Chinese Trade and Investment Law

Since China’s accession to the World Trade Organization (WTO) in December, 2002, the country has gone through a series of conceptual changes with respect to regulation and market control. This essay will try to examine the some of the impacts of its accession by focusing on the investment aspect.

China and the WTO

According to the latest statistics, the WTO now has more than 140 members and 90 percent of the world trade volumes are now co-ordinated under the frame of WTO.1 In other words, China’s accession to the WTO symbolizes its anticipation and recognition of embracement in the global economy. Furthermore, the accession will encourage and enhance China’s exchange and cooperation with other members in terms of trade policies and market environment. 2

Impact and Regulatory Changes

Being part of the WTO membership inevitably compels all remembers to meet its rules. There is no exception to China. Due to the uniqueness of Chinese culture and political history, to create conformity with WTO rules, one of the very first tasks of Chinese government is to review laws and regulations that that are inconsistent with the WTO rules. As a result, the Chinese government is now in a continuous attempt of amending or abrogating any provisions that create inconformity with the WTO rules or China’s commitments. In addition, China is also in an attempt to enact new legislation in case of absence of laws or regulations for the WTO purposes, with a view to effectively fulfilling its WTO obligations and commitments.3

China’s accession to WTO has carried out an encouraging message to the world that now as a member of the WTO, China is bound by WTO rules and therefore its potential for attracting foreign investment is rising rapidly. Furthermore, its WTO membership also helps the country to assure and establish a better and safer investment environment for the country and investors.

One of the significant regulatory changes China has made so far after its accession to the WTO is concerned with the relaxation of strict regulations on controlling foreign investment in China,

Prior to tis entry into WTO membership, the Chinese government has carefully set strict controls on foreign investment in the country through regulations (and setting tariff and non terrif barriers). Nevertheless, it was said that all of these are designed to aiming at “regional protectionism”,4 that is, to protect China’s home grown industries, which tended to be inefficient and non-competitive.5

For example, previously, foreign firms that operate in China were required (by law) to purchase all raw materials, fuel and factory fittings in china’s mainly state-run markets at fixed prices, which many foreign businesses complained about as they are often forced to use -sub-standard material.6

Furthermore, there are also laws that require foreign firms operating in China to sell all or the majority of their products in China, reserving lucrative export markets for cheaply manufacture goods for state-run and domestically owned firms. 7

Nevertheless, now being granted WTO membership, China is bounded to legal Obligation imposed by WTO, including all WTO treaties. According to WTO treaties such as TRIMs (the Agreement on Trade-Related Investment Measures) 8, under which, it is a violation of the requirement of national treatment of an investment measure require the purchase of local products by foreign enterprises to be tied with its exports. Similarly, it is 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. 9

The purpose of such treaties is to compel all members of the WTO to accord national treatment to other members and not to maintain quantitative restrictions in their investment measures.10

Hence suppose that the above mentioned old restrictions (regulations) on foreign investment are to be continued, it will be against the WTO rules and fail China’s at its commitment to WTO treaty obligations. The Chinese government recognizes the problem and already eliminated these old laws to meet WTO requirement. Moreover, there are other regulatory changes, which including abolishing previous requirement that concerns Sino-foreign joint ventures and solely foreign-funded ventures who were previously asked report production and execution plans to relevant Chinese government departments in advance. 11

Destiny of Local Business after WTO

Yet, how is the China’s domestic industry that often lacks competitiveness, going to survive through these regulatory changes remains at question.

China’s local industry will face many challenges after WTO. Without the umbrella of old strict regulations that have protected China’s domestic markets from foreign firms for decades12 , they are compelled to enter into competition with international companies. It is predictable that many will fail even before entering into competition due to its heavy reliance on previous favoured national treatment as well as its non-competitiveness. Subsequent issues follows; such as the settlement of the employees of domestic industry (in China, there are many factories that are owned by the country/government) and hence increase of unemployment rate.

Nonetheless, one positive impact of its accession to WTO brings the local business into an international perspective. WTO membership will give China access to the international market, and Chinese companies will have greater opportunities to do business with companies based overseas. 13 “Huawei” is a great example of Chinese company directly benefiting from gaining access to international market and subsequently expand its business worldwide successfully. “Huawei” started as a company specialising in manufacture switches which remained at the same quality as Cisco’s but half the price. It has won deals with Britain, Germany and others; its international sales climbed 210% in 2002 and opened Retailer and Dealer centres in New Jersey, California and Texas, and the company is targeting sales in Russia, India and emerging markets. 14

However, the successful example will be very few so that it is not to ignore the fact that there is many other local business are facing struggles and facing bankruptcies after China’s accession to WTO. One suggestion to China’s local companies will be to improve their operation in order to survive global competition.

Other industries

Apart from business industries, there are many other industries that remain primitive and awaiting for investment. Potential investment opportunities exist in areas, such as banking, insurance, telecommunications, trade and tourism. These are area where the Chinese government promised to gradually open up to foreign investors.

For instance, with respect to China’s agriculture, it is predicted that after China enters the WTO, it will dramatically reduce import tariffs for farm produce and change its trade and foreign currency management systems further to attract foreign funds.15 It is the government’s promise that “China is now quickening its pace in formulating investment policies and regulations in line with international standards, and establishes a foreign trade mechanism catering to tis actual conditions”.16

Neighbours Countries

In addition, accord to a recent research, facts have shown that China’s entry into WTO has not only contributed to Chian’s economic development, but also instilled new energy into neighbour countries.17

In conclusion, China’s entry into the World Trade Organization will give a powerful push to the country’s economic restructuring and its plan for building a socialist market economy.18

It is quite obvious that the Chinese government is enthusiastic about its entry into WTO through its positive attitude and echoing regulatory and market reforms. Despite the negative impact that some industries will feel pressure, particularly those in the low-level, capital intensive and technology-intensive sectors.19 So far, the WTO future remains optimistic for the country. Yet, the country still has a long way to go towards perfection of regulatory reform to meet both the WTO rules and its national demand.20