean exports are up for the first half of this year, our farmers stillhave to contend with the uncertainty surrounding whether China’s interim solution will be extended, andif so, for how long.

Tariff-rate quotas. China’s implementation and allocation of its agricultural TRQs have also beenwoefully inadequate. Again, this results in U.S. farmers and exporters failing to experience the marketgains they were promised under China’s WTO accession agreement.

When China joined the WTO in December 2001, it agreed to set up TRQs in nine categories ofagricultural commodities, such as corn, soybean oil, wheat, rice, and cotton. Although China has madesome good progress on drafting new regulations covering TRQs, and imports are up in the first half of2003, U.S. farm groups and trade officials have found that China has implemented the TRQs in a traderestrictivemanner. China has unfairly reserved a portion of the TRQs to entities that process forre-export, and has maintained cumbersome licensing requirements for TRQ holders. China has alsoallocated TRQs in amounts that are not commercially viable.

An August 2003 report from the U.S. Department of Agriculture (USDA) noted that China’s TRQ system did little to boost its imports during 2002, as the quotas were largely unused. For example, China’s 2002 “fill rate” for corn was beyond low, at 0.1 percent of the agreed-upon level. The fill ratefor soybean oil was only 34.6 percent. The TRQ for wheat was 8.47 million tons, but total imports wereonly 632,000 tons, for a fill rate of 7.5 percent. The fill rate for rice was only 6 percent; for rapeseed oil8.9 percent; and for cotton 21.6 percent. Further, China must ensure that information on entities thatreceive TRQ allocations is not withheld. Without transparency, it is very difficult to evaluate potentialbuyers in China.

Although China has recently made some progress in revising its TRQ regime, I look forward to seeing a full and fair implementation of the TRQ system for the 2004 allocations.Export subsidies. China is also continuing to provide export subsidies that are hurting our cornexports to third-country markets. Despite a WTO pledge to eliminate export subsidies on corn, China’s export sales are priced as much as $20 per ton below equivalent domestic sales. This difference is toogreat to be accounted for by any rebate of value-added tax (VAT), as China suggests, and cuts into U.S.sales to Asian markets. There is no adequate explanation for why China’s corn export prices are lowerthan its domestic prices.

Value-added tax. Another problem is China’s handling of its VAT. Although I understand that China may do away with its VAT in the future, Iowan and other U.S. industries have been negativelyaffected by its application. Chinese scrap importers, especially of copper, and Chinese customs officialsare manipulating the VAT to the detriment of U.S. industries. Chinese importers receive a rebate onVAT and then further manipulate import documents to gain greater VAT refunds. These actions causeglobal commodity scrap prices to rise because Chinese importers can pay more for scrap but still makea profit. U.S. manufacturers that utilize scrap are then forced to pay a higher price for raw materials, thusincreasing their production costs, and are then subsequently undersold in the U.S. market by imports ofcheap finished products from China. China’s VAT policies are also negatively impacting U.S.semiconductor and fertilizer exports.

Intellectual property rights. There are other areas where China is not living up to the letter and spirit of its WTO commitments. For example, although China has good intellectual property rights (IPR)laws on its books, it is sorely lacking in enforcement and coordination. U.S. businesses continue toexperience significant IPR problems in China that cost them billions of dollars each year in lost sales.

It is estimated that counterfeits account for 15 to 20 percent of all products made in China. Chinese factories violating copyright, trademark, and patent laws are not being shut down and violators are notbeing prosecuted. China should make an example of these offenders through stiffer penalties and byimposing prison sentences. This could go a long way toward slowing down the illegal trade.Services. China needs to continue to open its service sector to greater competition. Nontransparentactions by government agencies and high capitalization requirements are keeping U.S. serviceproviders out of the market. Although I welcome China’s recent proposals to lower capitalizationrequirements for foreign insurance companies operating in China, the new thresholds for capitalizationare still too high by international standards and are not justified by legitimate prudential concerns. In theend, these actions not only hurt the United States, but they also hurt China.

Currency. Lastly, China is well aware that a fairly valued currency is in China’s own long-term interest, and is key for moving to a market driven economy. I was pleased to hear that Secretary Snow was assured that interim steps are being taken and that progress in this area will continue (including looser restrictions on capital flows and ownership of financial assets, and the removal of some capitalrequirements in the banking system). However, the best international economic system is one based onthe principles of free trade, open markets, free capital flows, and market-based exchange rates amongmajor economies. Even the International Monetary Fund and the World Bank agree that China mustaddress this issue.

I urge your government to consider carefully the importance of abiding by both the letter and spirit of its WTO commitments. While I and many others stand ready to work with your government toresolve these trade problems, pressure is mounting within Congress and the Administration for concreteaction. It is my hope that China will make good progress in the near future so that we can eliminate theneed for any such measures.


Charles E. Grassley

cc: His Excellency,
Yang Jiechi,
Ambassador of the People’s Republic of China