It is likely that China will become a member of the WTO this summer, if not earlier. What effect will WTO membership have on the investment landscape in China? In this article, Mr. Huang expertly explains the various obligations and implications of WTO accession. He notes that there will be a tremendous amount of work in terms of regulatory compliance with WTO requirements, but predicts that China's economy will continually benefit from foreign investments.

Thomas W. Huang is a partner in charge of the Asia practice at the law firm of Holland & Knight LLP (Boston). He was born in Taipei, Taiwan and obtained his LLB from National Taiwan University. He subsequently obtained a J.D. magna cum laude from Indiana University Law School in Indianapolis and a Doctor of Juridical Science (S.J.D.) degree from Harvard Law School.

Author's Note: This article is adapted from a presentation delivered at the East Asian Legal Studies Program at Harvard Law School on February 21, 2001.

Although negotiations for China's accession to the World Trade Organization (WTO) appear to have encountered a few unexpected difficulties, most predict that China will become a member of the WTO this summer, if not sooner. The event will symbolize the end of a better part of the economic cold war era. By subscribing to the free trade system set forth in the WTO, China will complete a total about-face from its earlier import substitution strategy to a strategy commenced in the 1980s known as the "open door" policy.

The WTO came into existence in 1995 after several years of intensive trade negotiations known as the Uruguay Rounds. Different from its predecessor, GATT, which was simply a treaty, the WTO is an international organization presently headquartered in Geneva, within which members participate in a free trade system delineated in two sets of trade agreements.

The first set of trade agreements is called multilateral agreements. It includes, among other things, the General Agreement on Tariffs and Trade 1994 (GATT 1994), the Agreement on Trade-Related Investment Measures (TRIMs), the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), and many other agreements or codes. A member must accept all these agreements as a compilative whole.

The second set of trade agreements is called plurilateral agreements, to which members may adhere on a voluntary basis. Those agreements include, for example, the Agreement on Government Procurement (AGP) and the Agreement on Trade in Civil Aircraft (TCA).

In order to become a member of the WTO, China must conduct negotiations on two simultaneous fronts. Since the beginning of its application for membership, China has been negotiating with a WTO Committee called the Working Party on conditions for its accession. In addition, China has engaged in regular talks with WTO members on a bilateral basis. It was during such bilateral negotiations that China and the U.S. agreed to trade concessions and accession conditions in November 1999. China concluded a similar agreement with the EU in May 2000.

Although there are many agreements under the umbrella of the WTO organization, the following major legal obligations can be extrapolated from the major trade agreements, including GATT, TRIMs, and GATS: (1) Most-Favored-Nation status (MFN), (2) national treatment (NT), (3) quantitative restrictions (QRs), and (4) transparency.

MFN imposes an obligation of non-discrimination on WTO members in their dealings with other members. In other words, if a concession is granted by China to the EU, the U.S. should be able to enjoy that same benefit. Although in practice it may be possible to grant a so-called conditional or reciprocal MFN to other parties of a treaty, the MFN obligation under the WTO is both unconditional and immediate.

Another major obligation under the WTO treaties requires members to accord equal treatment to nationals of other WTO members. In the context of investment, particularly under GATT, TRIMs, and GATS, this mandates that tax laws, regulations, and other measures be applied equally to both imported and domestic products and services.

Subject to certain exceptions, GATT, TRIMs, and GATS also contain provisions against certain quantitative restrictions other than tariffs on trade. The rationale behind these provisions is that tariffs are the least harmful of restrictions on free trade. As such, quantitative restrictions such as quotas, subsidies, or licensing requirements are to be abolished.

In addition, the requirement of transparency permeates every major trade agreement within the WTO. Generally speaking, members are required to publish their laws and regulations, including trade and investment measures. In many agreements, members are required to notify not only the Secretariat or various Councils of the WTO, but also other interested members of their relevant regulations. There are also various obligations to engage in consultation and to provide information upon the request of other members.

One of the more laudable achievements of the WTO has been the institution of dispute resolution mechanisms. As stated above, members are required to engage in consultation on trade issues. In the event of a failure to resolve outstanding differences, a member has the right to request the establishment of a panel, or a quasi-judicial committee, to adjudicate the dispute.

All of the above-mentioned treaties and treaty obligations will alter the investment environment in China in a dramatic way. There are presently three major sets of foreign investment laws and regulations in China. The first is the Sino-Foreign Equity Joint Venture Law of 1979, as amended in 1990 ("JVL"), and the regulations promulgated under this law in 1983 ("RJVL"). The second is the Wholly Foreign Owned Enterprises Law of 1986 ("WFOE"), and the regulations for the implementation of this law promulgated in 1990 ("RWFOE"). The third is the Sino-Foreign Cooperative Joint Venture Law ("CJVL") of 1988, and its accompanying regulations of 1995 ("RCJVL").

What exactly do WTO treaties such as GATT or TRIMs mean when they stipulate that members are required to accord national treatment to other members and shall not maintain quantitative restrictions in their investment measures? The TRIMs agreement provides a few examples in connection with local content and export performance requirements, as well as with foreign exchange restrictions. For example, it is a violation of the requirement of national treatment for an investment measure to require the purchase of local products by foreign enterprises to be tied with its exports. Similarly, it is a violation of prohibitions of quantitative restrictions when investment measures require an enterprise to use its own foreign exchange reserve to import products. The prohibition of quantitative restriction is similarly violated if export is tied in any way with the local production.

If the investment laws and regulations in China are measured up against these requirements, one will encounter several provisions that are inconsistent with WTO treaty obligations. For example, the WFOE stipulates, among other conditions, that investment may be approved if all or most of its products will be exported. The Equity Joint Venture Law also stipulates that, other conditions being equal, joint venture enterprises are required to purchase local products or products from a local source. Yet laws also require joint ventures to maintain a balance in their foreign exchange accounts. Therefore, if joint ventures require hard currency to import materials or remit profits, they need to export more to build up their foreign exchange reserves.

Some of these requirements were abolished by amendments to the WFOE Laws and Cooperative Joint Venture Laws on October 31, 2000. However, these laws continue to exist for equity joint ventures. It is only a matter of time before these investment measures are changed, either prior or subsequent to China's accession to the WTO.

And what of the MFN obligation? By virtue of the fact that China must conclude many rounds of bilateral negotiations, any concession that China delivers to one member will automatically be enjoyed by another. For example, in the China-U.S. accord, the legal services schedule restricts U.S. law firms in China from rendering advice on Chinese laws. The EU, however, somehow negotiated a better settlement that removes such restrictions. Due to the MFN obligation, U.S. firms will enjoy the same benefit.

The requirement for transparency will undoubtedly be heralded by all those conducting business in China. The "state secret" mentality and propensity on the part of many Chinese bureaucrats to abuse discretion are quite infamous within the international community. In earlier days, foreign investors and their counsel were frequently stonewalled during negotiations with Chinese counterparts. They were often informed that matters had been decided according to "neighbor guiding" (regulations for internal use) which were confidential and not to be disclosed. Practices such as these will now constitute violations of WTO obligations.

To illustrate how China's accession to the WTO will affect actual investments in China, the following is the service schedule concluded between the U.S. and China on telecommunications services:

Telecommunications as an Example: Basic Telecom Services and Value Added & Communication Services (E-Mail, Voicemail): (30% JV; 3 Cities; upon accession) (49% JV; 17 Cities; upon accession) (50% JV; 1/1/02)

Communication Services:  Mobile Voice & Data Services (25% JV; 3 Cities; upon accession)  (35% JV; 17 Cities; 1/1/03)  (49% JV; 1/1/05)

It is apparent that China's investment market will be open to multi-national corporations in a very short period of time. As the second largest recipient of foreign direct investments in the world since 1996, China will experience the impact of WTO membership on a massive scale. As a result, China's economy will undoubtedly expand and living standards will rise accordingly. But these changes will also come at a price. At present, many multi-national corporations and Taiwanese firms are moving labor-intensive and environmentally harmful industries to China. Is this a cost that a developing country such as China must bear in order to forge ahead in this age of globalization? Hegel once said, mysteriously: "The owl of Minerva spreads its wings only with the falling of the dusk." So precisely because we are in the midst of a truly historical event, perhaps we are as yet unable to appreciate its full historical significance until the event has fully materialized.

Endnotes

1. See generally, the WTO news release entitled "Working Party on the Accession of China Formal Meeting", dated 1/17/01 and "Statement by H.E. Vice Minister Long Yongtu", dated 1/17/01, available at www.wto.org (visited Feb. 20, 2001).
2. Gunnan Myrdal, Asian Drama: An Inquiry into the Poverty of Nations 669-72 (1958).
3. See Marrakesh Agreement Establishing the World Trade Organization, WTO, The Legal Texts: The Results of the Uruguay Round of Multilateral Trade Negotiations 4 (1999). (Hereinafter "Texts").
4. GATT 1994, Texts, supra note 3, at 17.
5. TRIMs, Texts, supra note 3, at 143.
6. GATT, Text, supra note 3, at 284.
7. TRIPS, Texts, supra note 3, at 320.
8. DSU, Texts, supra note 3, at 354.
9. AGP, Texts, supra 3, at 383. Full text available at www.wto.org.
10. TCA, Texts, supra 3, at 383. Full text available at www.wto.org.
11. T.W. Huang, "One Treaty, Two Members": China and Taiwan Within the Context of the WTO/TRIMs, 1 J. World Investment 261, at 263 (2000).
12. Copy of U.S.-China Bilateral Market Access Agreement as Released by USTR on 3/14/00, available at www.uschina.org (visited 8/3/00).
13. News Releases, EU-China Agreement on WTO, 5/19/00, available at www.eurunion.org/news/press/2000/2000023.htm (visited Feb. 20, 2001).
14. See, e.g., GATT 1947, Art. I, Texts, supra note 3, at 424.
15. See, e.g., GATT 1947, Art. III, Texts, supra note 3, at 427.
16. E.g., GATT 1947, Art. II, Texts, supra note 3, at 437.
17. E.g., TRIMs, Art. 6, Texts, supra note 3, at 145.
18. E.g., Agreement on Safeguards, Art. 3, Texts, supra note 3, at 276.
19. E.g., TRIPS, Art. 63, Texts, supra note 3, at 348.
20. E.g., GATT 1947, Art. XXIII, para. 2, Texts, supra note 3, at 457.
21. JVL (zhonghua renmin gonghequo zhong wai heze jingying qiyefa), in 1 Compilation of Economic Laws Related to Foreign Countries, Hong Kong, Macau and Taiwan (shewai she gangao she tai jing ji falu shouce) (hereinafter "Compilation") 262 (Ma Yuan ed. 1999).
22. RJVL (zhonghua renmin gongheguo zhong wai heze jingying qiyefa shishi tiaoli), in Compilation, supra note 21, at 266.
23. WFOE (zhonghua renmin gongheguo waize qiyefa), in Compilation, supra note 21, at 765.
24. RWFOE (zhonghua renmin gongheguo waize qiyefa shishi xize), in Compilation, supra note 21, at 768.
25. CJVL (zhonghua renmin gongheguo zhong wai hezuo jingying qiyefa), in Compilation, supra note 21, at 301.
26. RCJVL (zhonghua renmin gongheguo zhong wai hezuo jingying qiyefa shishi xije), in Compilation, supra note 21, at 306.
27. TRIMs, Annex 1(b), Texts, supra note 3, at 146.
28. TRIMs, Annex 2(b), Texts, supra note 3, at 146.
29. TRIMs, Annex 2(c), Texts, supra note 3, at 146.
30. WFOE, Art. 3, in Compilation, supra note 21, at 765.
31. RJVL, Art. 57, in Compilation, supra note 21, at 277.
32. RJVL, Art. 75, in Compilation, supra note 21, at 281.
33. China Legal Change, 2000 Issue No. 21 (Nov. 18, 2000).
34. Explanatory Note to China’s Draft Services Schedule (hereinafter "Schedule") 6 (Nov. 13, 1999 draft), available at www.uschina.org (visited Aug. 30, 2000).
35. News Releases, supra note 13, at 4.
36. Schedule, supra note 34, at 25-27.
37. H. Houben, China’s Economic Reforms and Integration into the World Trading Systems, 33 J. World Trade 3-4 (1999).
38. Preface to Hegel’s Philosophy of Rights 13 (T.M. Knox trans. 1952).