China and the WTO - The .Net Effect of Accession - Courtesy of Stephenson Harwood*
 
February 4, 2002
 

Fifteen years after the People's Republic of China (PRC) initially applied to rejoin the General Agreement on Tariffs and Trade (GATT), on December 11, 2001, China became a fully fledged member of the World Trade Organization (WTO). China's accession to the WTO is based on a commitment to reduce tariffs and other mechanisms that act as barriers to trade. One of the main pillars of the WTO regime, "most favoured nation status," is intended to ensure that corporations receive similar treatment regardless of their jurisdiction of incorporation. There can be no doubt that China's accession will have enormous ramifications both within the PRC and the Asia-Pacific region as a whole. However, more realistic commentators point out that December 11 was not the final destination, but an important step down a very long road toward market equality.

In the past, foreign investment in the IT sector in China has been carefully restricted, and in some cases outlawed altogether. The Foreign Investment Catalog precluded foreign participation in Internet Service Providers, Content Provision, and any other telecommunication companies that fell under the broad interpretation of "value-added telecom" (fax, voicemail services, etc). Other "restricted" categories of investment, such as advertising and trading services, required state approval. Despite these restrictions, foreign investors keen to tap into the burgeoning market used "grey areas" and loopholes to allow an injection of foreign capital. For the most part, the PRC authorities have turned a blind eye to such practices, recognizing the need to remain competitive in the high-tech arena. Upon accession, however, doubts have resurfaced about the future of such activities now that a more legitimate investment alternative exists.

For foreign corporations, the lucrative sectors of the Internet and telecommunications are a key investment target, and WTO membership will be of vital importance in opening up the huge market within the PRC. In addition, there is a perception that, sheltered by state protection for so many years, the IT sector in China may be particularly vulnerable to foreign competition. China has the world's largest cellular mobile network, with 121 million users, a figure that represents a relatively modest market penetration of only 9.2% (compared to 40% and 50% in the U.S. and Europe respectively). At 167 million users, China also boasts the second largest market for fixed-line telecom. In the Internet industry, Chinese domain names have surpassed the one million mark, and with the growth of multilingual domains and the evolving sophistication of consumers, the Chinese Internet presence is expected to grow at an exponential rate over the next few years . Official figures from the Ministry of Information Industry (MII) reported that the IT sector accounted for RMB1Billion of China's GDP in 2000, predicting an annual growth in the sector of 25% over the next five years.

Of key importance in the PRC's commitment to open the IT sector to foreign participants is membership of the Basic Telecommunications Agreement (BTA) and the Information Technology Agreement (ITA). Like most WTO commitments, the transition is phased over a period to allow both domestic and foreign players time to adapt to new trading conditions. Under the BTA, WTO members commit to provide market access and national treatment to all aspects of telecom services, which for China involves a target timeframe of 2006. China's BTA commitments include an obligation to introduce pro-competition regulatory principles and restrict the behavior of major suppliers, promote unbundling and access to infrastructure, and greater transparency in the licensing regime of its telecom services. Complementary to the regulatory regime of the BTA, the ITA is principally a tariff-cutting mechanism. Again, China has a five-year target period to reduce the tariffs and quotas on all IT-based products, such as computers, semi-conductors and other high-tech goods. At the end of the transitional period, tariff barriers must be completely removed, together with all other related duties and charges. In the long term, the ITA makes provision for a voluntary commitment to reduce non-tariff barriers, although these are still being formulated by a consultation committee in the WTO.

Reduced tariffs and an improved regulatory system will not be sufficient on their own to attract foreign capital in substantial volume without a greater commitment to protect intellectual property rights. Such protection has been notoriously inadequate in the past. Despite enacting copyright and trademark protection laws, foreign rights owners have long complained that foreign-registered rights have not been recognized, and those that have are only sporadically and selectively enforced by the authorities. Membership of the WTO requires participation in the Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement. The TRIPS Agreement lays down minimum standards for the exploitation, protection and enforcement of intellectual property rights for all members. The PRC's domestic legislation to maintain this level of compliance must be in place by the end of 2001. In anticipation of this, substantial amendments to the copyright, trademark and patent regimes have been passed in the run up to accession, as well as a recognition of the rights in integrated circuit design for the first time. The exhaustive review of copyright legislation amended some 53 of the 56 original clauses. Recent court decisions also have indicated a growing commitment to uphold the applications of multinationals opposing Chinese cybersquatting domains (including Boss, KFC and UPS). In the long term, China must come to terms with the proper protection of intellectual property rights by stamping out the counterfeiting practices so endemic in the manufacturing and technology sectors.

Although a significant improvement from the blanket prohibitions of the Foreign Investment Catalog, foreign participation will continue to be carefully restricted. Regardless of the amount of investment, participation will be limited to a joint venture with a local presence, and may never amount to majority control (permitted ownership is subject to a strict 50% ceiling). Investment protection and other safeguards will have to be built into the joint venture agreement to persuade foreign capital to invest. Foreign participation in the telecom sector is phased according to maximum permitted ownership. In the fixed-line market (perceived as the most vulnerable telecom field) foreign participation is entirely prohibited until 2004. Geographic restrictions also operate, with a staggered roll out in three phases; Beijing, Shanghai and Guangzhou, followed by 14 additional cities Unlimited geographic access will be permitted only at the end of the liberalization program.

While WTO accession and the associated removal of tariffs represents a significant break through, it should be emphasised that historic barriers to foreign participation were as much associated with non-tariff factors that may not be directly addressed by WTO trading rules. For example, "Buy Local" campaigns, selective and lengthy import inspections, network access permits and product standards all have been used in the past to discourage foreign goods and services from entering the PRC. WTO membership is unlikely to change official or consumer habits in the short term. Nor should political habits be underestimated. In the IT industry in particular, China has endured a love-hate relationship, requiring technology to remain competitive in the global economy, but fearing the freedom of information that such technology brings. Such conservatism is perhaps no better reflected than by the current MII incumbent, Minister Wu Jichuan.

That is not to suggest that all barriers to foreign investment have been deliberately imposed. China's current lack of broadband Internet access (despite extensive cable saturation) is as much to do with wrangling between the State Administration of Radio, Film and Television (SARFT) and MII than any protectionist sentiment. Under WTO classification at least, China is still technically a developing country. Research group Gartner Inc. recently emphasised the importance of a realistic timetable for any return on investment in China, suggesting that WTO membership will require massive reforms in both the political and economic infrastructure of the PRC that will take at least a decade to play out. While China may have committed to give precedence to WTO commitments where local regulations conflict, WTO trading rules are governed by unilateral international treaties, and thus do not confer rights on foreign corporations aggrieved by their treatment. On considering any IT-based investment in China, individuals and organisations would do well to remember that the journey to Doha took the PRC 15 years. That is a long time in technology.

*Stephenson Harwood is an international law firm based in London with offices in Brussels, Guangzhou, Hong Kong, Madrid, Piraeus and Singapore. Visit Stephenson Harwood's Web site at http://www.shlegal.com/.