China's trade law a delicate
balance By Jayanthi
Iyengar
PUNE - Much has been written in praise of
the new Chinese foreign trade law, which came into force
on July 1. Yet two things have not been as forcefully
highlighted. One relates to the loosening of hold by the
Chinese bureaucracy and political leadership on its own
people regarding the manner in which they do business.
The other relates to China's own progression up the
learning curve, as it learns that accession to the World
Trade Organization (WTO) must also be accompanied by
protecting domestic interests, where necessary, using
WTO-compatible measures.
Now let us
look at what the new foreign trade policy has done. It
has, undoubtedly, opened up China further to
competition, which is seen by most experts as a step
forward in the right direction. Yet at the same time, it
also has incorporated some legal provisions that will
allow it to safeguard domestic interests. "The new
policies do have terms designated to protect domestic
industry from unfair foreign trade practices. But on the
whole, the new policy is a move to open up and
liberalize the Chinese economy, not protect it," said
Daniel Rosen, principal at China Strategic Advisory and
visiting fellow at the Washington, DC-based Institute
for International Economics. He is the author of
Behind the Open Door - Foreign Enterprises in the
Chinese Markeplace,
1998.
Balancing protection
with opening up Rosen's observation to Asia Times
Online is very pertinent, particularly in the context of
the air of freedom that now appears to pervade China and
some of its leadership, but has not yet percolated down
to the people. Of the 50 or so experts, including law
firms, individual lawyers, academics, economists, trade
law and China experts - of Chinese and non-Chinese
origin - that Asia Times Online approached across four
continents for on-the-record reactions on the
protectionist measures contained in the new foreign
trade policy, only Rosen chose to respond, apparently
reflecting the unnecessary but powerful fear that
surrounds everything China and Chinese. Fear of
offending the economic giant.
Interestingly, the
Chinese government itself has been very vocal about the
need to protect domestic industry, while at the same
time balancing its WTO obligations. As early as January
13, 2003, China Daily quoted Zhang Yuqing, director of
the Department of Treaty and Law of the Chinese Ministry
of Foreign Trade and Economic Cooperation, stating that
pending amendments to its nine-year-old foreign trade
law, the Chinese government would attempt to balance
better protection of domestic enterprise against
compliance with WTO norms.
Zhang was referring to the earlier foreign trade law which
was then in effect. It was a 1994 law, enacted
before the Uruguay Round of negotiations had been completed.
Zhang made it clear in an interview with China
Daily the functions of government had shifted from
micro-management of enterprises and their operations to
ensuring fair and orderly competition - and taking
measures to protect domestic enterprises when they faced
discrimination or injury in foreign trade. "The new
foreign trade law will fill the gaps of the current
provisions so that domestic enterprises find it easier
to protect their interests and rights," he said.
Similarly, as reflected in the Chinese media
from time to time, unnamed Chinese experts have been
vocal about the need for the Chinese trade law to
provide for general and security exceptions. These are
WTO-compatible measures and allow a country to safeguard
domestic interests when the government perceives a
general (under specified circumstances) or a security
threat that could compromise national interests.
Exceptions mean that while trading partners under the
WTO cannot block the free flow of goods, unless unfair
trade practices such as dumping are suspected, they
would be within their right to raise barriers to protect
domestic industry if a threat to national interest were
perceived.
Though this premise has not yet been
properly tested, developing nations believe that the
possible destruction of an industry, which would render
a large number of people jobless, could be considered
grounds for exercising the exception clauses.
Interestingly, many countries, including those in the
European Union and India, have very effectively used
non-tariff (non-tax) barriers to render imports
expensive. The Chinese leadership has been closely
watching these developments since it has experienced the
impact of some of these measures first-hand - Chinese
imports being one class of product that the Indian
government has targeted for action in the past. And it
has been equally vocal about wanting to learn foreign
trade law management from India in order to keep the
mindless onslaught of foreign products at bay.
Some of the popular WTO-compatible non-tariff
measures already being used by the EU and India to block
boundless imports include:
Product-wise and commodity-wise monitoring of
imports by a dedicated department;
Allowing entry of imports only through designated
ports;
Raiding stockers of foreign products to ensure that
they sell only legitimate, duty-paid imports and not
smuggled goods.
By allowing imports through
designated ports, countries manage to wipe out some of
the price advantage enjoyed by competitors. This is
because competitors would have to pay more in transport
charges, as well as deal with delays, which has the
effect of making imports costlier. The raids work as a
deterrent as they make the shopkeepers wary of stocking
foreign products, even if they are legitimate, duty-paid
imports. The monitoring of imports is an early warning
system. If a country finds that imports are threatening
the livelihood of a large number of people in an
industry - say textiles - they could always resort to
protectionist measures using the exception clauses if
necessary.
The Chinese measures Now
let us look at the specific measures in the new foreign
trade law and its implications. The revised Foreign
Trade Law includes 11 chapters and 70 clauses, three
chapters and 26 clauses more than the original. The new
law has three broad components: proposal to align with
WTO norms, procedural changes to make the above possible
and allowing for the healthy development of foreign
trade while balancing domestic interests.
A
significant clause in the revised norms allows
individuals to enter the foreign trade business for the
first time. Experts say that this in itself is an
achievement, considering that only 10 years ago (when
the 1994 law was framed) the Chinese government was
inclined to control individual activities, including
their right to trade abroad.
However, there is
also a counter argument. Under the WTO accession
agreement, the Middle Kingdom is required to extend to
foreign individuals and companies the same level of
treatment (if not more) that it extends to its own
residents. Benchmarks thus are necessary. Individuals
must be empowered to trade abroad, if comparative
parallels are to be established for foreigners. Still,
the wider consensus is that this step is still
commendable. "The measures mean that China is making
efforts to comply with WTO agreements, and that China
understands that trade is in its economic interest -
imports as well as exports. It also means that Beijing
continues to recognize that more competition inside the
Chinese economy is better than less competition," says
Rosen of the Institute of International Economics.
Add to this the relaxation in norms in December
2003, when the Ministry of Commerce lowered capital
requirements for domestic companies from 5 million yuan
(US$604,836) to 1 million yuan. As a result of these two
developments, individuals would be drawn to engage in
foreign trade. Further, it is more than possible that
many of the individuals would incorporate companies,
drawn by the lower capital requirement and the
advantages of limited liability that companies enjoy,
unlike unlimited liability, which would apply to
individuals. The former limits the liability of the
trader to the number of shares he or she holds in his or
her company in case it goes bankrupt. In case of the
latter, the individual could lose his car, home and all
his material possessions if his business fails. The
corporate structure at the moment is also attractive,
since the approval procedures have been simplified.
Instead of lining up before the Chinese Ministry of
Commerce for licenses to operate, the foreign trading
firms can approach local authorities, provincial or
city-level, to get their go-ahead.
Broadly, this
means that the cumbersome and bureaucratic licensing
procedure, which was in place until recently, has been
removed. In its place is a more user-friendly approval
regime. "In the past foreign trading entities had to be
approved; under the new regime, approval is supposed to
be a given, with firms only needing to register for
record purposes. We will be watching to see if this is
the case," says Rosen.
So far so good, but there
is a small catch here. Registration for oversees trading
is available only to residents. Thus, if foreigners want
to trade from China, they would have to set up a local
presence. "Notwithstanding the definition's inclusion of
individuals, foreign individuals may only engage in
foreign trade in the PRC [People's Republic of China]
through the establishment of a foreign-invested
enterprise," notes Neal Stender, Matthew McConkey &
Bi Xing of the China-based Coudert Brothers. Though they
declined to speak to Asia Times Online, their comments
were made in an article they wrote first for China Law
& Practice, the article now being freely circulated
through the Internet.
Opening up trading
rights Similarly, though Paul Thaler, the China
head of the Swiss legal firm, Wenger Vieli Belser,
declined to be interviewed by Asia Times Online on the
grounds that the firm was "involved in urgent business
elsewhere", Dieter DeSmet, one of firm's attorneys,
noted on Mondaq.com, a popular legal site, that the
revised law (Articles 8 & 9) "should have the effect
of opening up trading rights to all Chinese companies
and joint ventures regardless of ownership, an important
expansion of these rights".
However, he added on
the website that "by requiring registration, these
provisions appear to deny non-resident businesses the
opportunity to import and export in China. Thus, the new
provisions do not appear fully consistent with China's
WTO accession agreement, in which it is promised to
allow non-resident businesses to import into and export
from China."
Rosen voices another concern. "The
articles appear consistent with WTO, but what matters
will be how the rules are implemented by Beijing," he
says. The earlier quoted legal experts with Coudert
Brothers note, "Compliance with the PRC's WTO
obligations is a stated goal of the law, but the text
defines MOFCOM's [Ministry of Commerce's] powers so
vaguely as to permit a variety of actions that would
breach these obligations. Full compliance will depend on
more detailed rules and on MOFCOM's interpretations.
Much will depend on the law's interpretation and
implementation by governmental authorities."
Similarly, the Chinese government has also
introduced several protectionist measures to safeguard
national interests. Through Articles 16 and 17, the new
law empowers the state to impose restrictions or
prohibit trading in goods and services, even though
trading in these items is covered under the WTO
agreement. Provisions in the new law also clearly state
that these measures are being incorporated in order to
safeguard national security and public interests, even
while aligning the Chinese law with the global trading
order.
In the same vein, the Ministry of
Commerce's powers to crack down on monopoly and unfair
trade practices has been enhanced. It has also been made
clear that the Chinese government would resort to
anti-dumping, countervailing and safeguard measures to
ensure the orderly growth of its domestic industries.
Some tinkering has also been done to the
protection of intellectual property rights (IPR) in the
foreign trade law, but as Coudert Brothers note,
"Licensing of intellectual property is an area where the
law appears to create new potential non-tariff
barriers." Under these provisions, the Ministry of
Commerce could intervene in the interest of fair trade
practices, when products are licensed as a "package" in
a contract, or exclusive grant-back licenses provisions
are included. Experts at Coudert Brothers note these are
common international practices and could be
discriminatory, unless applied to domestic technology
contracts between two parties in the PRC.
Further, the punishments for violating the
foreign trade law have been tightened. The 1994 law
primarily allowed for the cancellation of licenses. The
new law provides for multi-stage action, including
administrative, criminal and legal. Also, cancellation
of licenses could now be accompanied by a ban on the
right to trade for several years. As Deiter from Wenger
Vieli Besler notes on Mondaq.com, "As such, the
enhancement of surveillance over foreign trade and the
enforcement thereof is emphasized."
Another
important provision in the amended Foreign Trade Law
includes clauses for an early warning system, a public
information system, a statistics mechanism and
publication of illegal operations. Now does that sound
familiar?
Jayanthi Iyengar is a senior
business journalist from India who writes on a range of
subjects for several publications in Asia, Britain and
the United States. She may be contacted at
jayanthiiyengar1@hotmail.com.
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