The Impact of WTO Treaties on Investments in China
By: Thomas Weishing Huang*

Although the negotiations of China's accession to the WTO appear to have encountered a few unexpected difficulties, most predict that China will become a member of the WTO in the summer of this year, if not sooner. When this transpires, 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 World Trade Organization (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, under which members subscribe to a free trade system contained in two sets of trade agreements.

The first set of trade agreements is called multilateral agreements. They include, 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), Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) and many other agreements. A member must accept all of 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 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 a non-discriminatory obligation of a member in its dealings with all other members of the WTO. 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 the 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 consists of a non-discriminatory obligation on behalf of a member to accord equal treatment to all nationals of WTO members. In the context of investments, particularly under GATT, TRIMs and GATS, this requires 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 also to be abolished.

In addition, the requirement of transparency permeates every major trade agreement under the WTO. Generally speaking, members are required to publish laws and regulations, including trade and investment measures. In many agreements, members of the WTO 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 at the request of other members.

One of the more laudable achievements of the WTO has been its dispute resolution mechanisms (DSU). 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.

Although the TRIMs agreement would have permitted China to postpone the implementation of WTO investment requirements for up to five years, China opted to comply with the requirements immediately upon its accession to the WTO. As a result, 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 regulation for the implementation of this law promulgated in 1990 (RWFOE). The third is the Sino-Foreign Cooperative Joint Venture Law of 1988 (CJVL) and its regulation 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 foreign exchange restrictions. For example, it is a violation of the requirement of national treatment for an investment measure require the purchase of local products by foreign enterprises to be tied with its exports. Similarly, it is a violation of the prohibitions against quantitative restrictions when investment measures require an enterprise to use its own foreign exchange reserve to import products. It is also a quantitative restriction if the export is tied in any way with the local production.

If one measures these requirements against the above-mentioned investment laws and regulations in China, one will encounter several provisions that are inconsistent with the WTO treaty obligations. For example, the WFOE stipulates, among other conditions, that the 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. In spite of amendments which took place on March 15, 2001, some of 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 membership in 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 with 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 the earlier days, foreign investors and their counsel were frequently stonewalled during negotiations with Chinese counterparts. For instance, they were often informed that matters had been decided according to "neibu 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):
    Basic Telecom Services: 30% JV; 3 Cities; upon accession Value Added &
    Communication Services: 49% JV; 17 Cities; upon accession.

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 transnationals 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 the 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 transnationals and Taiwanese firms are moving labor-intensive and environmentally harmful industries to China. Is this the cost that a developing country such as China must bear in order to get 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 unable to appreciate its full historical significance until the event has fully materialized.

*This article is adapted from a presentation at Harvard Law School, EALS, on February 21, 2001.  The author is a partner responsible for Asia practice at Holland & Knight LLP, Boston office.   Permission for reproduction granted by Harvard Asia Quarterly in which the article was published. 
The author can be reached via e-mail at thuang@hklaw.com

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