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A Non-market economy’s admission to the General Agreement of Tariffs and Trade: China’s unique situation Yan, Yibing 1993

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A NON-MARKET ECONOMY'S ADMISSION TO THE GENERALAGREEMENT ON TARIFFS AND TRADE - CHINA'S UNIQUESITUATIONByYibing YanLL.B. Faculty of Law, Beijing University, People's Republic of China (1985)LL.B. University of British Columbia (1993)A THESIS SUBMITTED IN PARTIAL FULFILLMENT OFTHE REQUIREMENTS FOR THE DEGREE OFMASTER OF LAWSinTHE FACULTY OF GRADUATE STUDIES(FACULTY OF LAW)We accept this thesis as conformingto the required standard.THE UNIVERSITY OF BRITISH COLUMBIAApril 1993©^Yibing Yan ^(1993)In presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission. (Signature)Ft-A-44.Z% 4Blepartffier-it—aifThe University of British ColumbiaVancouver, CanadaDate ^1--(4-e7 3 k,-3DE-6 (2/88)AbstractChina's GATT application has been regarded as a uniquecase. This thesis attempts to explore the unique features ofChina's GATT application. It starts to review the historicalbackground. It will examine the inherent conflict betweenGATT and non-market economy system. GATT's previousexperience with non-market economy countries will bereviewed as well.China's economic reform and its impact on the GATTapplication are the focus of the thesis. It will discuss theachievements made through the economic reform and itspositive influence on China's GATT membership. It will alsoaddress the weakness and insufficiency of the reform, andtheir negative impact on the GATT application.The author concludes that as long as both GATT andChina take a practical approach, a compromise is notimpossible. The author suggested a variety of accessionmechanisms for China to obtain the membership. Althougheach of the mechanisms has pros and cons, they all providesuseful references for China and GATT. The recent U.S.declaration to support China's GATT application and the newcompromise made between both China and U.S. serves as a goodexample.iiTABLE OF CONTENTSAbstract^ iiTable of Contents^ iiiAcknowledgement viIntroduction^ 1Chapter 1: Historical Background^ 6I.^Time Table(1) GATT Membership: 1947-1949^ 6(2) Absence from GATT: 1949-1980 7(3) Re-Approaching GATT: 1980-Present^8II. The Advantages of GATT Membership 11III. The Procedure Issue: Resumption V. Accession^18Chapter 2: GATT and Non-Market Economy^ 26I.^GATT & NME: A Conflict of Basic Assumptions^26(1) Tariff Concession is Not Meaningful in NME 28(2) MFN Is Not Significant under NME^29(3) The Observation of National Treatment Is Difficultto Assess^ 31II. GATT Provisions Related to NME: Article XVII---State Trading 32III. GATT Association with NME^ 35(1) Accession to the GATT by Yugoslavia:The Role of Tariffs 36(2) Poland, Romanian Accession to the GATT-"Import Commitment"^ 37Chapter 3:^China's Domestic Economic Reform - The Impact onIts GATT Membership^ 42I. Central Planned Economy Prior to the EconomicReform 42II. Agriculture Reform^ 44III. The Urban Economic Reform^ 48(1) Implementation of the "Contracting ManagementResponsibility System" and the "Factory ManagerResponsibility System" 49(2) Adoption of the Bankruptcy Law and Issuance ofSecurities^ 52(3) The Insufficiency of the Economic Reform^54(a) The "Corporation" in Modern Capitalist 55Economic System Does Not Exist in China(b) The Price Reform Is Not Sufficient to111ivReflect Market Supply and Demand^62(c) A Competition Mechanism Has Not BeenEstablished^ 62(i) Distribution of the Labour Forces^63(ii) Allocation of Capital^ 64(iii) Production and Distribution of RawMaterials^ 68(d) Capitalist Economy Is Not the Goal of theEconomic Reform 70(4) Summary^ 71Chapter 4:^Reform of China's Foreign Trade System^73I. Achievements through the Reform^ 73II. Current Import Barriers Maintained by the ChineseGovernment^ 76(1) Import Licensing System 76(2) Foreign Exchange Control^ 81(3) Import Commodity Inspection 83(4) Import Substitution 85(5) Import Pricing^ 88III. China's Current Unfairly Traded Export Practice 91(1) Direct Price Supports^ 97(2) Foreign Exchange Retention 97(3) Direct Rewards^ 98(4) Tax Rebates or Exemption 99(5) Preferential Loan 99(6) Preferential Access to Raw Materialsand Other Facilities^ 100(7) Workers Rebates 101IV. Rules aginst Unfairly Traded Export Practices 102(1) Anti-Dumping and CountervailingDuty Rules under the GATT-AnUnsatisfactory Solution^102(a) Determination of "Normal Value"^104(b) Determination of "CountervailedSubsidies"^ 110(2) Other GATT Provisions on UnfairlyTraded Exports 111(3) Selective Safeguard Measure and QuantitativeRestrictions-Effective Solutions to UnfairlyTraded Export Problem?^ 114(a) Selective Safeguard Measures^114(b) Quantitative Restrictions 117(4) Generalized System of Preference 120(5) Summary^ 122Chapter 5.^China & GATT: A Possible Compromise^124I. The Possibility of Accession Solely on the Basisof Tariff Concessions^ 125II. Import Commitment - A Possible Solution? 129III. Other Alternatives 133(1) Restriction on "Mark-Up"^133V(2) Adoption of "Transparent Criteria"^133(3) The "Milestone Approach"^136(4) Negotiated Accession-the 1992U.S.-P.R.C. MOU Approach 137(5) Summary^ 139Conclusion^ 141Bibliography 143ACKNOWLEDGEMENTThe author gratefully acknowledges the assistance and advice of ProfessorPitman Porter.The author also thanks the Faculty of Law, the University of British Columbiafor its support and assistance for the completion of the thesis.viA NON-MARKET ECONOMY'S ADMISSION TOTHE GENERAL AGREEMENT ON TARIFFS AND TRADE -CHINA'S UNIQUE SITUATIONIntroductionIn July 1986, the People's Republic of China announcedits intention to rejoin the General Agreement on Tariffs andTrade (GATT) 1 . Since China has great potential as a tradingpartner, its request for the GATT membership arousedconsiderable attention in the international tradingcommunity.China's decision was widely welcomed by the majortrading countries. They saw it as an opportunity to exploreChina's vast internal market, and also as an opportunity tobind China, a country with tremendous trading potential, toGATT obligations.From China's point of view, GATT membership would allowit to acquire many trading advantages currently unavailablein its existing trade pattern. More importantly, membershipwould allow China to play a leading role in the formation ofinternational trade rules and polices.1^Southerland, China Formally Says It Wants to Join GAIT, Washington Post, July 10, 1986, at1E3.China's application to the GATT raises unique andcomplicated legal, economic and policy issues. The GATTtrading system is based on principles of free trade in freemarket economy system. GATT rules make little sense in thecase of trade involving non-market economies (NME) 2 .Therefore, integrating China's economic, political andsocial structures to a trading system which is based onmarket economy principles presents a big challenge to theGATT Contracting Parties as well as the Chinese government.In reviewing the history of the GATT, GATT actuallydoes not exclude non-market economy countries' participationin its system. GATT has certain flexibility in this respect.Several Eastern European countries with non-market economiesacceded to the GATT under special arrangements during the1960's and 1970's. 3 Their experience will provide valuableprecedents for China.On the other hand, compared to East European countries,China is much larger in terms of its population and tradingpotentia1. 4 Therefore, as a potentially powerful country,the significance of its participation in the GATT will be2^The term "non-market economy" is commonly used to describe countries where good andresources are allocated by government planning agencies rather than by prices freely set in a market. JohnJackson, W. Davey, Legal Problems of International Economic Relations, Cases Materials and Text, at175, (2d, ed. 1986).3^These countries are Cuba, Czechoslovakia, Yugoslavia, Hungary, Romanian and Poland. SeeJackson, supra note 2, at 1183.4^China's population has reached 1.1 billion by 1990.2much more profound than those of the Eastern Europeancountries. This makes China's application more unique.Thus, the GATT will most likely treat China as a specialcase, even considering its non-market economy.China has been undergoing market-oriented reform since1978. Its domestic economic structure and the foreign tradesystem has been decentralized to a substantial degree. Thesuccess and extent of these reforms will significantlyaffect the prospect of GATT membership. At present, however,China's economy still lacks the basic requirements of amarket economy system. This makes China's application to theGATT difficult.This thesis will explore the primary legal, economicand policy issues raised by China's application to the GATT,particularly from a non-market economy's perspective.This thesis will be divided into five chapters.Chapter I will review the historical background ofChina's GATT applications. The Chapter will first go throughthe historical period accompanying China's experience withthe GATT. Then it will discuss the primary advantages of themembership and their implication to China. Finally, it willexamine the procedure issue which has raised much politicaldispute for both China and GATT from historical point ofview.3Chapter II will address the issue of GATT and Non-Market Economy. This chapter will first examine the basicconflicts between the GATT system and NME system. It willreview the GATT provisions dealing with State-Tradingenterprises---Article XVII. Finally, it will review the GATTexperience with NME countries. Emphasis will be given to twotypes of NME's accession to the GATT: Yugoslavia---accessionbased on tariff concession alone, Poland and Romanian---accession based on import commitment.Chapter III will review China's domestic economicreform and its impact on the GATT application. The domesticeconomic reform will be examined from two aspects:agriculture reform and urban economic reform. In discussingthe urban economic reform, the focus will be on the State-owned enterprise reform. Comparison will also be madebetween the enterprises and "corporation" in westerncapitalist society. It will focus on the insufficiency ofthe reform in this sector.Chapter VI will review China's foreign trade reform. Itwill first review the achievements made through the reform.Then it will go through the insufficient aspects of thereform and its implication for the GATT membership. China'sunfair foreign trading practice will be discussed in detail.It will examine the import barriers maintained by theChinese government. Then it will review a variety of exportpromotion measures adopted by the Chinese government, which4are inconsistent with the GATT principles. Following thisGATT provisions dealing with unfairly traded export will bediscussed. Other mechanisms to deal with the problem, suchas selective safeguard measures and quantative restrictionmeasures will be discussed as well.Chapter V will explore the possible compromises madeby both China and GATT. This section will discuss thepossibility of adopting the traditional arrangement betweenGATT and NME countries, such as admission on tariffconcession alone, import commitment. Emphasis will be onChina's unique situation.5CHAPTER IHISTORICAL BACKGROUNDI.Time TableWhen The General Agreement on Tariffs and Trade wasfounded in 1947, China was one of the original members l .Since then, the relationship has been through varioushistorical stages, during which both China and GATT haveexperienced dramatic changes. The historical period can bedivided into three stages:(1) GATT membership from 1947 - 1949;(2) Absence from GATT: 1949 - 1980;(3) Re-Approaching GATT: 1980-.(1) GATT Membership: 1947-1949The General Agreement on Tariffs and Trade was signedin late 1946 by twenty-two countries 2 , including China 3 . As1^China submitted its Instrument of Acceptance of the Protocol of Provisional Application of theGeneral Agreement on Tariffs and Trade on April 21, 1948. See Li Chong Zhou, Resumption of China'sGAIT Membership, 21 Journal of World Trade, at 26, (1987).2^A Protocol of Provisional Application was signed in late 1946 by the original 22 membercountries. It is only through this protocol that GAIT applied. See Jackson, supra note 2, Introduction ofthe thesis, at 295.3^During 1912-1949, China was governed by the Nationalist (Kuo Min Tang or KMT). In 1949,Nationalist forces were exiled to Taiwan, where they established the Republic of China (ROC) which isnot recognized by the People's Republic of China (P.R.C.).6a member country, China enjoyed tariff concessions andother trade advantages negotiated with the other GATTmembers. At that time, China was ruled by the Nationalistgovernment. On October 1, 1949, the government was replacedby the People's Republic of China (P.R.C.), and theNationalist government established itself in Taiwan.However, China maintained GATT membership until 1950 when itnotified the United Nations Secretary-General of itsdecision to withdraw from the GATT. The P.R.C. governmentnever recognized the validity of the withdrawal 4 .(2) Absence from GATT: 1949 - 1980After the withdrawal from GATT by the Nationalistgovernment, China showed little interest in GATT until 1980.During this period, the P.R.C. government advocated a"centrally planned economy" 5. Most GATT member countrieswithdrew the tariff concessions they had previouslynegotiated with China 6 . The P.R.C. government carried outthe so-called "Self-Reliance, Hard Struggle" foreign trade4^See Li, supra note 1, at 26.5^"Centrally planned economy" (CPE), also called "non-market economy" (NME), is used todescribe countries whose goods and resources are allocated by government planning agencies rather thanby prices set in a free market. Jackson, supra note 2, Introduction of the thesis, at 1140.6^See Li, supra note 1, at 28.7policy? and refused to do business with western industrialcountries. Based on this policy, the P.R.C. government didnot make efforts to resume its GATT membership. Foreigntrade was mainly conducted with the Third World countries.During the 1970's, China's trade with GATT membercountries gradually resumed 8 . However, it was mostlyconducted through bilateral trade agreements, rather thanthrough multilateral trade regimes 9 . For example, Chinaentered into a trade agreement with the United States inJuly, 1979 10 .(3) Re—Approaching GATT : 1980 — the Present7^In Chinese, "self-reliance, hard struggle" is called zi ligen g shen, inn ku fen dou. The idea ofthe policy can be traced back to the traditional Chinese notion that China should be an entity unto itself,restricting its dealings with the outside world in order to limit the corrupting effects of foreign influence.Under this policy, China cut back its foreign economic and trade ties with foreign countries, particularlywestern industrialized countries. A.Doak Barnett, China's Economy in Global Perspective, at 4, (1981).8^During the period of time, under the influence of other Chinese leader, such as Premier ChouEn-lai, China's foreign trade policy gradually acquired a more outward-looking orientation. Foreigntrade and the importation of technology from western industrial countries, including many GATTmember countries increased rapidly. See Barnett, supra note 7, at 5.9^Usually, the bilateral agreement provides for Most Favored Nation treatment, but it is lessfavorable than those specified in the multilateral system, such as GATT since the bilateral tradeagreement can create discriminatory policies. See Kostechi, East-West Trade and the GATT System, at58, (1979).10^For the text of the agreement, see The Sino-U. S. Trade Agreement, The China Business Review,24-30 (July-August, 1979).8Since 1980, China has undertaken economic reform andadopted an "open door" policyll . Abandoning the strategy of"self-reliance", the government has adopted a series ofmeasures designed to encourage trade and investment withwestern countries. Accordingly, the amount of trade andinvestment with western countries have been increasedtremendously. For instance, from 1977 to 1979, trade withwestern industrial countries rose 121 percent to $15.716billion12 .Due to the discriminatory nature of bilateral tradeagreement, trade conducted on the basis of bilateralagreements benefited China less favorably if they had beenin the GATT system13 . Realizing that a multilateral tradeagreement would be a better mechanism for its internationaltrade, the Chinese government decided to re-approach GATT.In 1980, China sent a delegation to attend GATTcommercial policy training courses which have since been11^China's new policy have proclaimed that "modernization" is the country's priority. In order toachieve this goal. China has to learn as much and as far as possible from many different types ofcountries, especially western industrial countries. The old "self- reliance" policy has been abandoned forall the practical purpose, and the new "open door" policy has been implemented. Barnett, supra note 7,at 4-7.12^Barnett, supra note 7, at 163.13^For detailed discussion of the discriminatory nature of bilateral trade agreement, see Kostechi,supra note 9, at 58.9regularly attended by Chinese officials 14. In 1980, Chinajoined the International Monetary Fund (IMF), and the WorldBank15 . In 1983, China joined the Multi-Fiber Arrangement -a multilateral textile agreement implemented under theauspices of the GATT 16. This move could be interpreted asan attempt by China to gain experience in multilateral tradeorganizations.In 1982, China obtained an "observer" status in theGATT which allowed it to attend the annual meetings of themember countries 17 . In 1984, China was granted a "specialobserver status" in the GATT, allowing it to attend meetingsof the GATT Council and other subsidiary GATTorganizations 18 .14^In the past few years, Chinese trade officials have attended the GATT seminars in Geneva andBeijing. In 1980, China sent its first official to a GATT training course. See China Attends GATTCourse, Wall St. J., Aug. 27, 1980, at 18, co1.3.15^Karen Green and Sharon E. Ruwart, International Economic Organizations Are BringingChanges to China Joining the World Economy, the China Business Review, at 32, (May-June 1988).16^The accession of China became effective on January 18, 1984. see Trade in Textiles, GATTBasic Instruments and Selected Documents (BISD), 294-97 931ST SUPPL 1985.17^As an "observer", a non-member country can attend the annual sessions of the membercountries, but can not vote on any issues raised. See GATT Rule of Procedure for Sessions of theContracting Parties, reprinted in BISD, supra note 14, at 11 (12th Supp. 1964). Regarding China'sobserver status, see GATT Doc. C/M160, at 2 (Sept. 24, 1982); GATT Doc. C/M173, at 2 (Nov. 16,1983).1 C18^See China to Attend Future GATT Council Meetings, Xinhua, FBIS Daily Report, Nov.9, 1984,at A2.Finally, the Chinese government decided it wouldattempted to resume China's GATT membership. On July 10,1986, China formally notified the Director General of GATTthat China wished to rejoin GATT 19. In February 1987, Chinasubmitted a memorandum on its foreign trade system20. TheGATT then formed a committee to work on China'sapplication21 . The substantive negotiations between Chinaand GATT Contracting Parties are currently underway.II. The Advantages of GATT MembershipChina's request for GATT membership is significant, notonly because of its enormous potential as a partner ininternational trade, but also because this represents aclear change of China's development strategy. Resumption ofGATT membership constitutes an element of its "open door"trade policy aimed at achieving a greater degree ofintegration in the world economy. The requests reflect theshift in development strategy from an emphasis on self-sufficiency to a more outward-looking approach.19^China Formally Says It Wants to Join GATT, Washington Post, July 10, 1986, at E3, col. 5.20^GATT Activities 1987-An Annual Review of the Work of the GATT, at 14.21^Id.1]From China's point of view, GATT membership willprovide a number of advantages. First, GATT membership willprovide China with more trading concessions than itcurrently receives under bilateral trade agreements.Foreign trade conducted on the basis of bilateral tradeagreements could create discriminatory trade policies,whereas a multilateral trade framework, such as GATT, wouldoffer greater protection against such tradediscriminations22. The discriminatory nature of bilateralagreements can be illustrated from the Most Favored Nation(MFN) treatment. Under the MFN policy, trade advantagesgranted to one country that has MFN status must be grantedto the others as wel1 23 . MFN treatment can be establishedthrough bilateral or multilateral agreements. Under abilateral agreement, the benefit of MFN treatment could bereduced or nullified by other provisions in the agreement,such as "quantitative restrictions" 24 or "selective22^Mr. Kostechi pointed out that foreign trade conducted on the basis of bilateral trade agreementscould involve discriminatory trade policies. For example, the agreement containing a preferential tarifftreatment between two countries would have the effect of discriminating against other countries. For thedetailed discussion, see Kostecki, supra note 9, at 58.23^For detailed discussions on MFN treatment, see Jackson, supra note 2, Introduction of thethesis, at 428-455.24^Quantitative restrictions refer to the measures that restrict the volume of imports into a country,not by artificially raising the cost of importing - as is the case when a tariff is imposed - but by placingdirect limits on the quantity or value of imports that may enter the domestic market. See Jackson, supranote 2, Introduction of the thesis, at 421.12safeguard" measures 25 . For instance, in the China-EECagreement, Article 5 provides that China will give favorableconsiderations to imports from the EEC and ensure that EECexporters can participate fully in opportunities for tradewith China. The EEC undertakes to strive for an increasingliberalization of imports from China and endeavorsprogressively to expand the list of products of liberalizedimports from China26. This formulation assumes thatdiscriminatory quota restrictions are the norm in EEC-Chinarelations and the EEC's undertaking in the bilateralagreement to progressively liberalize such quotasconstitutes a concession to China.However, under a multilateral trading system, the MFNtreatment is unconditional. Article I of the GATTspecifically prohibits discriminatory treatment among themember countries 27- Other discriminatory trade measureswhich are commonly used in a bilateral trade agreement, suchas quota restriction, are also restricted or prohibited25^Selective safeguard measure refers to the measures adopted by an importing country to controlimports from a particular country which is injuring its domestic industry. See Jackson, supra note 2,Introduction of the thesis, at 538.26^Harish Kapur, China and the EEC. the New Connection,  at 143, (1986).27^Article I of GATT provides "... any advantage, favor, privilege or immunity granted by anycontracting party to any product originating in or destined for any other country shall be accordedimmediately and unconditionally to the like product originating in or destined for the territories of allother Contracting Parties". See Article I, GATT, Jackson, W. Davey, Documents Supplement to LegalProblems of International Economic Relations, at 4, (1986).13under the GATT28. Therefore, when MFN treatment isestablished through a multilateral framework, it is morestable and complete.A Multilateral trade regime would also provide Chinawith more obligations from the member countries. Under abilateral agreement, a violation of a bilateral agreementwould only be a matter between the two counties involved.However, a violation of GATT rules could create an adverseprecedent which could be used against the violating membercountry by other GATT member counties. Thus, GATT membercountries would be less likely to violate China's traderights under the multilateral GATT rules than they wouldunder a bilateral agreement.Secondly, GATT membership combined with China's statusas a developing country, would also make China potentiallyeligible to receive benefits from the U.S. under theGeneralized System of Preferences (GSP) 29 . Since the GSP ispreferential to the MFN treatment, and considering thatChina's exports to the U.S. are a significant part of its28^Article XI of the GATT, supra note 27, at 17.29^The GSP is a program maintained by 20 industrialized countries designed to assist developingcountries by preferential reduction of tariff on imports of specified products from those countries. Fordetailed discussions, see Jackson, supra note 2, Introduction of the thesis, at 1154-1158.14total exports, it would be advantageous for China to gainGSP treatment from the U.S.According to U.S. law, the U.S. cannot grant GSPbenefits to communist nations that are not members of GATTand the IMF and who do not receive MFN treatment 30 . China isalready a member of the IMF and is receiving conditionalMFN treatment. According to the member classification ofIMF, China is also a developing country 31 ; therefore, GATTmembership would make China eligible to receive GSP benefitsfrom the U.S.Thirdly, GATT membership would allow China to help todevelop and refine GATT rules. It would give China theopportunity to participate in GATT meetings and otherfunctions where new problems are explored and to beinvolved in negotiations where new rules are formulated.This right to participate in the rule-forming process maybe more important than the gain of immediate legal rights,as it will allow China to shape the rules under which othercountries will expect it to operate. For example, China'smembership in the MFA gave it more influence in textile30^19 U.S.C. S2462(b)(1), 1982.31^International Monetary Fund Annual Report of the Executive Board for the Financial YearEnded April 30, at 180-181 (1985).negotiations and allowed China, a major exporter, to play akey role in the negotiations of the MFA 32 .Fourthly, GATT membership would provide the Chinesegovernment with a great deal of valuable information on thepolicies and activities of other nations which might affectChina's opportunities in the world markets. Through bothformal and informal processes, participation in the GATTprovides information on how the new member countries arebehaving, how their policies are being formulated, whattheir disputes are, which actions they will react to, andwhich ones they will disregard. Such information gainedimmediately upon membership could be valuable in China's ownpolicy-making.However, China's application to the GATT also presentspotentially difficult economic, legal and political issues.Its admission to the GATT would present challenge to thefree market principles of the existing GATT members 33 .Although GATT had been involved with non-market economycountries34 , it has never accepted any non-market economy32^U.S. Textile Import Regulations Condemned at the GATT, Xinhua, FBIS Daily Report, Oct. 18,1984.33^The GATT trading system is based on the principle of free market economy. The GATT rulesmake sense in that context. They make much less sense in the case of trade involving non-marketeconomies. See Jackson, supra note 2, Introduction of the thesis, at 1175.34^GATT has admitted several NME countries as members, such as, Hungary, Poland, Romania,Yugoslavia, Cuba, Czechoslovakia. See Kostechi, supra note 9, at 9.1countries with China's enormous trading potentials.^Themember countries fear that by providing China with GATTbenefits, such as tariff concessions, the Chinese may floodtheir domestic market with its cheaper labour productsthrough the benefit of government subsidies 35. They arealso concerned that the access to China's market could beblocked by a variety of administrative measures 36 .In response to GATT member countries' concerns, Chinahas claimed that its economic structure has decentralizedsubstantially over the past decade and that they areconforming to the GATT system37 . The Chinese governmentsubmitted a memorandum to the GATT committee which describesits decentralization movement in its domestic economy andforeign trade system 38. The question now is whether China35 Under NME systems, the cost of exported products do not accurately reflect the market demandand supply because of government subsidies.36^The main benefit of GATT membership is tariff concession. Under NME, such as China,governments can manipulate the production of domestic products, such as fixing lower prices,subsidizing the production, which makes foreign products less competitive in China's market. Therefore,tariff concessions would not have much effect as they are supposed to. For detailed discussion, seeChapter 4 of the thesis.37^At the meeting of the Working Party on China's request for the resumption of the status of theGATT, China's Deputy Minister, Mr. Shen Juren stated that in China "a new system is taking shape inwhich the state regulate the market and the market oriented enterprises". See GATT Activities 1988, AnOverview of the Work of the GATT, at 14.38^Id.has decentralized enough to satisfy the GATT. Practically,the question will be under what terms China would beadmitted and what kind of compromise will be made from bothsides.III. The Procedural Issue: Resumption v. AccessionIn addition to substantive issues, the procedural issueis a unique feature of China's GATT membership. As China waspreviously a member, it claims that it should be allowed toresume its membership in GATT, and not be required to joinGATT as a new member. 39The significance of "resumption" versus "accession"lies more in the issue of political sensitivity than in theactual benefits gained by both sides, particularly forChina. From China's point of view, the resumption ofmembership will enable China to acquire all the benefitspreviously negotiated by the former government, includingthe tariff concession, without having to negotiate the termsof admission into the GATT. However, admittance into GATTas a new member would imply that withdrawal by theNationalist government was legal. This would be contrary to39^Chinese officials have stated that China need not apply to the GATT as a new member. Instead,they argue, China needs only to resume the "old China seat" vacated by the Nationalist government. seeFeng Yu-shu, China's Membership of GATT:• A Practical Proposal, 22 Journal of World Trade, at 64,(1988).1 5.China's political view. China sees the P.R.C. as thelegitimate government of China, not the Nationalistgovernment. 40 Thus, China will likely view any objectionsto resuming its membership as an offense to its nationalsovereignty.The Chinese government's argument is supported by thefact that most international organizations, including theUnited Nations and its affiliated organizations, haverecognized the P.R.C. as the legitimate representative ofChina41 . The GATT has indicated that it follows the U.N.decision on this question42 .Even though the GATT is not a specialized agency of theUnited Nations 43 , shortly after the U.N. decision to admitthe 1971, the GATT Member Countries reviewed the40^Id.41^In 1971, the United Nations recognized the P.R.C. as the sole representative of China in theGeneral Assembly and in all the organizations affiliated with it. see G.A. Res. 2758, 26 U.N. GAORSupp. (No. 29) at 2, U.N.Doc. A/8429 (1972). The General Assembly also stipulated that the Assemblyresolutions of representation issue "should be taken into account" by other organs of the United Nations.See G.A. Res. 396, 5 U.N. GAOR Supp. (No. 20) at 24, U.N.Doc. A/1775 (1950).42^See the Interim Commission for the International Trade Organization and the GeneralAgreement on Tariffs and Trade, 1971 U.N.Y.B. 758, U.N. Sales No.E.73.I.1.43^While GATT is not technically a specialized agency of the U.N., it does maintain an informalworking relationship with the U.N. and is based in part on the aborted International Trade Organizationof the U.N. The GATT is also required by its own terms to consult and work with the InternationalMonetary Fund - one of the U.N. specialized agencies. See Kunuqi, State Succession in the Frameworkof GATT, 59 Am. J. of Intl L. 268, 269 (1965).question of the China seat44 . At the time, the P.R.C. wasnot requesting the seat. However, since 1965, the R.O.C.had been participating as an observer at the meetings of theContracting Parties 45 . Thus, at the first meeting of theContracting Parties following the U.N. decision, a proposalby the Chairman that "Representative of the Republic ofChina should no longer attend sessions of the ContractingParties as observers" was accepted. This proposal noted thatthe Contracting Parties had earlier agreed to follow thedecision of the U.N. on essentially political mattersrelating to the Chinese seat". Thus, the same reasoningthat led to the termination of the R.O.C. observer statusshould be applied to the present question regarding whetherChina should be allowed to resume its original seat in theGATT.Other international organizations have allowed China toresume its seat without having to apply as a new member,even though no Chinese representatives had participated inthese organizations for many years. For example, China wasan original member of the Food and Agricultural Organization(FAO), one of the United Nations specialized agencies. In1951, the R.O.C. withdrew from the FA047 . Yet, in 1971, the44^GATT Doc. SR.27/1, at 1-3 (Nov. 19, 1971).45^GATT Doc. SR 27/1 (March 16, 1965).GATT Doc. SR 27/1. supra note 286.47^Representation of China Within the United Nations System, 11 I. L. M. at 561, ( 1972).2(FAO decided to follow the U.N. decision on the Chinaquestion and allowed the P.R.C. to resume its original seatwithout applying as a new member". The FAO reasoned thatthe P.R.C., as the proper representative of China, had nosay in the R.O.C. withdrawal, therefore, the withdrawalcould not be held against it49 .In response, the GATT member countries could argue thateven though China had been admitted as a member of GATTafter the withdrawal, it did not actually participate inGATT activities in the past 35 years, such as the trade-liberalization negotiations. Therefore, it did not behaveas a member. Moreover, China's political and economicstructure have altered dramatically since 1948 when Chinafirst joined the GATT. Trade concessions made by the 1948 are largely inapplicable to modern China.Since the inception, the GATT and its ContractingParties have also changed dramatically. There have beeneight rounds of multinational negotiations, resulting in asignificant reduction of average tariff levels of the GATTmembers50 . Significant progress has also been made in48^Id, at 563.49^Id.50 The eight rounds are: Geneva(1947), Annecy(1948), Torqay(1950), Geneva(1956), DillonRound(1960-61), Kennedy Round(1964-67) and Tokyo Round(1973-79) and Uraguay Round. (The firstfive of these rounds focused on negotiations for the reduction of tariffs. Although the original goal for2reducing non-tariff barriers. The volume of trade among GATTnations has expanded tremendously, and GATT member countrieshave became increasingly interdependent in their trade witheach other s'. Many industries are now international,depending on resources, manufacturing facilities, andmarkets in different countries. The economies of the majortrading nations have changed so much that, even if the GATTrules ceased to exist, the economies would still remain opento foreign trade much more extensively than they were in1950. In light of the various changes in the world tradingcommunity, immediate resumption of the membership would beregarded by some GATT members as giving China the immediatebenefits of GATT membership vastly expanded since 1950, eventhough China's domestic economy has evolved in an unsteadydirection for thirty-five years without changing to confirmto the GATT standards 52 .the sixth round was reduction of non-tariff barriers, it turned out to focus on tariff reduction as well. Theseventh round was predominantly concerned with non-tariff measures, although considerable attentionwas still given to tariff reductions. See Jackson, supra note 2, at 324-325.51^For detailed discussions, see L. Moore, The Growth and Structure of International Trade Sincethe Second World War, (1985).52^For instance, the U.S. government used to take the aggressive role in resisting to grantimmediate GATT benefit to China It has resolved not to let China admitted to GATT without firstmaking substantial reforms. The U.S. government has proposed a five-point framework that wouldgreatly increase the consistency of China's foreign trade policy. See Karen Green and Sharon E. Ruwart,supra note 15. U.S. attitude has been changed since October 1992 when U.S. and China entered into anagreement that U.S. will support for China's GATT application in exchange for China's concession onits foreign trading system. See People's Republic of China-United States: Memorandum ofUnderstanding Concerning Market Access (MOU), Signed at Washington, October 10, 1992, cite in 31 I.L. M. 1247 (1992).22GATT member countries, particularly the United States,may prefer that China join the GATT under the accessionprocedures laid out in Art. XXXIII. This Article providesthat a country may accede to the GATT on terms to be agreedupon between itself and the Contracting Parties. This wasdesigned to permit individualized contractual arrangementswith nations entering the GATT system, in order to considerspecific questions raised by the new relationship. Themember countries may feel that the Article XXXIII procedurewould enable them to address the special problems resultingfrom the centrally-planned, non-market nature of China'seconomy, which cannot be resolved effectively through acontractual arrangement by China on restrictions of rightsby member countries.The voting procedure in Article XXXIII may also befavorable to member countries positions. If China'smembership is treated as a new accession, a two-thirdsaffirmative vote by GATT members is required 53 . However, ifChina's membership is treated as merely a question of propergovernment representation, a simple majority vote would beenough. The importance of the voting issue should not,however, be overstated. In practice, most GATT actions arethe result of consensus of all members. Therefore, It is53^GATT, Art. XXXIII, supra note 27, at 48.2:unlikely that voting margins will be a deciding factor indetermining China's membership application.In evaluating the positions of both China and the GATTmember countries on the procedure issue, the politicalimplications should not be over-emphasized. China's argumentis more important in theory than in practice. The primaryconcern of the GATT member countries will be that China'slaw and practices are altered sufficiently to afford accessto China's market roughly equivalent to the access thatChina will enjoy in their markets. Namely, if China agreesto the major trade and tariff concessions sought by themember countries, the procedural method will be unimportant.If this substantive goal is achieved, membership could occureither through a protocol of accession of China as a newmember under Art. XXXIII, or through an ad hoc agreementupon GATT recognition of China's old membership. An ad hocagreement could contain essentially the same provisions as aprotocol of accession executed upon China's entry under thenormal accession procedure.The GATT member countries do not have to take an overlytechnical approach to China's accession problem. Practicallyspeaking, even if China resumes its old seat, the country isa different economic and political entity than it was in1948. China's institutions have not adapted to economic2interdependence as have those of most other countries. Thus,China will still be a "new member" in fact.In summary, the substantive issues involved in China'smembership application are likely to be much more difficultto resolve than the procedure problems discussed here. Itwould seem to be in the best interests of all the parties toavoid discussing procedural issues at the early stages ofnegotiation since the political sensitivity of the issuemight destroy a cooperative atmosphere for the negotiationson the more important substantive issues.2 EChapter 2GATT and Non-Market EconomyChina's application to GATT raises difficult legal,economic and policy issues, such as market access, unfairlytraded exports, accession procedures, etc. The fundamentalproblem underlying these issues is how China, a large non-market economy (NME), or so called "central-plannedeconomy", can be integrated into the GATT trading systemwhich is based on a free-market system. In order to addressthis issue, this chapter will examine the basic conflictsbetween the two systems.The chapter will first discuss the fundamentalincompatibilities between the GATT system and the NMEregime. Then it will examine the existing GATT provisionsrelated to NME and its inadequacies dealing with the NME.Finally the chapter will review the GATT experiences withNME countries.I. GATT and NME - A Conflict of Basic AssumptionsGATT is based on the presumption of free trade in afree market system. Under this market philosophy, tradecompetition enables resources to be effectively andefficiently allocated, reducing the waste and cost ofproduction, thereby increasing real income. The price andquantity of a commodity are determined by consumer26preference. The export and import business is based oncommercial considerations and, in theory, is free fromgovernment interference. ) Therefore, the price of domesticand export commodities reflects the actual economic cost ofthe commodities.The situation is reversed under the NME system. TheState, not the market forces controls the price, quantity ofcommodities2 . The price and quantity of commodities are setby state planning authorities according to its estimatedeconomic goals3 . For instance, in China, the state planningauthorities - the State Planning Commission and the StatePrice Commission set up the plans for the quantity and priceof most products and supervise the implementation of theplans4 . Due to the arbitrary nature of central planning,the targets set by the two commissions rarely reflect themarket supply and demand. For instance, they set lowerprices for domestic goods even if the production cost ismuch higher, so that the Chinese products can be more1.^Under the GATT system, government interference is not absolutely prohibited. However, it hasto be limited to the extent that it is observable. GATT itself has devices to deal with these problems, suchas Article VI - Anti-Dumping Duty Rule, Art. XVI Countervailing Duty Rule.2^For detailed discussion on the operation of NME's international trading system, see Jackson,supra note 2, Introduction of the thesis at 1174-87.273^Id.4^Idcompetitive against similar foreign products made in thedomestic market. Therefore, in the Chinese market, a ChineseT.V. or refrigerator is much cheaper than a Japanese madeproduct, such as Toshiba or Sony. The result is thatJapanese products become less competitive than Chinesedomestic products. The same strategy could also be extendedto export products. State Planning authorities may set lowerprices for export products so that they can competeefficiently with foreign products in foreign markets. Inother words, the GATT system is undermined in NME countries.GATT itself contains various rules to govern tradingamong its member countries. These rules reflect themechanism of a free-market economy which contradicts thetrade practices of a NME system. The conflict between thetwo systems will be examined in the following contexts:(1) Tariff Concession Is Not Meaningful in NMEThe tariff is an essential instrument for a country tocontrol foreign trade. When a country wants to increase theimports of a particular product, it will usually reduce thetariff rates for the product. When a country wants to reducethe import of certain product, it will raise the tariffrate. Thus, the tariff becomes an important instrument tocontrol imports and exports. Tariff concessions orreductions comprise the fundamental obligations among GATTmember countries. GATT requires that member countries limit21their tariffs on particular goods to specified levels. 5 Thepurpose of tariff concessions is to reduce the tradebarriers among member countries and to encourage the freeflow of products.From an exporting country's point of view, tariffconcession are beneficial them because it will result in theincreased exports. However, this mechanism only works in amarket economy system. In a NME country, tariffs do not playa significant role in controlling import and export sincethere is no necessary connection between domestic andforeign prices. As previously noted, domestic price is setby the State planning authority in an NME country. The priceis usually lower than its actual cost so foreign productsbecome less competitive in the import country's market.Therefore, reducing or eliminating tariffs will notnecessarily increase imports. Thus, from an export country'spoint of view, tariff concessions from an NME country arenot very significant.(2) MFN Treatment Is Not Significant under NME.MFN treatment is the most important benefit enjoyed bythe GATT members. 6 It provides that "any advantage, favor,5^See Jackson, supra note 2, Introduction of the thesis at 395.6^The unconditional MFN treatment is the cornerstone of GATT. Jackson, supra note 2,Introduction of the thesis, at 428.29privilege or immunity granted by any contracting party toany product originally in or destined for any other countryshall be accorded immediately and unconditionally to thelike product origination in or destined for the territory ofall other contracting parties" 7 . The central theme of MFNtreatment is to prevent discriminatory treatment and promotefree trade among GATT member countries. The anti-discriminatory nature of MFN treatment is an incentive formany countries to join GATT.However, in a NME country, the MFN treatment may noteliminate discrimination. For example, the MFN treatmentrequires that the quantitative restriction are appliedequally to all GATT member countries (This is called a"global quota"-a quota not allocated to specific countriesor sellers 8). However, under a NME, domestic policy andadministrative measures can easily result in the applicationof quantative restriction to certain or particular GATTmember countries (This is called a "specific quota " 9 ). Thus,it favors the other countries which the restriction is notapplied to, but discriminate against the countries which therestriction imposed on.7^GATT Article I, supra note 27, Chapter 1 of the thesis, at 4.8^See Kostechi, supra note 9, Chapter 1 of the thesis, at 53.9^Id.3 C(3) The Observation of the National Treatment Is Difficultto Assess.Another^important^non-discriminatory^principleunderlying the GATT is "national treatment" 10. Thisprovides:"the products of the territory of any contracting partyimported into the territory of any other contractingparty shall not be subject, directly, or indirectly, tointernal taxes or other internal charges of any kind inexcess of those applied, directly or indirectly, tolike domestic products". 11The purpose of the national treatment obligation is toprevent a country from discriminating against importedproducts by imposing more stringent requirements on themthan on domestic products. Observation of the nationaltreatment obligation requires examination of domesticregulations. In a market economy, government regulation inthis field is more visible. However, in a NME, since thegovernment substantially controls the economy and heavilysubsidies the domestic industry, it is usually reluctant to10^National treatment obligation, like MFN obligation, is a rule of "non-discrimination". Thedifference between the two obligations is that the MFN prevents the discrimination between foreign-madeproducts whereas the national treatment prohibits the discrimination between the domestic-made andforeign-made products. See Jackson, supra note 2, Introduction of the thesis, at 484.11^GATT Article III 2, supra note 27, Chapter 1 of the thesis.3]make the relevant regulations public. Thus, the observationof the national treatment is difficult to assess.II. GATT Provisions Related to NME---Article XVII: StateTradingGATT itself does not have any particular mechanismsspecifically designated to deal with NME 12 . Therefore, the .provisions now in GATT do not provide adequate rules aboutNME countries. A provision that is tangentially related toNME is Article XVII — State Trading 13 . This provisionrequires that state trading enterprises, like any othertrading enterprises 14 are obliged to(1) act in a manner consistent with the general principlesof non—discriminating treatment' s ;12^The U.S. draftsmen had originally proposed an article entitled "Expansion of Trade byComplete State Monopolies of Import Trade", to be applied to NME countries. Since the Soviet Union,the only important NME country then did not become a member of the International Trade Organization(ITO), this article was removed. See Kostechi, supra note 9, Chapter 1 of the thesis, at 1-2.13^I refer the provision as "tangentially" related to NME because this provision should not beregarded as primarily dealing with NME. "State Trading" exists in both market economy and NME.Mr.Kostechi refers "state trading" in a free market economy country as "occasionally state trading" andthose in NME country as "state trading system" which has a complete or substantially monopoly of itstrade. See Kostechi, supra note 9, Chapter 1 of the thesis, at 43-64.14^State trading enterprises referred either to an instrumentality of government which has power tobuy or sell to a non-government body with such power and which the government has granted exclusiveor special privileges - GATT Basic Instruments of Selected Documents (BISD), 183-184 (1961).15^GATT Article XVII 1(a), supra note 27, at 26.32(2) act in accordance with commercial consideration whichinclude price, quality, marketability, transportationand other conditions of purchaser or sale, etc. 16 ;(3) requiring the governments which maintain state tradingenterprises to notify the member countries about itsenterprises' imports and exports, import mark up andother information about their operation to carry outthis provision 17 .The general view is that the Article is drafted to dealwith occasional state trading in a free market system 18 .Although some of these provisions are of generalvalidity and may also apply to the state trading system inthe NME system, The following remain:(1) The "state trading enterprises" are not clearlydefined.State trading is deemed to exist where a member country"establishes and maintains state enterprises . . . or grantsto any enterprises . . . exclusive or special privileges . .in its purchase or sales involving either imports or16^GATT Article XVII, 4(b), supra note 27, at 26.17^Article XVII (4), supra note 27, Chapter 1 of the thesis, at 26.18^Kostechi, supra note 9, Chapter 1 of the thesis, at 46.3 ?34exports^• • " 19 . The vagueness in this provision isobvious. It is not clear as to what constitutes "specialprivileges". This ambiguity resulted in variety ofinterpretation20 .(2) The notification requirement is undermined bybroad, subjective criteria. In a state trading system, wheretariffs are not the primary method of foreign trade control,the monitoring non-compliance with the duty of non-discrimination is difficult. 21 This problem is exacerbatedwhere in NME countries as considerable reliance is placed onthe countries to voluntarily to report the non-compliance.In a NME country, such as China, reporting non-compliancewith the GATT would be self-incriminating since it benefitssubstantially from trade practices which are inconsistentwith the GATT principles. The Article requires the membercountries to provide information on a regular basis aboutthe existence and activities of state trading enterprises.This gives NME countries discretion as to whether to providethe information.19^GATT Article XVII (1), supra note 27, Chapter 1 of the thesis, at 26.20^See Roy Baban, State Trading and the GAIT, 11 Journal of World Trade Law, at 339.21^There are different ways to restrain foreign trade other than tariff. the other ways of restrainingforeign trade are termed as non-tariff barriers (NTB), such as import licensing, subsidy, etc. Tariff isregarded as more visible and easier to monitor than non-tariff barriers. See Jackson, supra note 2,Introduction of the thesis, at 366.(3) The definition of "acting solely in accordancewith commercial considerations" is so ambiguous that it ishard to tell whether it imposes national treatmentobligations. Although Article XVII(1)(b) specifies certaincriteria, such as price, quantity, accountability, etc., itstill falls short of improving national treatmentobligations.Due to the weakness of this provision, Art. XVII is farfrom satisfactory for dealing effectively with problems inNME countries.III GATT Association with NME CountriesSince GATT does not have sufficient mechanisms to dealwith NME, the accession of a NME country to GATT isdifficult. However, GATT does not exclude NMEs. ArticleXXXIII provides: "a government not a party to this agreement. may accede to this agreement . • . on terms to beagreed. "22 "On terms to be agreed" implies that GATT isflexible to admit a new member. Several Eastern European NMEcountries have been accepted to GATT "on the terms to beagreed". The "terms" are primarily based on the extra GATTobligations-"import commitment" with one exception 23 . The22^GATT Article XXXIII, supra note 27, Chapter 1 of the thesis, at 48.23^Yugoslavia is the only NME country acceded to GATT without taking additional commitments.See the following discussion.3!accession of the other NMEs to GATT provide useful examplesfor China's application. Therefore, it is necessary toreview their experience with GATT. So far, NME's accessioncan be divided into two types:(1) Accession to the GATT by Yugoslavia: The Role ofTariffsYugoslavia is the only NME country admitted to GATTbased on tariff concessions 24 . The country had undertakenextensive economic reform before it obtained full GATTmembership. The GATT member countries are satisfied thatYugoslavia's reforms are sufficient enough to reduce thetrade barriers so that tariff alone would maintain openmarket to member countries. Strictly speaking, Yugoslavia'saccession to GATT should be regarded in free market terms.Some feel that Hungary's accession is also based ontariffs alone. According to Ms. Petterson, Hungary made acommitment during the working party session on its protocolto increase imports from Member Countries25 . Therefore,24^Yugoslavia's accession to GATT took about 6 years during which it undertook significanteconomic reform. See Heinstein, China & GATT, Legal, Economic and Policy Issues raise by China'sParticipation in the General Agreement of Tariffs and Trade, 1986, 18 Law & Policy in Intl Business, at385.25^Eliza R. Petterson, Improving GATT Rules for Non-Market Economy, 20 Journal of World TradeLaw, (1986).Hungarian accession did not occur under circumstancesidentical to Yugoslavia.(2) Poland and Roumanian Accession to GATT---"ImportCommitment"Most NME countries admission to GATT is based on anadditional "import commitment" obligation. This providesthat NME country increases imports by a specified amountfrom the GATT member countries26 .In October, 1969, Poland was admitted to GATT aftercommitting to increase its total import value from membercountries by not less than 7% per annum27 . Initially, Polandapplied to become GATT member on tariff concessions alone.GATT member countries were not satisfied that Poland'seconomic development had proceeded far enough to alley theirfears. Thus, it did not grant Poland full membership on thatbasis. Poland subsequently proposed to make the importcommitment and was accepted by GATT28 .Romanian is another NME country that acceded to GATT onimport commitment. Romanian committed to increase imports26^Herzstein, supra note 24, at 386.27^Kostechi, supra note 9, Chapter 1 of the thesis, at 27.28^Id, at 29.3'from member countries as a whole at a rate not smaller thanthose of its total import targets provided by its "five yearplan" 29 . Like Poland, Romanian intended to join GATT withoutsubstantially changing its central controlled economy".This goal was achieved through the import commitmentmechanism. It is interesting to note that Politics playedimportant role in Romanian case. The Romanian application toGATT coincided with political changes as they were the firstEastern European country to take advantage of the Sino-Soviet dispute 31 . During the 1950's and 1960's, Romaniangained independence by forming policy towards other EastEuropean countries while attempting to establish economicrelationship with western countries 32 . Romanian gainedconsiderable sympathy from the West for its independenceagainst Soviet contro1 33 . Therefore, the negotiation betweenRomanian and GATT was conducted in a very favorableatmosphere.29^Id, at 96.30^Id, at 30.31^Id.32^Id.333^Id.The NME countries experience with GATT indicates thatalthough GATT is based on the assumption of free marketeconomy system, it does not have adequate mechanisms to dealwith MNE, extra arrangements can be worked out. In thisregard, GATT has been flexible and pragmatic. However, themechanisms of import commitments has not been proved whollysatisfactory for the following reasons:(a) The commitment is calculated on currentprices, thus, if inflation rates are high, theeffect of the commitment will be undermined. Forinstance, in Poland, from 1968 to 1974, the realpercentage of import increase every year neverreached the required rate which is 7% because ofthe inflation34 . The inflation factor diminishesthe function of import commitments and made itless meaningful.(b) The commitment is in the form of a particularcurrency, thus, its real value can be affected bymanipulation of exchange rate by the government 35 .(c)^The commitment may create discriminationbetween Western GATT countries and GATT NME34^Table 6.1 on Nominal and Real Import Increase Required of Poland under the GATT, seeKostecki, supra note 9, Chapter 1 of the thesis, at 115.335^Id, at 188.countries, especially the member countries of theCouncil of Mutual Economic Co-operation which arecomposed mainly of East European NME countries.The commitment takes the form of "globalcommitment" 36 , under which the increased importpercentage is generally applied to all theContracting Parties 37. It didn't specificallystate whether imports from NME Contracting Partiesare to be included in fulfilling the percentageobjectives. Therefore, it seems possible for freemarket economy Contracting Parties to argue thatit discriminates against them insofar as NMEcountries.(d) Most importantly, is that the import commitment isinconsistent with the GATT principle of preventingand reducing government interference with economicactivities and the foreign trade system. Theimplementation of fixed import commitments wouldinevitably lead to government administrativemeasures and interference needed to guarantee thefixed import levels. Thus, decentralization andeconomic reforms a towards free market would be36^Id.37^Romanian agreed to develop and diversify its trade with the GATT Contracting Parties as awhole and undertake to increase imports from Contracting Parties as a whole at a rate not less than thegrowth of its total imports provided in its five-year plan. see BISD, at 10 (1971).4(discouraged. This appears to be totally contraryto the GATT's basic principle.In summary, GATT does not absolutely prohibit NME'saccession. On the contrary, it accommodates them to certainextent; such as the cases of Yugoslavia---accession on thebasis of tariff alone when its economy was decentralizedenough and Poland and Romanian---accession on importcommitment. However, the accommodation scheme, particularlythe import commitment system has not been satisfactory toeither GATT member countries or NME countries seeking entry.Exploration of a better solution to facilitate China'saccession is necessary.41Chapter 3China's Domestic Economic Reform---The Impact on Its GATTApplicationAfter examining existing GATT provisions dealing withNME and its experience with NME countries, one might easilycome to the conclusion that China is not eligible to joinGATT at this moment.' However, this conclusion ignores theimpact of the massive economic reforms which have beenunderway in China since 1978. The undergoing economic reformraises the questions: Has China been changed? Is China stilla NME country? How far away is the current Chinese economicsystem from those of GATT?In order to answer these questions, it is necessary toreview the progress brought about by China's currenteconomic reform. Domestic reform will be the focus of thechapter.I. Central Planned Economy Prior to the Economic Reform1^Mr.Heistein pointed out that the GATT expects that each participating country will open itsmarkets to roughly the same extent as the others. In China, however, the trading decisions traditionallyhave not been based solely on commercial considerations, but to a large extent on central planningrequirements. Therefore, it would be premature to accept China as a GATT member. See Heistein, supranote 24, Chapter 2 of the thesis, at 374.4Prior to the economic reform, the domestic economicsystem in China was entirely centralized. This can beillustrated from two aspects: Firstly, the State retainedthe so called "public ownership system" (known as gong youzhi) under which the State owned all the main productionmeans, such as, land, factories, equipment, etc. Privateownership of the production means was strictly prohibited 2 .Secondly, the domestic economy was entirely controlled bythe central planning authority. In both agriculture andindustrial fields, the State sets the plans for production 3 .The plan essentially sets the quantity of products, and thesale and purchase price for them 4 . Local production units 5had no authority to change the plan, only to fulfill it.2^Although the Chinese Constitution recognizes three different types of ownership: Wholly-stateowned (quan min suo you^Collectively- owned (ji ti suo you zl_Li) and Individually- owned (g,§ ti suoyou zjo, the wholly-state owned form is still the dominant ownership. See Article 6, the Constitution ofthe People's Republic China, adopted at the 5th Session of the 5th National People's Congress andpromulgated by the Proclation of the National People's Congress on Dec. 4, 1982, reprinted in the Lawof the People's Republic of China, at 7, (1979-1982) compiled by the Legislative Affairs Committee ofthe Standing Committee of the National People's Congress of the Peoples Republic of China. See LiuGuoguang and Wang Ruisun, Restructuring the Economy in China's Socialist Modernization,  at 104-105,(1984).3 For detailed discussion on China's planning system, see Christopher Howe, China's Economy, A Basic Guide, at 50-65, 1978.4^Id.5^In agriculture sector, there are three levels of production units: "commune"(goLgt she),"brigade" (shen than da du), and "team" (shen than xiao du), see Rosalie L.Tung, Chinese IndustrialSociety after Mao, at 70, (1982). In industrial sector, the local production unit is called "industryenterprises" on ye gi yo), or "factory" (gong chang), see Christopher Howe, supra note 3, at 38.42Even when the market fluctuated, producers still have toadhere to the original state plan..This situation started to change in 1979 when theeconomic reforms started in the agriculture sector.II. Agriculture ReformIn December, 1978, the third Plenary Session of the11th Central Committee of the Communist Party of China,created the reformed agricultural policy 6 . The central themeof this policy is to implement an agriculture productionresponsibility system" 7 , which allows farmers to contractwith the State on the quotas of production as householdunits8 . During the contractual period, a household hasautonomy to own and use the farm land 9 . This changes the6^The detailed policy on the agriculture reform is contained in the Drafted Decision on SeveralQuestions on Speeding Up the Agriculture Development ("decision of agriculture reform") adopted by the4th Plenary Session of the 12th Congress of the Central Committee of the Chinese Communist Party onSeptember 28, 1979, see the Communique of the 3rd Plenary Session of the I lth Congress of the CentralCommittee of the Chinese Communist Party, adopted on December 22, 1978 at the 3rd Plenary Sessionof the 11th Congress of the Central Committee of the Chinese Communist Party, reprinted in 1 Red FlagJournal (hongqi zazhi), at 7, (1979).7^See the "Decision of the Agriculture Reform", reprinted in Selection of Important DocumentsSince the 3rd Plenary Session of the llth Congress of the Central Committee of the Chinese CommunistParty, compiled by the Documentary Research Office of Central Committee of the Chinese CommunistParty, vol.1, at 185, (1982).8^In Chinese, it is called "bao chan dao hu". For the details, see Lu Feng, Luo Huan Zheng,Huang Wei Ping, An Overview and Prospect of Our Country's Economic Reform,  at 31-34, (1987).449^Idnotion that land has to be absolutely owned by the State 10 .The farmers also decide how to use the land and what toproduce on it according to market demand and supply 11 . Theycan retain goods produced in excess of the state quotas 12 .Therefore, the farmers are more motivated and concernedabout the efficiency of production. This reform has beenextremely successful 13 . In 1986, the agriculture productionvalue increased 6.2% compared to 1978; average farmer'sincome increased from $134 in 1978 to $424 14 .Another key aspect of the agriculture reform is thereform of the sale and purchase system. Prior to the reform,the sale and purchase of agricultural products was conductedaccording to the policy of "unitary purchase and sale" 15which provided that all the agriculture products for10^Id.11^Prior to the reform, most agricultural land was only used to grow grain due to the shortage ofgrain supply in China. Usually farmers did not have authority to grow other products on the agricultureland. Now, they can decide what to grow on the land in response to the market demand. See A WorldCountry Bank Study,  China: Between Plan and Market, at 38, (1990).12^See Lu, Luo, Huang, supra note 8, at 32.13^Until the end of 1983, the household production units amount to 90% of the total farmhouseholds in the country, see Lu, Luo, Huang, supra note 8, at 42.14^Id, at 46-47.15^In Chinese, it is called "tong you tong xiao".4f.consumer use had to be purchased from farmers and sold tothe market by the State. Trade between individuals werestrictly prohibited. Moreover, price were set by the State,usually below the market price. This policy was changed in1978 when the Central Committee of the Chinese CommunistParty decided to raise the price of the agriculture products16 . According to this decision, the purchase price for grainhas been increased 20% since 1979, and other mainagriculture products such as cotton, oil products, sugaretc. have been increased 24.80%. 17 Some agriculture productscan be sold to the market directly without going through theState sale and purchase channe1 18 .Due to reform, central control of the agriculturalsector has been relaxed, and the price of agricultureproducts reflects the market supply and demand of the marketmore than before. However, this does not necessarily meanthat the market economy has entirely substitute the centralplanned economy in the agriculture sector. This can beillustrated from the aspect of ownership of land.16^See the "Decision on Agriculture Reform", supra note 7, at 186.17^Id.18^For instance, in October, 1983, The types of medicine subject to the state sale and purchasehave been reduced from 54 to 30; the agriculture products reduced from 46 to 21 types. Id.4EUnder the current reform, land is still notunconditionally owned by farmers. The "household contractingsystem" provides farmers with the right to own and use landduring the contracting period. After the contract expires,farmers do not own the land any more. Ultimately, land isstill owned by the State. This view has been supported byChinese academic authorities. Many legal and economicscholars think that the household contracting system is notlike the private ownership in market economy system19 . Theypointed out:"the characteristics of private economy is that landand other basic production means are owned byindividuals. It has nothing to do with collectives.Household contract is different in the followingaspects: First of all, land and other basic productionmeans are still owned by the collectives. They arecontracted to household only for use during thecontract period. Households are allowed to transfer theland to others through leases but not sales. Secondly,apart from paying the agriculture tax and fulfillingthe quota requirement in the contract, a household mustfulfill the quotas imposed by the collectives.Therefore, it is not appropriate to characterize thehousehold contracting system as a phenomenon of privateeconomy, it should be regarded as the ncialistagriculture production responsibility system"Moreover, decentralization of the state sale andpurchase is far more from complete. Some products are stillgoing through this channel, such as tobacco21 . The so-called19^See Lu, Luo, Huang, supra note 8, at 46-47.20^Id, at 47-48.21^Id, at 60.4first class products subject to State control are still notabolished, although its scope has been reduced.In summary, the agriculture reforms has brought insignificant market influences to the once-entirely centralplanned economy. However, the market economy is not yetfully in place of central planned economy in the agriculturesector. The State still maintains certain degree of centralcontrol.III. The Urban Economic ReformThe success of agriculture reforms encouraged Chinesegovernment to extend the reform to the urban areas. InOctober, 1984, at the third Plenary Session of the 12thCommunist Party Committee, the government announced majorurban economic reforms 22 . The main object of this policy isto expand the autonomy and invigorate urban industrialenterprises 23 .22^See the Decision on the Reform of the Economic Structure adopted at the 3rd Plenary Sessionof the 12th Congress of the Central Committee of the Chinese Communist Party on October 20, 1984("Decision on Economic Reform"), reprinted in Selection of Important Documents since the 12thCongress of the Central Committee of the Chinese Communist Party,  compiled by the DocumentaryResearch Office of the Central Committee, vol.2, at 558-587, (1986).23^The "Decision on Economic Reform" states "improve the invigoration of industrial enterprises,particularly the large and medium size enterprises is the center of the urban economic reform", supranote 22, at 564.48The new policy calls for the reduction of "mandatoryplanning" 24, and increases the use of "guidance plan" 25 . Italso recommends price structure reforms 26 . Extensive reformhad been carried out in the urban economic sector, in whichthe urban industrial enterprises reform have emerged as thekey aspect.(1) Implementation of the "Contracting ManagementResponsibility System" and the "Factory ManagerResponsibility System"The main purpose of industrial enterprises reform is togrant enterprises more autonomy in production, separatingtheir management function from government administrativecontrol 27 . In order to achieve this goal, a system called"contracting management and responsibility" has beenimplemented28 . Under this system, an enterprise is requiredto contract with the State to fulfill production quotas and24^In Chinese, it is called zhilingxing iihua. It means that the plan must be fulfilled by theenterprises and the modification of the plan is not allowed. See A World Bank Country Study, supra note11, at 73.25^In Chinese, it is called zhidaoxing iihua. It means that the plan could be implemented as aguidance, and the enterprises do not have to fulfill it strictly. They could adjust it according to marketdemand. see the World Bank Country Study, supra note 11, at 73.26^See the "Decision of Economic Reform", supra note 22, at 570.27^Id, at 572.28^In Chinese, it is called giyie chengbao iinyin zerenzhi.4profit goals 29 . An enterprise is entitled to retain theprofits above the quota provided in the contract. If anenterprise fails to fulfill the quota, it is liable for theloss 30 . Within the scope of the contract, the enterprise hasmanagement authority with respect to the quantity ofproduction, fixing the price for its products, distribution,etc31 .Compared with the former centrally controlled systemunder which an enterprise had to submit all its profit tothe State32 , the new system gives enterprises substantialfreedom and incentive. The new system has led to substantialimprovements. According to Chinese statistics, up to the endof 1988, the industrial enterprises subject to the newsystem amounted to 88% of total production, among which thelarge and medium sized enterprises takes 93.4%, and thetotal profits increased 10% compared to 1987 33 .29^Under the new system, an enterprise still has to fulfill the quota set in the government plan. Itcan sell the above quota part products in the free market. See Tung, supra note 5, at 158.30^Id.31^Id.32^Prior to the reform, the State set up production plans for an enterprises regarding the supply ofraw materials, equipment, and production targets. An enterprise had to fulfill all the plans. In addition, ithas to hand in the above quota profits to the State. see Tung, supra note 5, at 157-158.33^Wang Wei Cheng, Gao Shang Quan, Liu Guo Guang, the New Thoughts on the EconomicReform, at 212, (1988).5(The "factory manager responsibility system" 34 gave theenterprises more autonomy and make them independent ofgovernment control. Moreover, the legal recognition ofenterprises formalizes the system 35 . Prior to the reform,the Communist Party Committee in the factory made businessdecision. Factory managers had no authority to make theirown decision but had to implement the policies made by theParty Committee. Now, under the new system, factory managershave been given power and responsibility regardingmanagement decisions. This authority includes: (1) makingproduction management decisions, (2) making decisions on orrequesting approval for all products in accordance with thelaw and the regulations, (3) appointing and dismissingmiddle level personnels in the factory, (4) drawing up plansfor wage readjustments and distribution of bonuses andformulating major rules and regulations 36 .34^In Chinese, it is called giye changzhang fuzezhi.35^The "factory managers responsibility system" is provided in Part IV (Article 44-48) of theState-owned Industrial Enterprises Law of the Peoples Republic of China (SIEL), adopted by the FirstSession of the 7th National People's Congress on April 13, 1988, reprinted in the Law Year Book ofChina, at 124, (1989). The law directly applies to more than 90,000 State-owned industrial enterprisesoperating in China, and accounting for 70% of the total industrial output value of the country. seeClement Shun, the State-owned Industrial Enterprises Law in the P.R. C. Business law Review, May,1989, at 125.36^Article 45, SIEL, the Law Year Book of China,  supra note 35, at 124.5:The power given to the factory managers, make theenterprises independent of the State control and the Party'sleadership. Also, the powers given to the factory managersresembles, in many ways, those of the directors andpresident of a corporation in the modern capitalist country.The urban economic reform also suggests that thedistorted economic system created under central planningauthority has been restored and that China's domesticeconomy is moving towards a more marked-oriented directionwhich might give rise to its GATT expectation. For example,reform of the pricing system has resulted in free flow ofprices of many products, particularly, consumer goods37 .Also, reform of the planning system has reduced the scope of"mandatory panning", and increased the use of the "guidanceplanning" to a substantial scale38 .(2) The Adoption of the Bankruptcy Law and Issuance ofSecuritiesIn addition to the reforms mentioned above, there aretwo significant steps taken by the Chinese government. The37 Prior to the reform, the prices of most consumer goods were set by the State. Many of themwere artificially low and did not reflect the market supply and demand.38^See Asia-Pacific Report-Trends, Issues, Challenges, at 28, (1986).5:known as "iron rice bow1" 41 . Thisfirst one is the passage of the Bankruptcy Law in 1986 39 .This law provides that a State-owned enterprise can declarebankruptcy when it suffers serious losses caused bymanagement and is incapable to repay the debts". Thisimplies that an state-owned enterprise is liable for its ownlosses. In the past, many State-owned enterprises had beenrunning at a loss for many years, but the government stillsubsidized them. There were never been any State-ownedenterprises which were forced to close down. Also, theemployees of these enterprises were still paid wages andsalaries regardless of their poor performance, a phenomenacreated the problem thatthe State-owned enterprises did not care about improvementof management. The implementation of the Bankruptcy Law hasimposed financial responsibility on both the enterprises andthe employees. Thus, the "iron rice bowl" has be broken tosome extent.The second aggressive step taken by the Chinesegovernment is the issuance of securities. Regarded as a39^See the Enterprise Bankruptcy Law of the P.R. C. ("Bankruptcy Law") adopted by the 18thSession of the Standing Conunittee of the 6th National Peoples Congress on December 2, 1986, reprintedin the Law Year Book of China, at 119-121, (1987).40^Article 3, the "Bankruptcy Law", supra note 39, at 119.41^In Chinese, it is called "tie fan wan". It is described by the Chinese economist Xue Mu Qiao as"workers are hired but not fired, promoted but not demoted, a phenomenon which we call the "iron ricebowl". see Xue, China's Socialist Economy, at 210, (1980).5:typical capitalist vehicle, equity securities wereeliminated in the Chinese economy since 1949 42 . Starting in1984, selected enterprises have been permitted to reorganizeas joint stock companies and issue securities. It isestimated that by 1988, approximately 6,000-10,000enterprises have issued shares worth Renminbi 7.5 millionshares 43 . Although this amounts to only a small percentage ofall Chinese enterprises, "it represents a stunning increaseover the negligible level of activity of the previous 30years" 44 . It also signifies the Chinese government's furthercommitment of reforming towards a free market economysystem.(3) The Insufficiency of the Economic ReformSummarizing the progress of the economic reform, onemight came to the conclusion that the central planningaspect of domestic economy do not exist any more, and marketforce are in place. The management decisions of enterprisesare now made by the independent factory manager, thus, theyare no longer subject to the central planning authority.The price system is not arbitrarily controlled by the42^Paul Schroeder, Rebuilding China's Securities Markets, China Business Review, at 20, (May-June 1991).5443^Id.44^Id.government, but subject to the economic standard of supplyand demand. Therefore, the basic principle of GATT seems tobe complied with.However, it is still premature to conclude that theChina's economy has conformed to the market economy. Anumber of factors indicates that despite the extensivereform , the domestic economic system is still far short ofbasic characteristics of those of the free market economy.Three primary aspects of the Chinese economy which do notconform with free market principles are as follows:(a) The "Corporation" in the Modern CapitalistEconomic System Does Not Exist in China.The reformed industrial enterprises resembles someaspects of the "corporation", however, they still lackseveral fundamental characteristics. Most importantly, theownership of the enterprises has not been changed. Thegovernment still owns the enterprises 45 .In the modern capitalist economy, a "corporation" is anindependent economic and legal entity which is privatelyowned by individuals through the form of "share" or45^Ownership of socialist enterprises has been legally problematic in China. According to thesocialist theory, only the State or CollectiveIly-owned enterprises can carry out big economictransactions. Even with the economic reforms of last decade, these two basic forms of ownership havennot been changed. See James V. Feinerman, The Evolving Chinese Enterprises, 15 Syr. J. Intl L. &Com., at 204, (1989).5.!5E"stock" 46 . "Shareholders" are the owners of thecorporation47 . Their liability to the corporation is usuallylimited to their respective investment in the corporation 48 .Therefore, a corporation is not only managed by individualsindependent of government contro149 , but also owned byindividual "shareholders". This makes governmentinterference more difficult. In recent years, thegovernments in capitalist countries have tended to increasetheir interference with corporate activities by the way ofsupply of money, increase interest rate, etc. 50 . However,government interference with private business has notsubstantially changed the nature of a "corporation" incapitalist society. As Mr. Hadden stated: "The underlyingcommitment to the principles of free competition andconsumer sovereignty has remained" 51 . The privately owned46^Hadden, Company Law & Capitalism,  at 25-26, 9-12, (1977).47^Id, at 75.48^A corporation is a legal entity entirely distinctive in law from its shareholders. It can own itsown property and business, it can sue and be sued in its own name, and it bears liability as a corporationindependent of its shareholders. see Hadden, at 46, at 103.49^In the modem capitalist society, the people who manage a corporation, such as directors ormanagers, are usually not shareholders. This is particularly true in large corporations which have manyshareholders and the daily management responsibility are entrusted on a relatively small group of people.see Hadden, supra note 46, at 81.50^Hadden, supra note 46, at 26.51^Id.5 7business corporation^has been for all of the 20thcentury the most important business form ..." 52 .Although the industrial enterprises operating in Chinaare named as  "corporation" or "legal persons" 53 , they arestill fundamentally different from the "corporation" in thewestern capitalist countries.According to the State-owned Industrial Enterprise Lawof P.R.C.(SIEL) promulgated in 1988, a "legal person" shouldsatisfy the following conditions: 1. It must be establishedin accordance with the law; 2. It must possess thenecessary property or funds; 3. It must possess its ownname, organizational structure and premises; 4. It must beable to assume civil obligation independently 54 .Then, what constitutes a "corporation" in capitalistsociety? In his book "The Law of Corporation", Mr. Hamiltondescribe it as follows:52^Alfred F.Conard, Robert L.Knauss, Stanley Siegel, Corporations. Cases. Statutes and Analyseson Enterprise Organization. at .2, (1972).53^In Chinese, it is called faren. The law requires that an State-owned industrial enterprise mustobtain the status of a "leal person" in accordance with the law. see Article 2, the State-owned IndustrialEnterprise Law in the P. R. C. (SIEL), supra note 36, at 124.54^Article 37, SIEL, supra note 35, at 124."The simplest and usually the most useful way ofviewing a corporation is to consider it a fictitiousbeing or artificial entity independent of the owners orinvestors. This artificial entity may conduct abusiness in its own name much in the same way that a'real' person could. Business is done, assets acquired,contracts entered into, and liabilities incurred, allin the name of the corporation rather than in the nameof any individual. Also, the artificial entity may sueor be sued as though it were a person, it pays taxes,it may apply for business licenses in its own name, itmay have its own bgpk account, it may have its ownseal, and so forth".''From a simple reading of the description of a"corporation", we may come to the conclusion that anindustrial enterprise in China is very similar to a"corporation" in a capitalist country because therequirements for a "corporation" are very close to those ofan enterprise as was provided in SIEL. However, if we lookat the ownership aspect of a "legal person", the conclusionwould be different. The fundamental difference between anenterprise legal person and a "corporation" lies in thefollowing:First of all, an enterprise "legal person" does not ownits assets. Its right to property referred to in the secondrequirement above only means that it has right of managementon the property rather than the ownership of the property 56 .55^Robert W. Hamilton, The Law of Corporations, at 1, (1990).56^Chinese scholars distinguish the "right of management" (auvine ouan) from the "right ofownership" (g_lo you quan) in respect of the relationship between the State and an enterprises. In theirview, an enterprise does not own its own assets. Rather, it "mange" (iingying, or guanli) the assets onbehalf of the State. For detailed discussion, see Qi Ming, The Ownership Right and Management Right ofEnterprises, in  Comments on the State -owned Industrial Enterprises Law. at 33 -34, (1988).5E"The ownership of the enterprise belongs to the State. TheState is the only body that can own the assets of theenterprise" 57 .Secondly, an enterprise legal person has no right toindependently dispose its assets. According to the forthrequirement cited above, a "legal person" must independentlyassume civil liability. The question arises: how can aState-owned enterprise bear independent civil liability? Inother words, if an enterprise does not own its assets, howcan it be responsible for its civil liability? For instance,if an enterprise goes bankrupt, how can the enterprise payoff its creditors if it does not own the assets, such asland, building, machines etc.? Article 41 of SIEL providesthat a State-owned "legal person" bears civil liability tothe extent of the property the state has allocated to it tooperate and manage58 . Therefore, it is the State whoultimately bears the responsibility, rather than enterpriseitself. Therefore we can hardly say that these enterprisesbear civil liability "independently". Therefore, Article 41of SIEL conflicts with the forth requirement provided inArticle 37 of SIEL.57^Id.58^Article 41, SIEL, supra note 35, at 124.55Finally, the change of ownership to the private sectoris not even intended by the government. The 1984 Decision ofthe Central Committee of the Communist Party of China on theReform of Economic Structure stressed the "law of value" 59 ,and emphasizes the continuation of the "public ownership".As professor Feinerwen pointed out "even with the economicreforms of the last decade, there has been little erosion ofthe two basic fundamental forms of ownership---"State-owned"and "Collective- owned" 60 .These factors led to the conclusion that an enterprise"legal person" fundamentally differs from a "corporation" inthe modern capitalist society.It has been noted that the Chinese government hasencouraged some enterprises to become shareholding companiesand allowed them to sell shares or stock to the public61 .This reform is still at an experimental stage, and it hasnot been implemented in the majority of large enterprises inthe country 62.59^In Chinese, it is called jiazhi guilu-"the law of value" which stands for the market demand andsupply.60^J.V. Feinerman, supra note 45, at 203.61^See Communist China Makes Two small but Significant Capitalist Move, Washington Post,August 8, 1986, at 17A.6(62^Id.Thus, it would be logical to conclude that theindustrial enterprise reforms have not resulted in ownershipreform, rather it is reform in the sense of internalmanagement reform. Even in this regard, the reform is notsufficient to resemble the management process of a westerncorporation. The factory manager lacks real control in boththe financing and operation of the enterprise. The Stateplan still plays important role. The allocation of necessaryinputs for production, and prices for the products are notdetermined by the enterprises themselves 63 . Facilities whichare not within the enterprises, such as communications,transportation, are all beyond their control. Access tocapital, particularly foreign exchange, is restricted by theState. Moreover, under the "contract managementresponsibility system", the enterprises still must fulfillthe quotas designated by the State. Thus the Stateinterference in these areas are inevitable.At present, the Chinese industrial enterprise is stillfar from the "corporation" in the free market economysystem.6]63^See Wang, Gao, Liu, supra note 33, at 316.(b) The Price Reform Is Not Sufficient to ReflectMarket Supply and Demand.Despite substantial progress made in liberalizing theprices of a large number of the consumer goods, pricedistortion still exists, especially in energy sectors, suchas, petroleum, coal etc 64 . Equally important is theunderpricing of financial capital, for instance, interestrate are one of the important sources of price distortionleading to excess demand for investment 65 .(c) A Competition Mechanism Has Not Been Established.A competition mechanism is one of the essentialelements in a market economy". Markets will only functionefficiently if enterprises are exposed to vigorous and faircompetition.^The competition mechanism is not selfsustained.^Instead, it reliant on the outside marketenvironment. Factors which have substantial influence on it64^Energy industry in China has been largely allocated administratively, with market forces playingonly a minor role. Energy prices reflects neither scarcity nor production costs. For example, officialprices for coal barely cover operating costs. See A World Bank Country Economic Report, China: Long-Term Development Issues and Options,  at 71, (1985).65^World Bank,  China, External Trade and Capital, at 82, (1988).66^Hadden, supra note 46, at 26.are labor, capital and raw materials 67 . Despite a decade ofreform, none of the factors exist in China at this stage".(i) Distribution of the Labour ForcesDespite of the ongoing reform in the labour area, thebig "iron rice bowl" is not broken yet. Since 1980, theChinese government has been exploring ways of reforming thedomestic labour system. The ultimate objective of the policyappears to be to create free flow of labour force in orderto allocate labour in response to market demand". Under thenew policy, an enterprise is authorized to choose employeesthrough examinations and to hire them on a contract basis".Individuals will be allowed to choose their jobs within theconstraints of the market 71 . Although the initialimplementation of the system has been successful 72 , it stillremains at the experimental stage. A lot of the employees in67^According to Adam Smith, free market competition in the various factors of production, labour,capital and raw materials can operate to produce the most democratic distribution of goods and servicesin a given economy. Hadden, supra note 46, at 26.68^See China Reforming Labour System in the State-owned Enterprise, Recruitment of New WorkerBased on labour Contracts, People's Daily, September 10, 1986.69^See Henry R. Zheng, An Introduction to the Labour Law of the People's Republic of China, 28Harvard International Law Journal, at 391, (1987).70^Id.71^Id.6:72^By October, 1986, there were about 3.5 million contract employees in China, id, at 392.the State-owned enterprises are not subject to the newcontract employment system73 . Tenured employment forindustrial workers still exists 74 . Further decentralization ofthe administrative authority of a State-owned enterprise isrequired75 . Moreover, the labour reform has not extended tothe employees in other professions, such as professors,doctors, lawyers76 . Due to the shortcomings, it is prematureto say that a free flow labour market has been formed inChina.(ii) Allocation of CapitalThe current condition of capital market in China is farfrom those of free market economy countries. In a capitalisteconomy, the stock market is the primary mechanism for theallocation of capita177 . An individual investor can make his73^Up to 1986, 3.5 million of the employees of the State-owned enterprises are covered under thecontract employment system. This implies that the rest of them are still subject to the old job assignmentsystem, id, at 392.74^A World Bank Country Study, supra note 11, at 72, (1990).75^Despite the recent reform, State-owned enterprises still exercise broad administrative authority.For example, the labor contract regulations expressly authorize enterprises to "manage" employees (seeRegulations on the Implementation of Labour Contract in State-Owned Enterprises, promulgated in July,1986, reprinted in People's Daily, September 10, 1986). This implies powers of administrativediscipline. See Zheng, supra note 69, at 430-431.76^The labour reform is required in the area of white collar employees. Some Chinese lawmakershave advocated a comprehensive reform plan which covers such employees. Since such a step wouldaffect those situated at the upper levels of the employment hierarchy, the Chinese government will likelyadopt a cautious approach in this area. see Zheng, supra note 69, at 431.77^Hadden, supra note 46, at 69.6investment choice according to the market supply anddemand78 . In the past, China essentially eliminated any rolefor debt and equity securities in its economy 79 . Thisphenomenon has been changed since 1980. The first step wasthat the government issue a treasury type of bond".Following this, selected enterprises are given permission toreorganize as joint stock companies and issue stocks to thepublic81 . Although this represents a significant change ofattitude towards the adoption of the capitalist vehicle, thereform has not been sufficient enough to resemble theoperation of security market in western capitalist countries.Regarding the issuance of the treasury type of bond, asMr. Paul Schroeder pointed out: "the motivation behind theseissues was not so much to create an efficient capital marketas to finance government activities, in many cases, workers78^In a free market, the individual investor will ideally choose to make his money available to thosenew or existing enterprises which offer the best prospect of immediate or continuing profit. Also, he isentitled to withdraw his money from a less profitable enterprise by selling his shares as long as he canfind a buyer and to reinvest it, he will continually be looking for new and more profitable opportunityfor his money. see Hadden, supra note 46, at 29.79^Paul Schroeder, supra note 42, at 20.80^In Chinese, it is called guo ku juan. From 1981 to 1988, the government issued about 145million renminbi worth guo ku ivan. see Schroeder, supra note 42, at 20.6!81^Id.were compelled to purchase bonds or receive them in lieu ofcash salary"82.With respect to issuance of stock, the current Chinesepractice is far behind the stock exchange system in westerncountries. Firstly, the stock or shares traded in the marketdiffers from those of the western country. Most types ofsecurities are like bonds, have fixed interest rate and noownership attached83 . "Common shares" 84 are relatively raresince it carry an implicit share of ownership and therebyconflicts the fundamental principle of public ownership 85 .Secondly, the security market is not well regulated.Although there are some local regulations on securitytrading", they have not provided sufficient protection topublic investors. For instance, in a capitalist society, oneof the most important way of regulating securities exchange82^Id.83^Id.84^In western economy, the holders of "common shares" or "ordinary stocks" have the rights toshare the profits of the company, voting at the shareholders meeting of the company and receivingdividend from the company. They are the people who own the company. see Gower, infra note 87, at373-375.85^Id.86^Security regulations are generally issued at the local level and changed often, creatinguncertainty, id.61is so called "disclosure requirement" 87 . This provides thata public company must make accurate and updated disclosureabout its financial status, operation and other aspect ofthe company which may affect an investor's decision88 . Thereason behind this requirement is to allow investors to bewell informed of the situation of the company and assistthem to make right decision. In China, however, there is nolegal obligation for enterprises to disclose suchinformation". Moreover, the current accounting system makeit difficult to monitor the financial situation of theenterprises". Thirdly, the security system has not beennationalized. Although there are a number of stock exchangecenters in China91 , they are strictly limited to certaineconomically developed areas.87^The fundamental principles underlying the company law has been that of disclosure, see L.C.B.Gower, Principles of Modern Company Law, at 447, (1992).88^The disclosure requirement provides that a public company listing its shares in a securityexchange center must publish its financial statement certified by a profession auditor. Gower, supra note87, at 447.89^See Schroeder, supra note 42, at 21.90^Id.91^The stock exchange centers have been established in Shanghai, Beijing, Shenyang, Wuhan,Tianjin, Chongqing, Guangzhou, Harbin, and Shenzhen. see Schroeder, supra note 43, at 20.6In short, the current security system in China is stillin its very preliminary stage. It will take long time beforethe establishment of a western type of security system.(iii) Production and Distribution of Raw MaterialsTraditionally, the production and distribution of rawmaterials has been subject to direct central contro1 92 . Anenterprise which is involved in the production anddistribution of raw materials is subject to multi-levelgovernment administration. Raw materials are classified asthree categories; the first category is called "unifieddistribution materials (tongpei wuzi) which refers to thoseof the vital importance of the national economy, such ascoal, steel, timber, etc. 93 This type of material is subjectto the mandatory planning of the State Planning Commission.The second category is called "ministerial-managedmaterials" (buguan wuzi) which are more specialized, such asdrilling equipment for petroleum industry 94 . This type ofmaterials is subject to the control of relevant Ministries.The third category is the materials not contained in thefirst and second categories. They are usually locally92^See section 5, the Regulations on the Management of Raw Materials, in Chinese Economic LawText edited by Fei Zongwei and Xu Jie, at 252, (1990).93^Id.6^94^Id.produced and distributed and subject to planning and controlof the provincial Planning Commission 95 .This multilateral control system gives enterpriseslittle freedom to make their own decisions. Despite thereform, the basic structure of the management system onmaterials still remains the same".Moreover, the prices of most raw materials have beensubject to mandatory planning 97 . the enterprises cannot setthe price for their own products according to market demand,since government has heavily subsidized the production of rawmaterials, the price structure has been quite irrational".The situation has not been changed much since thereform. On the contrary, the government created morecentralized control in the production and distribution ofraw materials. In its notice to the relevant industries of95^Id.96^Id.97^The prices of raw materials and other important production means within the quota limit are stillfixed by the government. see Zhao Ziyang, the Current Economic Status and the Economic StructureReform-A Government Report at the Third Plenary Session of the Sixth National People's Congress,March 27, 1985, reprinted in Selection of the Important Document Since the Twelfth Congress  of theCentral Committee of the Chinese Communist Party, vol.2, at 700, (1986).6198^See D Gale Johnson, Progress of Economic Reform in the P.R.C.,  at 21, (1982).the country, the State Council stressed that allrequirements concerning the raw materials subject to the"mandatory plan" must be strictly fulfilled 99 . According tothis notice, the free flowed price applies to only a few rawmaterials, and those prices must be set by the State PriceCommittee, State Materials Administration Committee and therelevant Ministries according to the general supply level ofthe materials100 . Therefore, an open market for productionof materials has not been established yet.(d) The Capitalist Economy Is Not the Goal of the EconomicReform.What is the goal of the economic reform? Is it intendedto be moving towards entirely free market economy which islike those of most GATT member countries? Some may arguethat the reform will eventually lead towards free marketeconomy. However, many indications from the Chinesegovernment suggests that they are not willing to go thatfar. On a number of public occasions, government officialshave stated that the public ownership system is going to beretained and that the central planning will apply in the99^See the State Council Approval of the Notice on Strengthening the Management of the UnifiedDistributed Materials Issued by the State Economic Commission, the State Planning Commission and theState Materials Administration Bureau, September 9, 1986, reprinted in the Law Year Book of China, at399-400, (1987).100^The Law Year Book of China,  supra note 99, at 340.7(macro economy101 . Even in its GATT application, the Chinesegovernment did not declare that all market distortions havebeen abolished nor did they promised not to use centralplanning. Instead, it described the goal of reform as "aplanned commodity economy" 102 which mean that the governmentcontrol is maintained through the usage of "economic levels" such as prices, taxes and the interest rates 103 . Thegovernment also frequently use the expression "establish thesocialist economy with the Chinese characteristics" 104.SummaryIn summary of the domestic economic reforms, one cannot ignore the significant changes have been brought in: inthe agriculture field, the economic structure has beensubstantially decentralized; in the urban area, theindustrial enterprises have become more independent101^When the government encourages development of different types of ownership, the "publicownership" Lgongyouzhi) still takes dominant position. see the "Decision of Economic Reform", supranote 22, at 568.102^you jihua de shangpin jingii, supra note 22, at 568.103^Id.104^Deng Xiao Ping, Establishing the Socialism with Chinese Characteristics (part of the speech atthe meeting with the Japanese Delegation of Japan-China Unofficial Delegates on June 30, 1984),reprinted in Selection of the Important Documents Since the Twelfth Congress of the Central Committeeof the Chinese Communist Party, compiled by the Documentary Research Office of the CentralCommittee of the Chinese Communist Party, vol.2, at 515, (1986).7commodity producer; the pricing reform has resulted in thefree flow of many products; and the reform of the planningsystem has caused a substantial reduction of the "mandatoryplan". However, the reform is not far-reaching enough toconvert the domestic economic structure from a highlycentralized regime to a free market system. There stillremains extensive areas where further decentralization isrequired for China to benefit from an efficient tradesector. Further decentralization is also necessary forChina's GATT entry.7:Chapter 4Reform of Chinese Foreign Trade SystemI. Achievements through the ReformThe foreign trade reform is crucial to China's GATTapplication. This is especially clear when we review theforeign trade practice before 1978. Since 1949, when theCommunist Party took power, China's economic developmentstrategy was essentially "self-reliance", and trading withforeign countries played a supplemental function. Foreigntrade was conducted through a highly centralizedbureaucracy---Ministry of Foreign Economic Relations andTrade (MOFERT) 1 . Its function was surprisingly broad,including the formulation of import and export plans,formulating foreign trade policy, determining tariff levels,issuing import and export licenses, etc. 2 . There were twelveForeign Trading Corporation (FTC) under the MOFERT'scontrol 3 . Each FTC had monopoly powers within its specifiedscope of business, and they would procured all goods from1^China's foreign trade apparatus is headed by MOFERT, which was established in 1982 as anamalgamation of two former ministries and two commissions: the Ministry of Foreign Trade, theMinistry of Foreign Economic Relations, the Foreign Investment Commissions and the State Import-Export Commission. For detailed discussion, see Jamie P. Horsley, The Regulation of China's ForeignTrade, in Foreign Trade, Investment and the Law of P.R.C.,  at 9, (1988).2^Id.7:3^Id, at 10.the domestic market for export purposes and sell allrequired imports at the domestic price 4 . Enterprises otherthan FTC were prohibited to engage in foreign trade.Since 1979, the centralized system has changed rapidly,The FTC have lost their monopoly powers due to the emergenceof many new local and ministerial foreign tradingcorporations and individual enterprises with the foreigntrading authority to compete with FTC. The government's newforeign trade policy allows local governments and someindustrial enterprises to conduct foreign trade directly 5 .Since 1982, nearly 1,000 enterprises had been givenauthority to conduct foreign trade 6 . In addition, a systemof "foreign exchange retention" has been established 7 . Itallows the foreign trading company to retain the above quotaprofit, which is a significantly progressive step from theformer system under which the enterprises had to submit allthe profit to the State 8 .4^Each FTC handles a separate category of commodities or services, such as chemicals, textiles,arts and crafts, etc. The FTCs have local branches in various cities that are supervised by the localauthorities. see Christopher Howe, China's Economy-A Basic Guide, at 142, (1978).5^Horsley, supra note 1, at 10-11.6^The director of MOFERT 's Foreign Trade Administration Bureau, Shen Jueren estimates that,as of the end of 1982, about 1,000 enterprises had authority to engage in foreign trade. World EconomicHerald, Dec.13, 1982, at 1-2.7^China University of Politics and Law, An Overview and Prospect of the Economic Reform ofOur Country. at 165, (1987).8^In the past, each FTC, like other State-owned industrial enterprises had to submit all its profit tothe MOFERT. Id.74However, it would be premature to say that China'sforeign trade system has been changed to the extent thatmarket supply and demand plays a dominant role, and tariffsalone are serve as the vehicle of foreign trade control. Thecurrent foreign trade policy of Chinese government and itstrade practice suggests that the central control of importand export still exists. MOFERT still plays significant rolein import and export planning9 . FTC has not been replaced bythe newly emerged foreign trading corporation 10 . The way theFTC operate still impede trade efficiency. Their monopolydeprives the trading system of the competition thatefficiency requires.Moreover, MOFERT's import and export plan still coverswide range of products. From 1978 to 1986, the number ofproducts governed by the export plan dropped from 3000 to120; however, in value terms, that component still governsabout 50-60% of all exports 11 . An import command plan stillgoverns 7 key raw materials which account for 40% by valueof all import, and a guidance plan governs a further 30% 12 .9^MOFERT continues to prepare an annual import plan distributing to the major industrialenterprises which set out the import products required.10^FTC continue to be responsible for handling foreign trade on behalf of entities not authorized totrade directly and with respect to commodities beyond the scope of authorized trading scope of variousentities and for the export and import of major and staple commodities. Speech by Jia Shi, a Vice-Minister of MOFERT, China Handbook, at 539, (1982).11^The World Bank, External Trade and Capital, at 20, (1988).12^Id.The following will review unfair trade practices in theimport and export areas and examine their incompatibilitywith the GATT principle.II. Current Import Barriers Maintained by ChineseGovernmentPrevious import barriers have not been abolished byreform. The existence of these barriers is incompatible withthe GATT principles. The most important barriers are importlicensing system, foreign exchange control, importsubstitution, import pricing, customs tariffs, importinspection.(1) Import Licensing SystemChina's import licensing system was established in1984 when the Interim Regulation on Licensing ImportCommodity of P.R.C. was promulgated13 . Under this system,only certain types of enterprises are qualified to importcertain products 14 . Namely, both the enterprises seeking therequired license and the products it wishes to import mustmeet the requirements of the import licensing regulations 15 .13 China's first import licensing regulation came out in 1957. see Almanac of China's foreignTrade Economic Relations and Trade, at 69, (1987).14^Only state-owned enterprises with required licenses can import certain products. SeeArticles 3-4, Interim Regulation on Licensing System for Import Commodities of P.R. C. , supra note 13,at 69.15^For instance, China National Cereal and Oil Import and Export Company is able to get animport license for its products, whereas other companies in the same area are not eligible to be issued thelicense.76Generally speaking, production enterprises are separate fromthe foreign trade companies. They are not allowed to importtheir products directly from the international market. Theyhave to import their products by submitting their request toFTC which will negotiate and conduct the import on theirbehalf16 . The effect of the license requirement for theenterprises is that the import will be excluded if there isno entry authorized to deal with in the particularcommodity. Therefore, no matter how good the Chineseenterprise is, it can still be excluded from the market bythe import licensing system.Another important aspect of China's importlicensing system is that it restricts the types and theamount of the import products. The import licensingregulation of 1984 provides that 28 products were underimport licensing contro1 17 . Moreover, the number of itemstends to be growing. As of January 2, 1987, there were42 items subject to the import licensing system, the importvalue of which account for one-third of the total value ofChina's imports 18 . The most recent list of goods which need16^Horsley, Supra note 1 at 10-11.17^List of Controlled Imports Permitted by the P.R. C. Appendix. Detailed Rules for Implementationof the Interim Regulations on Licensing System for Import Commodities of the P.R. C., May, 1984.18^People's Republic of China, China's Status as a Contracting Party: Memorandum on China'sForeign Trade Regime, GATT Document, No. L/6125, at 34, Feb.18, 19877import licenses has been increased to 53 items 19 . It hasbeen reported that China intends to make all imports gothrough the import licensing procedure 20 . Apart from theordinary import license, special licenses were required forsome goods, especially consumer goods such as vehicles,household appliances, electronics, etc. 21 . Recently,officials for China Ministry of Foreign Trade and EconomicRelations have reiterated that China would strictly controlthe import of luxury consumer goods from 1989 22 . This makesit very hard for a foreign exporter to sell their productsin China's market.During the process of implementing the import licensingsystem, the local foreign trade agency may have discretionto impose more restrictions. For instance, they mayarbitrarily increase the number of import controlledproducts even though in theory the central government issupposed to supervise the implementation23 . Therefore, inpractice, the restricting effect of the import licensing19^Items of Commodities Under Import Licensing System Partly Restored, International Business,February 19, 1988.20^John Kamm, Import Controls in China - Protectionism with Chinese Characteristics, The ChinaBusiness Review, at 43, (January-February 1987).21^China Economic News, at 2, October 11, 1982.22^Vice-Minister of the Ministry of Finance, Wang Bing Qian said that local import administrationshould be strengthened and foreign exchange should be used to import urgently needed raw materials andimportant technology, and luxury consumer goods, such as vehicles and appliances, should be strictlycontrolled, International Business, October 25, 1988.23^See Kamm, supra note 20, at 44.7 Esystem is exaggerated by the local government. This growingtendency of protectionism by using the import licensingsystem is also reflected in the recent rules of punishmentfor the violation of import and export licensing 24 . Therule imposes stringent penalties for the violation of importlicensing regulation. It lists more than ten situationsunder which the import licensing system may not be compliedwith and provides more specific punishment than those ofimport licensing regulation. For instance, in the case offorgery of an import license, a fine of at least 70% of thevalue of the goods will be imposed as well as confiscationof the goods 25 . The stated reason behind the new punishmentrules is that the violation of the regulations haveincreased26 . However, this is one of the measures taken byChinese government to restrict imports of foreign productsin order to protect domestic industry.In terms of international trade, while tariffs are themost essential import restraint, there are a variety ofother ways by which a country can restrain imports 27 . Mostof these other ways are termed as "non-tariff barriers24^In February 1989, China implemented Punishment Rules for Violation of Import and ExportLicensing. See Custom Strengthens Import and Export Commodity Licensing System and Imposing NewPenalties on Violation, People's Daily February 10, 1989.25^Penalty Rules Concerning Import and Export Commodity Licensing Administration System,People's Daily, February 13, 1989.26^Id.27^See Jackson, supra note 2, Introduction of the thesis at 365.758((NTB)" 28 .^One most prominent non-tariff barrier is thequota" or "quantitative restriction" 28 . The quota is aspecified amount or quantity of a particular good which acountry will allow to be imported". China's importlicensing system has the same effect of quantitativerestriction because it could restrict and limit the amountand types of import products by issuing licenses to theforeign trade companies only for certain products.International trade policy has generally favoredtariffs over all other types of import restraints 31 . It isbelieved that tariffs are more visible and easy tomonitor32 . Tariff reduction is also easier to negotiate 33 .However, quotas are thought to entail the risk of governmentcorruption in the licensing process34 . They also tend toconceal from the public the degree and cost of theprotection being afforded to domestic producers35 .28^Id, at 366.29^Id.30^Id.31^GATT is basically designed to prefer tariffs. Many of the provisions of GATT are designed toprevent the use of non-tariff barriers for protective reasons, but tariffs are permitted by GATT. seeJackson, supra note 2, Introduction of the thesis, at 367.32^Tariffs do not need license to administrate, do not require government funds to support, andgive a specific amount of protection. Id, at 366.33^Id.34^Id.35^Id.Based on these considerations, the GATT prohibitsquantitative restriction except in certain circumstances 36 .Thus, many aspects of China's import licensing system arenot compatible with GATT principles. This presents a bigobstacle for China's admission to the GATT.(2) Foreign Exchange ControlChina maintains a policy of centralized control offoreign exchange by the government 37 . The Bank of China isthe specialized bank in China's financial structureresponsible for foreign exchange matters. No otherinstitutions are permitted to engage in foreign exchangebusiness without first getting the approval of the StateAdministration for Exchange Control (SAEC) 38 . Under thissystem, the central government allocates foreign exchange toa foreign trade company, usually a FTC. The allocation offoreign exchange can severely limit the volume of importspurchased by the FTC. There are a number of types of foreignexchange allocations, each of which is subject to controlregulations or methods. For instance, under central foreignexchange allocation, there is the so-called condition,"using imports to promote exports",^namely,^foreign36^See GATT Articles XI-XIV, supra note 27, Chapter 2 of the thesis.37^Article III. Provisional Regulation on Foreign Exchange Control, East Asia Executive Reports,at 21, (February 15, 1981).38^Id.8 :exchange is only used to import raw materials for processinginto export goods 39 .Although this allocation system is gradually beingreplaced by a system in which enterprises can borrow foreignexchange from the bank and pay interest on the funds", itstill has the effect of an import control since the bankassesses the economies of the proposed import transactionbefore granting the loan 41 . On the other hand, the Chinesegovernment imposes a variety of internal regulations andtargets on enterprises for them to get foreign exchange.Foreigners have no access to those internal regulations andtargets. Thus, it is very hard for them to know whethertheir Chinese business partners have enough foreign exchangeto buy their products. The difficulty of identifyingqualified business partners has also created a barrier forforeigners to penetrate the Chinese market.The manipulation of exchange rates also createsrestriction on foreign trading. At present, China maintaina floating exchange rate system under which the exchangedrate is based on development in the balance of payments andmovements in costs and exchange rate of China's major39^See Kamm, supra note 20, at 45.40^Id.41^Banks are much more willing to grant a loan for foreign exchange if it will promote exports. Insome locals as much as 70% of foreign exchange spent on imports goes for items that will, in turn helpchina increase exports. see Kamm, supra note 20, at 45.8trading partners. However, this has only limited impact onthe trading decisions. Foreign trade are still largelydetermined by authority of administrative planning 42 .(3) Import Commodity InspectionImport commodity inspection is another effectiveway to restrict imports. Since the 1950s, China hasestablished a series of import commodity inspectionsadministrative bureaucracies headed by the StateAdministration for the Inspection of Import and ExportCommodity43 and has promulgated a set of regulations andrules for import commodity inspection44 . The Chinesegovernment stated that the administrative system of importcommodity inspection is designed to ensure the quality andquantity of the imported products and protect Chinesepurchersers from substandard foreign goods 45 . Nevertheless,many aspects of China's current practice on import commodityinspection has been considered a "non-tariff barrier" forforeign imports. For instance, the Interim Procedures For42^World Bank: China's External Economy and Capital, (1988).43^Guiding Book on Tradine with the P.R.C. at 133, (1989).44^The rules and regulations are: Regulations on the Inspection of Import and Export Commoditiesof the P.R. C. promulgated in January 1984; Provisions for Supervision and Control over the Quality ofImport Commodity promulgated in 1988; Interim Procedures for the Inspection and Control ofHousehold Electrical Applications, promulgated in 1985.45^According to Zhu Zhenyuan, Director of the State Administration of Import and ExportCommodity Inspection, substandard imports has become a chronic problem for China. 10.3% of importgoods were found substandard in 1987. See Commodity Inspection - 40 Years' Experience, People'sDaily, February 27, 1989.8The Inspection And Control of Household ElectricalAppliances which was promulgated in 1985 46 requires minuteinspection of every appliance in every imported shipment47 .This type of inspection has been regarded as a time-honoredJapanese means of restricting a foreign exporter's marketaccess to the importing country48 .The recent provisions on import commodityinspection 49 also reflect this tendency of importrestrictions. First, the provisions provide a long processof inspection involving many departments and units toconduct inspection. This is a quite time-consuming andcomplicated procedure. For instance, not only the StateAdministration of Import and Export Commodity Inspection andits branch offices at the local level conduct the importcommodity inspection, all the agencies and units involvedin the import transaction, such as, the transportationunit, the storage unit, the consignee and user unit are alsorequired to inspect the commodity 50 . For certain importantcommodities, the provision requires preliminary inspection46^See Communique of State Council, at 23, October 1985.47^Kenneth T.K. Wong, Taking Aim and Substantial Imports The New Import Quality ControlMeasures, East Asia Executive Reports, at 10.48^Id.49^See Provisions for Supervision and Control over the Quality of Import Commodities, China DataBase Economics and Foreign Trade, October 28, November 30, 1987.50^Article 17-19, supra note 49.8,in the exporting countries 51 . This preliminary inspectionprocedure can also be time-consuming and delay the entry ofthe commodity into China. Moreover, "certain importantcommodities" are not defined in the provision 52 . This couldgive rise to administrative manipulation. Second, theprovision contains rules for penalties and rewards 53 . Thereward system provides that the Ministry in charge is torecommend and reward the outstanding achievements of unitsand individuals in their inspection responsibilities 54 .This reward system may stimulate the inspection units to beover-enthusiastic in inspection of import commodities and inpursuing a claim for damages 55 . In practice, the rewardingsystem has been adapted effectively. It is reported that HuBei, Shandong, Shanxi and Liaoning provinces have adoptedbonus systems: 1% of the value of any claim for defectiveimport goods goes to the units or individuals who contributeto the discovery of defects 56 .(4) Import Substitution51^Article 8, id.52^Supra note 47, at 9.53^Article 25, supra note 49.54^Id.55^Supra note 49, at 10.56^What to Expect from New Import Inspection Rules, 20 Business China, at 154, (1984).8!Although it has already abandoned the dogma of "selfreliance" to conduct trade with foreign countries, Chinastill protects and relies heavily on domestic industry.Most of its imports focus on products which are in shortsupply or can not be produced by domestic industry 57 . If theproducts can be made by domestic producers and the qualityis the same as similar products abroad, the imports of thelike products will be substituted by domestic ones 58 .Chinese leaders have supported this method and regarded itas significant national policy for import contro159 . As aresult of the policy, imports of many kinds of products havebeen decreased rapidly. For example, since Chinesedomestically produced T.V. has improved, China has curbedthe import of foreign made color televisions. The amount ofimported color televisions was reduced to 100,000 sets in1987 from 2,000,000 sets in 1985 60 . Meanwhile, domesticproduction of televisions climbed to 5,000,000 sets from57^See Horsely, supra note 1, at 17.58^In practice, the criteria governing the quality of domestic-made products is quite subjective sincethey are determined by the Chinese government. As a matter of fact, the quality of domestic-madeproducts do not reach the level of foreign products, they are still subject to import substitution.59^China's former Premier Zhao Zi Yang and former Political Bureau member Hu Qili said, "Wewill not import the product we can produce by ourselves", when they visited the exhibition ofdomestic-made cars on October 10, 1988 in Beijing. See Domestic Made Cars Is in Silent Growth,People's Daily, December 5, 1988.60^Homemade Household Appliance Have Amounted for 45% in Our Domestic Market, EconomicDaily, Dec. 7, 1987.818',4,000,000 61 .^A similar situation has occurred in theimport of cars and other products 62 .The implementation of the import substitute measure issupplemented by administrative manipulation. The Ministriesin charge of the relevant industry are responsible forrecommending and publishing the list of substitute products.For example, the Committee of Machinery and Equipmentpublishes a list of 50 import substitute products rangingfrom generators to the machines for production of instantnoodles 63 . Moreover, the list of substitutes is increasedfrom time to time". As to the criteria used to determinewhether domestic products can replace imported goods,discretion is given to the relevant ministries according totheir investigation and evaluation 65 . This also gives riseto administrative manipulation again.Since 1986, a particular type of import substitutionhas been implemented. This is so-called "inviting bidsdomestically", which is particularly applied in the field61^Id.62^It is reported that China was speeding up the production of cars so that by 1990, it will produce700,000 s and will not import cars anymore, supra note 59.63^The Commission of Machinery & Equipment First Recommends 50 Kinds of Import SubstituteProducts, Economic Daily, August 4, 1987.64^Id.65^Id.of electrical and machinery equipment" Under this system,before importing electric and machinery equipment, theChinese importers must invite bids publicly in its owndomestic markets. If domestic producers can make the sameor a similar quality product, the importers must buy thedomestic one instead of the import67 . In order to implementthis system, China Bidding Center for Electric andMachinery Equipment has been set up and eight specializedcompanies in this field have been established in eight majorcities". This measure has been effective in discouragingimports of electronic and machinery products. The successrate of domestic bids amounts to 80% 69 .(5) Import PricingImport pricing has the most direct influence on themarket access of foreign products since the level of pricewill directly determine the quantity of the importedproducts. In free market economy, the price of importedproducts is directly link to the price of the like productswhich are domestically made. Therefore, if the price ofimported products is low, the products will be competitivein the importing country and the quantity of the imports66^The Measure of Inviting Bids First on Electric and Machinery Equipment in Domestic Market IsGood, People's Daily, Sep 18, 1987.67^Id.68^Id.69^Id.818Swill subsequently increase. In NME country, since thegovernment impose various administrative measures on importpricing, the price of import products does not reflect itsreal cost. This makes the foreign products less competitivein the domestic market of the imported country.China's import pricing system is of a typical NME type.Administrative measures play a more significant role thanmarket supply and demand. For example, under the present"import agency pricing system'70 , the government canmanipulate any components of the system71 . The officialRenminbi to United States dollars exchange rate is setunilaterally by the People's Bank 72 and it has devaluedmany times 73 . This devaluation factor can simply change theequation of import pricing under the agency system andincrease the domestic price of the imported products.The most abused part of China's import pricing systemis "Ministry Mark-Up" which means that if the import priceis not high enough to protect the domestic industry, theconcerned industry may determine to impose a price mark up70 It is called "iinkou iiage daili zhidu"  which is the primary method used by Chinese government tocalculate the price for import goods. See Memorandum, supra note 18, at 34.71^Under the system, the domestic price of imported goods is the CIF price multiplied by theofficial exchange rate and customs duty plus industrial commercial tax plus import regulatory tax plusforeign trade commission plus banking plus insurance plus other charges. Obviously, the government canmanipulate any parts of the equation. Id.72^People's Bank is the Central Bank in China.73^Thomas Chan, RENMINBI Devaluation on the Cards, China Trade Report, August 1987.9(on the goods74 . For example, the Ministry of ChemicalIndustry and the Ministry of Foreign Economic Relations andTrade issued a "joint notice" on the pricing of importedchemicals75 . The notice states that if the importedchemical whose Renminbi prices, after all agency mark upare still below the prices of domestic ones, a price markup would be granted on the application by the domesticproducer to the Ministry 76 . This price mark up has theeffect of raising the domestic price and making the importedgoods less competitive in China's market. Moreover, thepractice of price mark up has been legitimized by relevantregulations77 .China's pricing system for domestic made goods alsoundermines the competitiveness of imported goods. Generallyspeaking, the prices of domestic goods are fixed by thegovernment78 and do not reflect the real value of thegoods79 . The price of many goods might be much lower thantheir real value. Thus, the irrationality of the domestic74^See Kamm, supra note 20, at 48.75^Id.76^Id.77^An import regulation on import commodity pricing was promulgated in 1980. However, it isconsidered as an internal document, and was never published. See Kamm, supra note 20, at 49.78^The government agency which are responsible for fixing the price of domestic goods are mainlythe National Price Administration Bureau and National Industrial and Commercial AdministrationBureau. Id.79^Id.price may prevent imported goods from competing withdomestic ones.III. China's Current Unfairly Trade Export PracticesThis section will review the unfairly traded exportpractice in China. It will be followed by the discussion onthe relevant provisions of GATT, particularly the Anti-Dumping rules and Countervailing duty obligation and theirweakness. Finally, it will explore the application ofselective safeguard measures and quantitative restrictions.GATT prohibits unfairly traded export among the membercountries. For instance, Article XVII requires a statetrading enterprise must act "in a manner consistent with thegeneral principle of non-discriminatory treatment" 80 , andmake trade decisions "solely in accordance with commercialconsiderations" 81. Moreover, Article VI of GATTspecifically prohibited export subsidy by government andauthorizes imposition of a Countervailing duty offset theadvantage created under the subsidy82 .The Chinese government has repeatedly asserted that asa result of the economic reform, its foreign tradeenterprises have been operated according to the market80 GATT Article XVII,1, supra note 27, Introduction of thethesis.81^GATT Article XVII paragraph 1(b) defines "commercial considerations" as price, quality,availability, marketability, transportation and other conditions of purchase and sale. Id.82^GATT Article VI, id91supply and demand 83 . However, as discussed in Chapter 3,this goal has been only achieved to a certain extent.Further decentralization is required, particularly in theexport area. The government interference in the area is noteven reduced, but increased. In order to make urgent neededforeign currency, the government has attached greatsignificance to the export trade. A variety of exportpromotion measures have been implemented by the government.In 1984, China started an ambitious export promotionscheme. The State Council worked out a series of strategiesfor export promotion, such as developing coastal areas toboost an "out-looking" economy84 , promoting exports in themachinery and electrical industry 85 , supporting exportproduction bases and networks", etc. Both central andlocal governments invest huge amounts of funds to realizethese strategies. For example, Guangdong Province invested$150,000,000 (U.S.) to establish its export production 87network in 1987. The Chinese government issued a number ofrules and regulations to encourage exports. In 1985, MOFERT83^See Memorandum, supra note 18.84^The coast areas have better industrial bases and transportation facilities, and have better trainedworkers.85^Creating the New Situation for the Export of Machinery and Electrical Products, The WorldEconomic Herald, August 1, 1988.86^Rural enterprises has big potential for export because of their cheap labour resource. RuralEnterprises Has Big Potential for Export, The World Economic Herald, December 28, 1987.87 Reform Let Export Energy Come Out, Economic Daily, August 25, 1987.92issued Detailed Rules Concerning Rewarding ExportPerformance 88 , which is an important document in this field.In 1986, the State Council issued No. 17 and No. 18documents on measures of export promotion 89 .If China obtains GATT membership, the other membercountries will be obliged to open their markets to Chineseexports at an increased volume according to the MFN clause.As discussed in Chapter 2, at present, China enjoys MFNtreatment through bilateral trade agreement. The MFNtreatment under the multilateral framework---GATT wouldprovide it with more stable benefits than those of thebilateral agreements. China's export would benefit from thelow tariff schedules previously negotiated among the membercountries in the earlier GATT rounds. A more persuasiveincentive for China to seek GATT membership is theopportunity to use the multilateral trade regime'sobligations to eliminates non-tariff barriers on its exportsin the other member countries. Most developed countriesstill maintain protectionist barrier against Chineseexports. For example, Chinese textile exports, one of themost significant export source, are subject to quantitativerestriction in almost every developed country 90 .88^This rule is mentioned in Intertrade (at 36, April 1986). It was never officially published.89^Id.90^Meade, Textile Import Quotas and United States-China Trade Relations, The Danger ofProtectionism, 10 Brooklyn Journal of International Law., at 465, (1984).9:Eliminating the barriers and increase its exports to themember countries has become one of the important incentivesfor China to join GATT.The GATT member countries are not be willing to opentheir market to China because they fear that the unfairlytraded exports from China would distort their domesticmarkets. As previously noted, the price system in NMEcountry does not reflect the market supply and demand. Evenwith the substantive reform, the price of many products inChina is still subject to the State control 91 . The price ofexport products has been set lower than the real cost sothat the products are more competitive in the foreignmarket. In addition, China's massive cheap labour forceexacerbate the fear92 .At present, Chinese exports has not presented asubstantial threat of displacing foreign producers. TheGATT member countries are more concerned with its greatexport potentials. The existing GATT provisions providingremedy to the unfairly traded exports. However, they wereproved to be difficult to apply to exports from NMEcountries. GATT member countries would most likely demandadditional restrictions in this regard.91 For detailed discussion, see Part III of this Chapterof the thesis.92^China's labour force is estimated to be 460 million, see China's Economic DevelopmentStrategies and There Effect on U.S. Trade, Investigation No.332-168, USITC. Publication, at 107, 1645,February 1985.9,GATT prohibits government subsidies to exportproduction. It has specific provisions to deal with theproblem, such as Article VI---Antidumping Rules and ArticleXVI---Countervailing Duty Rule 93 . Most importantly, thereis a Countervailing Duty Code which is phrased to interpretArticle VI and Article XVI94 . The Code provides anillustration95 which defines what an export subsidy is. Themain subsidies in the list are:(a) direct subsidies: direct aid to a firm based onexport performance.^This is the most obvioussituation for subsidies;(b) currency retention practice which involves a bonuson exports;(c) favorable transport charges to aid exports;(d) delivery by the government involved for productsof imports that will ultimately be exported, whenthe delivery of those imports is on favorableterms: cheaper, easier, etc.;93^For detailed discussion, see Part III of the Chapter.94^The Countervailing Duty Code was reached in 1979 during the Tokyo Round. The code isphrased to interpret Article VI and Article XVI of the GATT. It goes further than Article XVI in thesense that it expressly prohibits export subsidies on non-primary products although there are someexceptions. See Article 9, the Countervailing Duty Code reprinted in Jackson, Havey, DocumentsSupplement to legal Problems of International Economic Relations, at 95, (1987).95^Id, at 95-97.91(e) exemptions or remissions of direct taxes" payableby the enterprises;(f) advantage in the calculation of the base by whichdirect taxes are charged;(g) exemption or remission of indirect taxes in excessof those levied on products sold domestically;(h) special export credit guarantees, special loanrates given below market terms.This list is significant because it illustratesspecific criteria allowing the importing country torecognize the subsidies involved in the exporting country'spractice. However, it is not a comprehensive list and it isnot intended to list every prohibited export subsidy 97 .Therefore, we cannot say if a country's conduct does not fitexpressly in the list, it will not be liable for its act.Many tools used by Chinese government to promoteexports constitute export subsidies which fall into thecategories of the Subsidy Code. The following will reviewChina's current practice in this area.96^The term "direct tax" means taxes on wages, profits, interest, rents, royalties, and all otherforms of income and the taxes on the ownership of real property. see supra note 94, at 96.97^Other practices inconsistent with the spirit of the Code can also be export subsidies, Id. at 97.9(1) Direct Price SupportsIn April of 1985, MOFERT announced that any State-ownedforeign trade company can apply for direct price support forexported products if there is an overall profit on exportsthat would be obtained by the enterprise 98 . Thus, directsubsidies are given to exporting enterprises. Within thiscategory, if the exporting enterprise does not have aprofit, price support can still be obtained if the exportedproducts are labour intensive or consume little energy99 .Also, traditional export commodities that are perceived ashaving growth potential can obtain price support 100 .(2) Foreign Exchange RetentionThe current Chinese foreign trade system allowsexporting enterprises to obtain a portion of foreignexchange if the enterprise makes profits on its exports 101 .This is an important measure in the reform of foreign trade.But it falls into the category (b) of the subsidy list. Theamount of foreign exchange obtained by a particularexporting enterprise becomes more directly connected with98^Karl Herbst, Export Incentive and the GATT PRC Practice (Remarks delivered to the AmericanChamber of Commerce in Hong Kong), at 7, September 10, 1986.99^Id.100^Id.101^Zhang Sontao, The Problem of Our Country's Foreign Trade Reform, 5 International TradeIssues, at 20, (1989).9'its export performance. If foreign trade enterprises exportmore, they will have more foreign exchange retention. Theamount of retention varies in different areas. For example,Shanghai gives 50% of retained foreign exchange to theexporting enterprise, Guangzhou has said it is giving 60% tothose enterprises producing above quota 102 .(3) Direct RewardsUnder GATT terms, this is called a bounty or grant.Enterprises are directly rewarded for meeting or exceedingtheir foreign exchange quotas103 . For example, HongHucounty in Hu Bei Province announced that they granted$2,080,000 (U.S.) as rewards to their enterprises. Themethod they used was to grant Chinese Yuan 0.04 to theenterprise if it made $1 (U.S.) profit, within the foreignexchange quota. Chinese Yuan 0.20 was granted if theenterprise made $1 (U.S.) profit beyond the quota 104 .Another way of rewarding foreign trade enterprises is to setup a special fund to reward the enterprises that have made asignificant performance in exports, like Shanghai ,s105.102^Supra note 98, at 8.103^Id.104^How We Develop the Export Production of Rural Enterprises, 4 International Trade Issue, at 40,(1987).9105^Supra note 98, at 8.(4) Tax Rebates or ExemptionItem (e) on the subsidy list of the GATT Subsidy Codeprovides that exemption or remission of direct tax payableto the exporting enterprise constitutes an export subsidy.This is what China has been doing. Shanghai has announced areduction or exemption of the adjustment tax on enterprisesthat are primarily exporting106. Recently, Shan Xi provincesaid that it would encourage development of new exportproducts by giving a reduction or exemption of income taxwithin three years to the enterprise which develops newexport products, based on the amount of excess foreignexchange they make107 . In addition, some industries, forinstance, the enterprises product electrical and machineryproducts are allowed to retain part of their depreciationfunds108 .(5) Preferential LoanThis is also prohibited by item (h) of the Subsidy Listof the Subsidy Code. Granting special loans or export creditguarantees to exporting enterprises is common in China. Forexample, in Zhejiang Province, special loans in both United106^Id.107^Developing the Advantage of Natural Resources to Promote Foreign Trade, 4 Intertrade, at 24,(1989).108^Expanding the Export of Machinery and Electrical Products, Strengthen the Foreign Trade ofour Country, 8 Intertrade, at 47, (1988).9States dollars and Chinese Yuan are granted to the ruralexporting enterprises by the branches of the Bank of China,China Bank of Agriculture and China Bank of Industry andCommerce 109 . In may 1987, the Bank of China granted loansof $700 million (U.S.) at preferential rates to theexporting enterprises in the coastal areas 11° . The head ofthe Bank said the policy of granting the loan is thatwhoever exports, whoever will be supported by the loans 111 .(6) Preferential Access to Raw Materials and OtherFacilitiesThis measure is also widely used by both central andprovincial governments to encourage exports. JilingProvince announced in April 1989, that the provincialgovernment would give priority to 22 major exportingenterprises in the province in supplying electricity, rawmaterials and arranging of transportation 112 . Also, theprices of some raw materials, which are in short supply,such as beef, beans, lumber, etc., will be fixed to aceiling price in order to guarantee that exporting109 The Prospect of Developing Rural Exporting Enterprises is Promising, 4 Intertrade, at 38,(1988).110^Economic Daily, May 31, 1988.111^Id.112^Jiling Province Take Measures to Promote Export, International Business, April 4, 1989.11enterprises can buy them more efficiently113 . Many otherprovinces have the same or similar measures 114 .(7) Worker RebatesWorkers rebate is among the most unusual exportpromotion measures. It is viewed as a part of breaking the"big rice bowl" system 115 . But it violates GATT rules andis regarded as a subsidy. There are two kinds of workerrebates: one is tied to the export performance of theenterprise. If the enterprise makes a good profit on itsexports, the workers of the enterprises will be able to getcertain amounts of wage rebates116 . The other one is forindividuals who make exceptional contributions to exports.For example, a foreign trade enterprise in Beijing announcedthat it "would award Yuan 10,000 to a designer who designs anew fashion cloth which will be ordered by foreign buyers atabove 100,000 items" 117 . The designer's salary in thisfactory is on average Yuan 260 118 , so the award will be113^Id.114^Jiangsu Province Works Out Measures to Encourage Export, International Business,September 22, 1988. Qing Dao Take Initiatives to Implement Export Plans , International Business,February 2 1988. Guang Zhou Adopt Four Measures to Export, International Business, July 26, 1988.115^Prior to the reform, Chinese workers got the same pay more or less, no matter how hard theyworked and what quantity of their work was. This is the so-called "iron rice bowl" system.116^Beijing Fulfills the Task of Foreign Trade Last Year, International Business, February 2, 1989.117^Shunhua Textile Factory Encourage Developing New Products, International Business,September 22, 1988.118^Id.11about 375 times of designer's salary, which is a huge wagerebate.The seven kinds of export subsidies discussed above aretypically unfairly traded export promotion measures. Thereare many other forms of subsidies as well, such as indirectsubsidies by providing artificially low priced imports andraw materials, etc. Even these subsidies do not fall intothe categories of the list provided in the Subsidy Code,they might still constitute subsidies because the list isnot comprehensive. Therefore, all these subsidies would besubject to countervailing duty actions by the membercountries.III. Rules Against the Unfairly Traded Export Practises(1) Anti-dumping And Countervailing Duty Rules UnderGATT---An Unsatisfactory SolutionGATT has several provisions dealing with unfairlytraded exports119 . The so-called anti-dumping andcountervailing duty provisions are among the most importantone that are designed to offset the influence of unfairlytraded exports.119^These provisions are: Article VI, Article XVI, Article XVII, and Article XIX.1CArticle VI sets out the mechanism of anti-dumping andcountervailing duties. It provides:"dumping by which products of one country areintroduced into the commerce of another country at lessthan the normal value of the products is to becondemned if it causes or threatens material injury toan establi shed industry in the territory of a membercountry" 14u .An anti-dumping duty will be imposed on the exportcountry to offset the advantage gained by its dumpingconduct. The amount of the duty will be less than themargin of the dumping of the product 121 . Normally, it isthe difference between the "normal values" and the "dumpingprice".With respect to countervailing duties, Article VIprovides that when one Contracting Party grants a bounty orsubsidy directly or indirectly upon the manufacture,production or export of any product, and the export of theproduct is such as to cause or threaten material injury toan established industry of the importing country. Acountervailing duty will be levied on the product 122 . Theamount of countervailing duty will not be in excess of theestimated bounty or subsidy 123 .120^GATT Article VI, supra note 27, Introduction of the Thesis.121^GATT Article VI(2), id.122^GAIT Article VI.3, id.123^GATT Article VI.3, id.11Article XVI specifically deals with the subsidy issue.Three clauses are particularly important in this article.Article VXI, paragraph 1 requires Contracting Partiesmaintaining production subsidies to report this to otherContracting Parties. Paragraph 3 admits that a subsidy mayhave harmful effects on the market of the importing country.Paragraph 4 seeks to eliminate export subsidies innon-primary products 124 . This clause tries to get acommitment to phase out export subsidies in non-primaryproducts dealing particularly with those subsidies thatallow a product to be exported at prices lower than thedomestic level.The application of anti-dumping and countervailing dutyrules to NME countries have presented some difficulties.This is mainly reflected in two aspects: determination ofthe "normal value" and the finding of a "subsidy".(a) Determination of "Normal Value"The anti-dumping rule which is contained inArticle VI provides that dumping occurs when the price ofthe exported goods is below the "normal value" 125 . Whatconstitutes a normal value? GATT provides severalalternatives.124^GATT Article XVI.4, id.125^GATT. Article VI, paragraph 1, id.1 1The first one is the price of like products in thedomestic market of the export country126. This createdproblems in applying to the NME countries. As previouslydiscussed, in NME countries, the domestic price of productsdo not usually reflect the real cost of the production. Itis decided to a large extent by political reason, instead ofby market forces. For example, the price of grain inChina's domestic markets is very low because the governmentsubsidizes it heavily to keep balance between the rural andurban areas127 This happens to other products, such ascoal, oil, gas, etc. 128. If choosing the domestic price asthe "normal value", the result of the comparison will bethat no dumping exists since the price of the like productsof export country would be higher than those of theimporting country. Thus, in theory, the method ofdetermining the normal value by looking at the domesticprice in the export country is not reliable.In practise, the method is also criticized and hasproved unsuccessful 129 . In the United States, the weakness126^Article VI, paragraph 1, id.127^A Notice on Increasing the Amount of Fertilizer for the Production of Grain, issued by the StateCouncil on Dec.11, 1988, reprinted in Adjusting Economic Environment, Reorganizing the EconomicOrders. Developing the Reform,  at 127-128, (1989).128^See D. Gale Johnson, Progress of Economic Reform in the People's Republic of China,  at 21,1982.129^The main problem of the application of the method is that many NME countries are reluctant toallow other countries to scrutinize their internal economic data and policy. See Eliza R. Patterson,Improving GATT Rules for Nonmarket Economies, 20 Journal of World Trade Law, at 196, (1986).of the method was first recognized in the case of Bilks fromCzechoslovakia, which is the first NME dumping case whichresulted in the determination of less than "normalvalue" 130 In the Jalousie-Louvre-Sized Sheet Glass fromCzechoslovakia case131 the United States TreasuryDepartment refused to use the Czechoslovakian domesticprice132 Later on, in the case Portland Cement fromPoland133 , the Treasury Department concluded that Polanddomestic price was not qualified in sales "in the ordinarycourse of trade", as required by the Anti-dumping Act of1921 134 .The second alternative of determination of "normalvalue" which is provided in GATT Article VI is thatcomparing the export price in an exporting country with theexport price of the like products to any third country 135 .This approach also suffers from the unreliability of the NMEcountries' export price. The reason is obvious because NMEcountries may also dump their products to the third countryand, thus, the export price in the third country is below130^25 Fed. Reg. 5, 657 (1960).131^Gary Horlick, Shomnon Shuman, NME Trade and U.S. Anti-dumping/Countervailing DutyLaws, 18 International Lawyer, at 808, (1984).132^Id.133^27 Fed. Reg. 8,457 (1962).134^28 Fed. Reg. 6,660 (1963).135^GATT, Article VI, 1(b)(i).1 (the "normal value". The United States Commerce Departmentrecently has rejected this approach in the case involvingRomanian Carbon Steel Plate in 1982 136Due to unsatisfactory application of theapproaches on determination of normal value under GATTArticle VI, a new method called "surrogate country" approachwas created. Under this approach, the price of like productsof a third country is chosen as a substitute for thecomparison. The third country must be at a comparable levelof economic development with the exporting country137 . Forexample, the United States has been using the surrogatecountry method to determine the "fair value" 138 in dumpingcases involving NME countries 139 . In the case NaturalMenthol which involves menthol dumping from China, theDepartment of Commerce selected Paraguay as a surrogatecountry for the purpose of deciding the comparison price 140 ,since the Department of Commerce considered that Paraguayoverall economic level is closer to China' s141.136^47 Fed. Reg. 35,666 (1982) 48 Fed. Reg. 317 (1983), Horlicki and Shuman, supra note 131,at 819.137^Id, at 814.138^The "fair value" in the U.S. law is equivalent to "normal value" in the GATT.139^Supra note 131, at 821.140^William P. Alford, When is China Paraguay? An Examination of the Application of theAnti-dumping and Countervailing Duty Laws of the People's Republic of China and Non-MarketEconomy Country, Southern California Law Review, at 79, (1987).141^46 Fed. Reg. 3258, 3260, 1981.1 (The "surrogate country" method suffered from anumber of weakness. First, there are no specific rules aboutchoosing the "surrogate country". Even it is said that theeconomic level of the surrogate country should be at the"comparable level" with the exporting country, it failed todefine "comparable level". The U.S. law is a good example.The United States regulations use per capita gross nationalproduct and similarity of infrastructure development ascriteria of "surrogate country" and export country todetermine whether they have a "comparable level" 142 .However, the law and regulations do not provide how thegross national product is to be measured 143 . Instead, thefigures collected by the World Bank has been used. Butthese figures are said to be not reliable for thiscomparison144 .Second, the "surrogate country" may not be willingto cooperate with the importing country in theinvestigation. Thus, it creates difficulty for an importingcountry to get reliable information. The reason for thereluctance of the "surrogate country" is that it regards itsmanufacturing and commercial data as highly confidentialand, thus, it would not like to provide the information toforeign governments. This happened quite often when the142^19 C.F.R. 3538(b) 1986, supra note 140, at 91.143^Id.144^Id.1 (United States applied the "surrogate country" method in itsanti-dumping cases to NME countries.For example, in the 1982-83 case involving Chineseshop towels, the United States Department of Commerce soughtsurrogates for China by considering Pakistan, Malaysia, HongKong, the Dominion Republic and Columbia145 . However, eachof the countries refused to supply the information abouttheir domestic production.From the exporting country's point of view, the"surrogate country" method is not satisfactory. It has beenopposed for the reason that it "presumes that non-marketproducers are never the most efficient producers of aproduct" 146 . Also, the exporting country cannot effectivelypredict what country will be chosen as a surrogate and it isunable for it to get its export price to avoid a charge ofdumping147 .To date, there has been no effective methodcreated to determine the problem of "normal value" under theGATT anti-dumping rule when it is applied to NME countries.145^48 Fed. Reg., 37,055 (1983).146^Id.147^Sullivan, United States Trade Law Hinder the Development of U.S. -P.R. C. Trade, 22 ColumbiaJournal of Transnational Law, at 135, (1987).1 ((b) The Determination of Countervailed SubsidiesThe most difficult problem on application ofcountervailing duty rules to NME countries is thedetermination of Countervailed duty. It is recognized thata Countervailed subsidy cannot be found within a NME systembecause the entire economy in an NME is regulated throughgovernment intervention 148 . Thus, it is unlikely to singleout any one of the many subsidies under the determinationunder the GATT Countervailing Duty rules.In addition, in order to determine the existenceof a Countervailed subsidy, there must be certain"market-based norm" or commercial standards against which tocompare government interaction. For instance, theCountervailed duty will be identified if the governmentgrants more benefits to the exporter than the same situationbased on market forces. In NME countries, there are notsuch norms or standards. Due to these difficulties, manycountries refuse to apply the countervailing duty rules toNME countries. Several U.S. cases illustrated this point.In the case Carbon Steel Wire Rod fromCzechoslovakia and Carbon Steel Wire Rod from Poland, theUnited States Commerce Department decided that no subsidycould be formed within an economy determined to be a NME 148 .148^Id.149^49. Fed. Reg. 19.370; 49.Fed. Reg. 19,474.1The basic assumption of the Commerce Department's analysiswas that subsidies are distortions to free market economyand that the concept doesn't make sense in NME 150 . Thus,the countervailing duty should not be applied to the NMEcase.Summarizing the application of the GATT'santi-dumping and countervailing duty rule to exports fromNME countries, difficulties remain. Even a variety ofapproaches have been suggested and employed, none of themcould satisfy either the market economy or non-marketeconomy countries.(2) Other GATT Provisions on Unfairly Traded ExportsApart from anti-dumping and countervailing dutyrules, there are some other GATT provisions dealing with theproblem of unfairly traded exports. These may provide someremedies to the unfairly traded export from NME countries.On the other hand, they also suffer from some problems.These provisions are provided in Article XVI, StateTrading 151 and Article XI, Safeguard Measures 152 .Article XVII is a general provision about Statetrading enterprises.^Although it does not specify the150^Supra note 130, at 850.151^GATT Article XII, supra note 27, Introduction of the Thesis.152^GATT Article XI, id.1:problem of unfairly traded exports, it lays down the basicprinciple for State trading enterprises, which is that theyshould make the trading decisions "solely in accordance withcommercial considerations" 153 Applying the principle tothe issue of unfairly traded exports from the NMEs, thismeans that NME countries should regulate their export tradein response to market force instead of government control,i.e., reducing or eliminating export subsidy, setting theprice of export goods in accordance with supply and demandforce in the international market. Thus, the principle isimportant in the sense that it imposes the obligation on NMEcountries to act "solely in accordance with commercialconsideration" even though it is not designed solely to dealwith NME countries 154 . However, Article XVII has beencriticized as too general and ambiguous 155 . This makes itsapplication to NME countries difficult.GATT Article XIX is a more detailed provisionproviding relief from injury for an import country caused byunfairly traded export. The Article provides that when theimport from an exporting country is increased to suchquantities that cause or threaten serious injury to a153^GATT' Article XVII, paragraph 1(b), id.154^State trading enterprises exist not only in NME countries but are also in a free market system.155^As to what constitute "according to commercial considerations", it is not clear whether thestandard of "national treatment" should be applied. see Ivan Bernier, State Trading and the GATT, in M.M. Kostechi  State Trading in the International Market,  at 245, (1982) and the previous discussion inChapter 2 of the thesis.1]domestic industry, the importing country could withdrawtariff concessions or impose temporary importrestrictions 156 .However, this provision also suffers from severalweakness. The most serious problem is that the provision isbased on MFN treatment157 which means that the safeguardmeasure will not be only imposed on the exporting countrywho cause the increased quantity of export and cause seriousinjury to the importing country's domestic industry, it alsoapplies to all the countries which export the same productsto the importing country. This would not likely beacceptable to the importing country because it will preventthe imports of the same product which is needed within itstolerable capacity. Also it will offend other exportingcountries which export their products to the importingcountry in a legitimate quantity justified by the GATTrules. In addition, the test for injury is too strict toprove for the importing country since it requires that itwas caused as the result of both "unforeseen" developmentsand of the effect of the obligations incurred by ContractingParties under the GATT 158 .156^GATT Article XIX(1)(a), supra note 27, Introduction of the Thesis.157^Id.158^Id.(3) Selective Safeguard Measures and QuantitativeRestrictions Effective Solutions to the Unfairly TradedExport Problem?Since the existing GATT provisions cannot provideadequate remedies for unfairly traded exports from China,GATT member countries may request additional "safeguard"measures. "Selective safeguard" and "quantitativerestriction" may be suggested as solutions to remedy againstthe unfairly traded exports from China.(a) Selective Safeguard MeasureThe selective safeguard measure refers to the safeguardmechanism provided in the GATT Article XIX on a non-MFNbasis. GATT member countries would most likely use it as ameasure against unfairly traded exports from China. Namely,they would suspect their obligation in whole, or in part orto withdraw or modify their concessions only to theparticular products exported from China instead of the sameproducts from other countries when they find that increasedquantities of the imports cause or threaten serious injuryto a domestic industry. These restrictions can bemaintained for such time as a member country deems necessaryto prevent or remedy the alleged injury.The economic rational of taking selective safeguardmeasures is that it can penalize the most efficient11producers 159 . From the importing countries' point of view,it has the advantage of avoiding the risk of massiveretaliation or potential for widespread political antagonismengendered by global import restrictions 160 . This measurewill help to alleviate the fears among the GATT membercountries of China's huge labor-intensive industries andunfairly traded export practice.This mechanism has been subject to a lot of criticism.Critics argue that the selectivity will not deal with theproblem of international reallocation of resources 161 .Since it is directed against the "trouble maker" which isthe most efficient competitor, it contradicts with the needsof optimal world allocation of resources and of theefficiency of the international trading system162 . Also,the penalized country will sell its surplus on a thirdcountry's market which may cause a chain reaction 163 .Selective safeguard measures have been employed toother NME countries when they joint the GATT. The protocolsof Poland, Rumania and Hungary contain the provisions that159^Victoria Curzon, Price Surplus Capacity and What the Tokyo Round Failed to Settle, 2 WorldEconomy, at 305-312, (1979).160^Under MFN based safeguard measures, since the importing restriction has to be imposed on allthe countries exporting the same products, all these exporting countries may retaliate against the importcountry. See M.C.E.J. Bronckers, Selective Safeguard Measures in Multilateral Trade Relations, at 69.161^Patrizio Merciai, Safeguard Measures in GATT, Journal of World Trade Law, at 51-52, (1981).162^Id, at 52.163^Id.1:allow Contracting Parties to take emergency action solelyagainst that non-market economy country responsible forinjurious imports 164 . The provision, however, haveimportant disadvantages for these countries. As the onlycountries subject to this special safeguard clause, thesecountries may find it difficult to lift import restrictionsto negotiate compensatory remedies for the reason that theyhave fewer means of retaliation than a group of countrieshurt by withdrawal of concessions under Article XIX ofGATT165 . In addition, although the protocols of thesecountries allowed the member countries to gradually relaxall the existing discriminatory restrictions, includingselective safeguard measures against the acceding country,there were no clear target dates or objective guidelinesprovided in the protocols 166 .Same problems would happen if selective safeguardmeasures apply to China. China would feel that itsretaliation act would be less effective than working with agroup of other countries.164^All three protocols allowed GATT Contracting Parties to restrict trade if imports from thatcountry "caused or threatened serious injury to domestic producers of like or directly competitiveproducts". See Protocol for the Accession of Poland to the General Agreement on Tariffs and Trade,BISD, at 46, June 30, 1967; Protocol for the Accession of Romanian to the General Agreement on Tariffsand Trade, BISD, at 5-7, (October 15, 1971), (18th Supp. 1976); Protocol for the Accession of Hungaryto the General Agreement on Tariffs and Trade, BISD, at 3-5, August 8, 1973, (20th Supp. 1974).165^Kostechi, supra note 9, Chapter 1 of the Thesis, at 107.11166^Id.(b) Quantitative RestrictionsThe GATT member countries may place direct limits onthe quantity (or value) of the imports solely from China incase market disruption occurs.^These quantitativerestrictions are generally prohibited by GATT 167 .^Also,GATT was opposed to imposing discriminatory quantitativerestrictions168 In practice, however, these measures weremaintained by some member countries, particularly by the EECand Nordic countries against the products from NMEcountries. The accession protocols of Poland, Hungary andRomanian each contain a paragraph permitting the use ofdiscriminatory quotas with certain limitations 169 . Theseprovisions, however, are not successful.Aside from the problem of vaguely worded provisions,disputes over interpretation arose because there is notarget date for elimination of the quantitativerestrictions. Poland has not been able to negotiate a finaldate for the so-called transition period at the end of whichcomplete elimination of quotas is to be achieved 170 . TheRomanians were able to negotiate a termination date for the167^GATT Article XI, provides for the general prohibition of quantitative restrictions. There are,however, some exceptions such as allowing imposition of quota in case of safeguarding foreign exchangeresource, etc.168^GATT Article XIII, supra note 27, Introduction of the Thesis.169^Kostechi, supra note 9, at 107, Chapter 1 of the Thesis.170^Id.1]transition period, but only as an objective, and with thecondition that, "for exceptional reasons", "a limitednumber" of restrictions could remain in force thereafter,subject to review by a working party. 171 But one canquestion whether there is any substantive value to thisobjective as it was only "the objective" not "theobligation" to eliminate the quotas by the final date. Asto Hungary, no target date for the complete elimination isprovided in the protocol, but notification and examinationof any quota remaining after 1 January 1975 is required 172 .These "notifications" and "examinations" createdcontroversial.In addition, there is a problem of monitoringcompliance (enforcement). Although the member countries arerequired to notify the GATT, and working parties arerequired to examine measures taken to achieve theelimination of quotas, NME countries complain thatinformation on such measures is insufficient to permitmeaningful monitoring 173 .From the Chinese government's point of view, it wouldstrongly oppose to the imposition of selective safeguardmeasures and quantitative restriction on its exports to the171^Protocol of Romanian's Accession to the GATT, BISD, supra note 164.172^Protocol of Accession for Hungary, BISD, supra note 164.173^Supra note 254, at 194.1]GATT member countries on the basis that it is discriminatorytreatment and, thus, contrary to the GATT principles. TheChinese government views that the employment of selectivemeasures and quantitative restrictions serves only toperpetuate discriminatory restrictions by major tradingpartners against imports from itself and other developingcountries 174 .The Chinese government also argues that the additionalcontrols of its export are unnecessary because the economicreform has brought in rationalization of foreign tradingsystem175 . The price of export products reflects marketsupply and demand. Subsidies granted by the government havebeen reduced. If the assertion was true, the additionalcontrol would have been unnecessary. However, as previouslydiscussed, the economic reform has not been carried out tothe degree stated by the Chinese government. In the exportarea, the distortion of price of exported products stillremain. Subsidies appear to be reduced as they are seldomreferred to in the publications 176 . However, subsidiescontinue to exist in various hidden forms. Therefore, theargument of Chinese government is not convincing.174^Li, supra note 1, Chapter 1 of the Thesis, at 36.175^Li, id, at 38.176^A variety of Chinese publications, especially the newspapers and trade magazines used to reportthe achievement of foreign trade industry. Government support such as subsidy, was in the content of thereports.11(4) Generalized System of PreferenceChina has argued that since it is a developing country,it should benefit under the Generalized System of Preference(GSP) 177 . Under the GSP, a developing country is allowed toenjoy special tariff concession granted by developedcountries. The system is a derogation from the MFNprinciple of GATT. China currently enjoy GSP benefit formany of its export programs from most of the developedcountries except the United States.China's claim in GSP benefit seems logical from thehistorical point of view that China has been granted thebenefit bilaterally from most developed countries. It alsocan be justified under the provisions of GATT. Part IV ofGATT provides the basic principle of preferential treatmentfor a developing country. Article XXXVI explicitlystipulates that developed countries should provide"increased access in the longest possible measures" 178 tothe products 179 from developing countries considering thatthe export earnings of developing countries depends on itsessential imports 180 . Thus, China would argue that as adeveloping country, its export earnings play a vital role in177^Li, supra note 1, Chapter 1 of the Thesis, at 30.178^GATT Article XXXVI, 4, 5, supra note 27, Introduction of the Thesis.179^The products includes primary processed and manufactured goods. Id.180^GATT', Article XXXVI, 1(b).12its economic development and it relies on essential importsfrom other countries, therefore, it is entitled to"increased access" under more favorable conditions to GATTmember countries.From practical point of view, China's claim on GSP maynot be acceptable by the member countries. GATT membercountries are reluctant to give China the absolute GSPbenefit without the guarantee of further commitment onChina's part. They are afraid of a flood of Chineseproducts into their market. The U.S. attitude towards Chinain the past was a typical example.The U.S law formerly prohibited the extension of GSPtariff concessions to China's exports although there was aprovision in the 1979 U.S.-China Trade Agreement expresslyrecognizing China as a developing country181. The 1984Trade and Tariff Act contains a general prohibition againstextending GSP treatment to communist countries182 . Theprohibition may be lifted at the President's discretion incases of certain communist countries that are members of theI.M.F. and member countries to GATT183 However, GATTmembership is only a prerequisite to the invocation of the181^Agreement on Trade Relations Between the United States and China, 31 U.S.A. 4651, ArticleII, paragraph 3 states: "The Contracting Parties note, and shall take into consideration in the handling oftheir bilateral relations, that, as its current state of economic development, China is a developingcountry".182 19 U.S.C. 246(b)(1)(1982).183^Id.12discretionary criteria. The President must examine indetermining a country's eligibility for GSP status. Thereare other requirements which are political in nature, suchas the President must consider whether the country seekingeligibility is providing satisfactory protection tointangible intellectual property of foreign nationals;whether the country is properly recognizing internationalarbitration awards etc. 184.The U.S. attitude against granting GSP to China as partof China's GATT membership has been changed since October1992 when U.S. signed the agreement (the P.R.C.-U.S.Memorandum of Understanding Concerning Market Access,hereafter refer to "MOU"). In MOU, the U.S. specificallystates that it will support China's application to theGATT185 . Thus, the prerequisite for granting GSP is met.However, the actual granting of the status will depends onthe further negotiation between the two countries.SummaryChina's unfairly foreign trade practices presentsignificant threat to the GATT system. The existing GATTrules are inadequate to deal with NME. Also, in practice,184^19 U.S.C. S2462(1)-(c).185^Article VIII of MOU provides: "The U.S. government will staunchly support China'sachievement of contracting party status to the GATT and will work constructively with the ChineseGovernment and other GATT contracting parties to reach agreement on an acceptable "Protocol" andthen China's rapid attainment of contracting party status."the application of the rules to NME countries is far morefrom satisfactory. Given China's huge labour resources andits status of one of the world's largest central plannedeconomy countries, it is impossible for GATT to grant Chinathe membership within the existing GATT framework.Additional commitment has to be undertaken by China.As to the additional commitment, the traditionalmethods, such as selective safeguard measures and quantativerestrictions, used by GATT to deal with the unfairly tradedexport from NMEs have many problems. Moreover, the Chinesegovernment will feel being offended by accepting theadditional commitment because of its discriminatory nature.China's claim of GSP status is reasonable in the sensethat it is a developing country. The previous resistanceagainst the granting GSP to China, particularly from theU.S. has been lessened due to the recent agreement betweenthe two countries (MOU).The ultimate solution to the problem will depend onChina's further economic reform. Although the reform of thepast decade has resulted significant changes in the domesticeconomy and the foreign trade system, it is far more fromsufficient to allay the fears of GATT member countries.Further decentralization in the export area is needed aswell as in other aspects of the economy.Chapter 5China and GATT - A Possible CompromiseThe previous discussion indicates that despite thesubstantial economic reform, neither China's foreign tradesystem nor its domestic economic structure has been changedto the degree of market orientation required by the GATT.This might lead to the conclusion that China's GATTapplication should be rejected.From practical point of view, the conclusion is notacceptable to either China or GATT. Given the size ofChina's population and its potential impact on the worldeconomy, China should not be excluded from GATT---one of themost important international trade organizations. As onecommentator pointed out:"with a country the size of China excluded, GATT can hardlyclaim to be global. The refusal of China's applicationwould be close to an admission that GATT is not capable ofdealing effectively with economies other than those ofwestern industrial democracies."1^Paul D. McKenzie, China's Application to the GATT: State Trading and the Problem of MarketAccess, 24 J. of W. T. L., at 151, 1990.1;Moreover, GATT membership does not only means rightsand benefits to China, it also imposes on China a number ofobligations. The most important obligation will be thatChina must continue reforming its economic system to conformto the GATT principles. Excluding China from GATT woulddiscourage China's economic reform, and might push it backto the former centralized economy. Therefore, "thedisruptive threat of the Chinese economy is greater outsidethe GATT than within it.... There is no better way to dothat than to tie its economy into the liberal regulatorystructure of the GATT." 2In short, despite the insufficiency of the Chineseeconomic reform and the uncertainty of its future direction,GATT member countries are still motivated to facilitateChina's membership application. No doubt, this will requireserious efforts from both GATT and China to facilitate theprocess. The following will discuss the possible compromiseswhich might be reached between the both sides.I.^The Possibility of Accession Solely on the Basisof Tariff ConcessionsAs discussed in Chapter 2, reducing the tariff rate inChina will not automatically result in increased imports2^Id.from member countries. China, however, might point toYugoslavia accession as precedent for its admission on thebasis of tariff concessions alone. But, the situations inYugoslavia is quite different from those in China.Yugoslavia implemented more significant economic reformprior to becoming a full GATT member.In Yugoslavia, by the time of GATT accession, itseconomic structure and foreign trade system was extensivelydecentralized 3 . The Report of GATT Working Party onAccession of Yugoslavia illustrated the significant changeas follows 4 :(1) The enterprises were independent entities. Theyhave independent authority to determine theoutput, quality, and prices of their productsaccording to market supply and demand. They alsohave authority to decide on how profits and wageswere to be distributed. This system also apply tothe foreign trade enterprises. This makes foreignproducts competitive in the Yugoslavia domesticmarket.(2) The government increasingly limited itsintervention. The enterprises were not subject to3^China Academy of Social Science Delegation Report on the Economic Inspection to Yugoslaviaand Romanian, at 277.4^Basic Instrument and Selected Documents (BISD), at 52-53, (1966).1 ;the control of both central and local governmentexcept the normal financial and health controls.The National Social Plan set out the main targetssuch as, gross national product rather thanspecific targets. The targets would be achievedthrough the market forces. Government controlcould be only exerted though credit, monetary andbudgetary means.(3) The price reform had led to removal of the price spreviously fixed by government for certain basicindustries. Price control only remained in thefield of daily necessity goods. Generallyspeaking,^Prices are determined by theenterprises themselves.(4) The banking system had been reorganized and allbanks reformed to become independent enterprises.The previous state-owned banks had becomecommercial or investment banks which channel thefunds to the most productive line of investment.Enterprises reliance on public funds forinvestment^and working capital had thus beengreatly diminished.(5) Even though Yugoslavia still used importrestrictions, they were "purely for the purpose ofsafeguarding the balance of payments and themonetary reserves and their administration is12fully in accordance with relevant provisions ofthe GATT." 5These reforms made GATT member countries feel thattrade-distorting internal controls had been reduced to theextent that tariff reduction would create an open market inwhich foreign suppliers could compete effectively with localproducers.. Therefore, Yugoslavia was allowed to accede tothe GATT solely on the basis of tariff concessions.Compared with Yugoslavia, China's domestic economicstructure and foreign trading system have not reached alevel of market responsiveness which will be able to providesufficient market access to the member countries. Evenafter the ten year's of economic reform, neither its foreigntrading system nor the other aspects of its economic systemhave necessary economic elements like those in Yugoslavia.As previously discussed, the government plan still maintainsan important role in the national economy. The majority ofgoods are still produced under the central plan 6 . The pricesof many products are still fixed by the state; enterprisesdo not have enough freedom to get supplies of raw materials,5^Id.6 Exploring the Planning System with Chinese Characteristics, Essays on China's EconomicReform at.17.1:fix prices or choose buyers 7 . As to the foreign tradingsystem, the central government, especially MOFERT still hasstrong powers to control the major foreign tradingcompanies. FTC still carries out the major portion ofimports and exports even after the emergence of many othertrading companies 8 . Moreover, China maintains a number ofquantitative control measures over imports 9 .Since China's situation is different from Yugoslavia,GATT member countries would likely to object to anyassertion by China that merely making tariff concessionswill provide adequate access to China's market.II Import Commitment — A Possible Solution?Another possible solution to the market access problemis the so-called "import commitment" which means China willundertake to import a specified amount of goods from theGATT Contracting Parties. Some NME countries, Poland andRomanian have used this mechanism to resolve the marketaccess problem10 .7^It is reported that apart from the price of coal has been reformed, the prices for other rawmaterials still fixed by the government. See Xu Xing, The Implication of China's Economic Reform,  at248.8^Horsley, supra note 1, Chapter 4 of the Thesis, at 10.9^See the discussion on Import Licensing System in Chapter 4 of the Thesis.10^Poland undertook to increase its imports from GATT Contracting Parties by at least 7% eachyear. Romanian agreed to increase imports from GATT Contracting Parties at a rate not smaller than thegrowth in total Romanian imports provided for in its "5 year plans", Protocol for the Accession of1 :The advantage of import commitment is that it willensure the import amount would be increased from the exportcountry. Since it specifies a certain percentage of importincrease. Also, it provides specific data which will be easyto verify. However, as previously noted, the mechanismsuffers many material weakness. Both Poland and Roumanianexperience on import commitment are far more fromsuccessful.In the case of China, the same problem couldhappen if the import commitment mechanism is employed.Moreover, due to China's unique situation, new problemswould likely come up. Firstly, the import commitmentmechanism would not be compatible with China's currenteconomic reform. Under the reform, many decentralizationmeasures have been implemented, such as adoption of the"guidance plan", making the prices of many products freeflouting, granting autonomy to industrial enterprises,decentralizing foreign trade system. However, theimplementation of fixed import commitment would, to a largeextent, rely on centralized control by the Chinesegovernment. For instance, the government has to designatesome foreign trade companies and industrial enterprises tobuy the imported goods to fulfill the fixed importPoland to the GA7T, BISD at 46, (1967). Protocol for the Accession of Romanian to the GATT, BISD at10, (1971).1commitment. Due to the reform, more economic entities havebeen allowed to engage in foreign trade business 11 , and thegovernment has exercised less control. Thus, if the foreigntrade company or enterprises do not comply with thegovernment designation, the government cannot force them todo so and therefore, it would difficult for them to fulfillthe import commitment.Secondly, the inflation factor would significantlyundermine the effect of this type of import commitmentmechanism if the commitment is based on current RENMINBI 12 .Although the same problem exists in other NME GATT membercountries, like Poland and Romanian, China's situation ismuch more threatening. The Chinese inflation rate has beenincreasing very rapidly over the past several years 13 . IfRENMINBI remain devalued at the current inflation rate, theimport commitment would be meaningless.Thirdly, the commitment could create seriouseconomic and social problems in China. The import commitmentwould result in the importation of a substantial amount ofproducts into China's market. Thus it would threaten China'sdomestic industries. Since the development of most domestic11^Horsley, supra note 1, Chapter 4 of the Thesis, at 3.12^Renminbi, (RENMINBI) is current Chinese currency.13^Lu Fan7hi, China's Economic Reform and Adjustment, at  286, (1986).1:industries in China is still far behind many developed GATTmember countries, the Chinese government has always stressedthe necessity of protecting infant domestic industries fromthe distortion of foreign producers 14 .Because of these problems, the fixed importcommitment mechanism may not be appropriate for China. Fromthe GATT Contracting Parties' point of view, the mechanismmay not be satisfactory for them either. Since thecommitment fixes a maximum percentage of import, once thepercentage is reached, the foreign exporter would not beallowed to export any more. Thus, it would not provideequivalent market access in return for giving GATT benefitsto China.Moreover, the import commitment mechanism does notrestrict administrative measures on import restriction. Onthe contrary, it would encourage the Chinese government todecide what kind of products should be imported. the foreignexporter may find that their products have difficultycompeting with Chinese domestic product. The substantialweakness with the import commitment scheme suggests thatneither China nor the GATT member countries would be likelyto accept an import commitment as a proper solution forChina's GATT admission.14^Li, supra note 5, Chapter 1 of the Thesis, at 38.13III Other Alternatives(1) Restriction on "Mark-Up"It has been suggested that China could be requiredto restrict the mark-up it adds to the price of imports toprevent it from pricing imported products so high that theyhave no chance to compete with domestically- madeproducts 15 . This approach may not work for China either.Even if the price of an imported product is kept low byrestricting the mark-up, the central planning measures, suchas the requirement to purchase domestic products orreduction of prices of domestic-made products, could stillprevent Chinese consumers from purchasing the importedproducts. Moreover, the economic reform make it difficultfor China to control the prices established by independenteconomic entities.(2) Adoption of "Transparent Criteria"Another alternative would be for China to adoptthe "transparent criteria" which is provided in the GATTGovernment Procurement Code 16 . This would require China topublish the bid opportunities and explain the criteria bywhich purchasing decisions would be made 17 . This approach15^See Heinstein, China & GATT, supra note 24, Chapter 2 of the Thesis, at 390..16^See Agreement on Government Procurement, BISD, 26th Supp. at 33, (1980).17^Article V, Id.13might help to solve the problems caused by the arbitrarypurchase decisions made by the Chinese governmentHowever, the implementation of this approachpresent difficulties. It would be difficult for the Chinesegovernment to publish its major decisions on imports. In thepast, the decisions relating to import and export are"important national economic information" 18 , thus subject tothe confidentiality requirements. The document containingthe decisions is labelled as "internal document" 19 whichmeans that public has no access to it. The governmentsensitivity to its foreign trade information has not beenmuch changed even with the economic reform. This can beillustrated from the recently adopted the State Secret Lawand its Implementing Procedure. According to the law, anyinformation "damaging the political or economic interests ofthe State in its foreign-related activities" are subject tothe scope of confidentiality. 20 This makes the adoption ofthe "transparent requirement" difficult.18^In Chinese, it is called guoiia zhongyao jingii qingbao. The reason for the government toinclude the information regarding foreign trade is that a lot of the foreign trade policies and practices areinconsistent with those of international trade, such as subsidy (for detailed discussion, see Chapter 4 ofthe thesis.). Therefore, public disclosure of these information will be against its interest.19^In Chinese, it is called nei bu wen jinn. 20^Article 4, iii, P.R. C. Maintenance of State Secrets Law Implementing Procedures, reprinted in 4China Law and Practice, at 44, (1990).13A compromise which might be reached between GATTand China was suggested in the recent Sino-U.S. negotiationregarding market access issue 21 . In the memorandum ofunderstanding (MOU) reached between the U.S. and China inOctober, 1992, China agree to publish all current laws,regulation and policies concerning its customadministration, import and export restrictions, etc. 22 . Thisinformation will be published in an official journaldesignated by Chinese government23 .It is interesting to note that this disclosurerequirement does not extend to "the confidential informationwhich would impede law enforcement or otherwise be contraryto the public interest or would prejudice the legitimatecommercial interests of particular enterprises, public orprivate." 24 Obviously, the exempted of disclosure of theconfidential information reflected the compromise made fromthe U.S. side. However, it suffers from ambiguity. For21^People's Republic of China-United States: Memorandum of Understanding Concerning MarketAccess (MOU), Signed at Washington, October 10, 1992, Cite as 31 I.L.M. 1274, (1992).22^Article 41) MOU provides "The Chinese Government will publish on a regular and prompt basisall laws, regulations, rules, decrees, administrative guidance and policies pertaining to the classificationor valuation of products for customs purposes, or to rates of duty, taxes or other charges, or torequirements, restrictions or prohibitions on imports or exports or the transfer of payments therefore, oraffecting the sale, distribution, transportation, insurance, warehousing, inspection, exhibition,processing, mixing or other use of imports or exports. Such information will include the quantity orvalue to be imported of any products intended to be imported, and other relevant commercialinformation, such as projects which could involve imported products." supra note 21, at 1275.23^Article 1(4) of MOU, supra note 21, at 1275.24^Article I(1) of MOU, supra note 21, at 1275.13instance, what constitutes "the legitimate commercialinterests of particular enterprises"? This term is notdefined in the MOU. The ambiguity of the term may allowChinese government to argue that a lot of the information iswithin "the legitimate commercial interests - of particularenterprises", thus exempt from disclosure.Despite of the ambiguity, MOU reflects the seriousefforts made by the U.S. and China to solve the transparencyproblem. This indicates that the transparency problem can beresolved between GATT and China through the similar type ofagreement.(3) The Milestone ApproachThe other possibility to solve the problem is the"milestone approach" suggested by Mr. Heinstein 25 . Hesuggested that China's accession to GATT should be realizedin a series of steps---information gathering, establishmentof milestones, tariff negotiations, experimentalassociation, phase in of GATT benefit, and finally GATTmembership26 . This approach has several advantages. Itaddresses the concern of member countries that immediatefull membership to China would cause unbalanced benefit.Also, it gives China time to further reform its economy. In25^Heinstein, supra note 24, Chapter 2 of the Thesis, at 410-414.1326^Id, at 410-413.the meanwhile, the member countries can monitor China'sreform progress. However, this approach has been criticizedas not appropriate for China 27 . McDonell thinks that pace ofChina's economic reform is slow, thus it may take long timeto achieve the first stage. He would rather adopt a "one butfor all" policy to provide China with positive spur tochange. His argument seems plausible given the way China'sreform takes and the goal intended to achieve by the Chinesegovernment.(4) Negotiated Accession - the 1992 U.S.-P.R.C."MOW" ApproachGATT article XXXIII provides that a country canaccede to GATT "on terms to be agreed" between the countryand the GATT 28 (referred to as "negotiated accession"). Theadvantages of this approach are : 1. flexibility: the termsof the agreement does not have to be set out exactly asthose of GATT. Parties to the agreement can set out theterms which they think of importance to them. 2.bilaterally: the agreement can be reached upon between twoparties, for example, China and U.S., rather than amongmultilateral parties.27^McDonald, China's Move to Join the GATT System, An Epic Transition, 10 World Economy, at346, (1987).28^GATT article XXXIII, supra note 27, Introduction of the Thesis.13This approach has been reflected in the MOU. InMOU, Chinese government agreed to undertake the followingcommitments:1. eliminating all import restrictions quotas, licensingrequirements on the products provided in the Annex of theMOU29 ;2 assuring that it has abolished all import substitutionregulations, policies and will not subject any products toany import substitution measures in the future";3. confirming that it will reduce tariffs that were raisedsince 1988 in certain areas31 ;4. assuring that it will publish all current laws andregulations concerning custom administration and importrestrictions in a designated official journal subject to theconfidential requirement. China will maintain tribunals andprocedures for review of administrative actions 32 .In exchange for these commitments from Chinesegovernment, the U.S. agrees to29^Article II of MOU, supra note 21, at 1275.30^Article III of MOU, id.31^Article V of MOU, id.32^Article I of MOU, id.131. considering liberalizing export control lists andprocedures, and considering liberalized treatment ofcomputer exports for civilian use 33 ;2. terminating the ongoing investigations of the marketaccess barriers of China; and supporting China to become aGATT member 34 .Although there are some ambiguity in the agreementand thus require further interpretation, the MOU reflectsthe serious efforts made by both China and U.S.. It provesthat a compromise can be made between the GATT membercountries and China as long as the both sides are takingpractical approach to solve the problem.SummaryThe issue of integrating China-a big NME countryinto the GATT system is a difficult one. Other GATT NMEcountries' experience may serve as precedent. But sinceChina's situation is different, GATT would treat China as aspecial case. China's economic reform may provide asatisfactory solution to the issue if it is sufficient andfar reaching. However, the frequently changed policy of the33^Article VI of MOU, id.34^Article VII of MOU, id.13Chinese government and unstable speed of the reform makefuture directions the reform uncertain. Thus GATT isreluctant to admit China as a member under the currenteconomic conditions. GATT requires China to take furthereconomic reform and eliminate massive central control beforeit obtains the membership.However, a new approach has been taken by the U.S.recently. The agreement between U.S. and China on the marketaccess issue serves as an example that a compromise can beworked out under China's current economic condition. Thus,GATT does not need to wait for China to become a marketeconomy country in order to grant it the membership. Thisrequires both China and GATT to make serious commitments.Therefore, as long as the both sides are realistic andwilling to make the compromise, the issue China's GATTmembership should not be too difficult to resolve.14ConclusionNME countries' participation in the GATT systempresents difficult problems, both in theory and in practise.As one of the largest NME country in the world, China'sapplication to the GATT presents more challenges to the GATTsystem.The experience of other NME countries' accession to theGATT might provide precedents for China to some extent.However, due to substantial weakness of the scheme, it maynot be appropriate for China. Moreover, given China's hugetrading potential and the status of the one of the largestNME countries, the GATT will demand China to pay more"admission fees" than those NME countries which haveobtained the GATT membership.During the past decade, China has been going throughthe economic reform which has brought in significant changesto its economic system. No doubt, the reform will havepositive influence on China's GATT application. However, thereform is far from sufficient to meet the GATT requirement.As previously discussed, at present, the domestic economicsstructure still lacks the basic characteristics of those inthe free market economy system. The foreign trade system hasnot been substantially decentralized. Moreover, theuncertainty of the future direction of the reform remains.1These factors will make the GATT reluctant to give Chinafull and immediate membership.However, practically speaking, GATT should not excludeChina-a big trading partner in the world. Thus, a variety ofaccession methods have been proposed, including importcommitment, gradual accession (milestone approach), andnegotiated approach (the MOU approach). These methods allhave pros and cons. The traditional import commitment willnot be an attractive method due to its rigid requirement anddifficulty of practical implementation. Gradual accessionmay be a good mechanism since it gives both GATT and Chinatime to familiarize and adjust to each other. However, itmay take long time before China obtains the membership. TheMOU  approach provides a practical solution. It allows Chinato be admitted to the GATT under the current economiccondition. This accession is based on the commitments fromthe both U.S. and China. Therefore, as long as the bothsides are willing to make commitments and make compromise,China's immediate accessions to the GATT is not impossible.With respect to the procedure issue, although thepolitical significance may not be ignored, it should not beoverstated because the issue will, to a large extent, dependon the substantial issues.1,BIBLIOGRAPHYBOORS:John H. Jackson, William J. Davey, Legal Problems ofInternational Economic Relations, (1986).John H. Jackson, William J, Davey: Documents Supplements toLegal Problems of International Relations, (1986).John H. Jackson, World Trade and the Law of GATT (1969).K. Kamm, The GATT, Law and International EconomicOrganization, (1970).M.M. Kostechi, East-West Trade and the GATT System, (1979).M.C.E.J. Bronchers,^Selective^Safeguard^Measures^inMultilateral Trade Relations, (1985).A.W. Hooke, The Fund and China in the International MonetarySystem, (1983).Harish Kapur, China and the EEC, the New Connection, (1986).Colina MacDougall, Trading with China, (1980).1,David C. Buxbaum, Cassandra E. Joseph, Paul D. Reynolds,China Trade, (1982).Zhang Peiji, Ralph W. Huenemann, China's Foreign Trade,(1987).Guiding Book on Trading with the P.R.C., (1984).Almanac of China's Foreign Economic Relations and Trade,(1985), (1986).Estrin, Self-Management:^Economic Theory and YugoslaviaPractice. Lu Fanzhi, China's Economic Reform and Adjustment, (1986).Shanghai Academy of Social Science, Selected Essays onChina's Urban Economic Reform, (1984).Yang Zixuan, The Principles of Economic Law, (1987).China Academy of Social Science, the Exploration of China's Planning Reform, (1987).1,Xu Xing, The Study on China's Economic Reform, 1985.Keith Griffin, The Structure Form and Economic Developmentin China's Rural Areas, (1987).World Bank, China's External Trade and Capital, (1988).Wang Wei Chen, Gao Shang Quan, Liu Guo Guang, The NewThoughts on the Economic Reform, (1988),China University of Political Science and Law, the Reviewand Perspective of Our Country's Economic Reform, (1987).Yu Guang Yuan, China's Sociolist Economy, (1984).A. Doak Barnett, China's Economy in Global Perspective,(1981).Selection of Important Documents since the Third PlenarySession of the Eleventh Congress of the Chinese CommunistParty, Vo1,1,2,3, (1982).Selection of Important Documents Since the Twelveth Congressof the Central Committee of the Chinese Communist Party,Vol.1,2,3, (1986).14GATT Activities 1987 GATT Activities 1988,Rosalie L. Tung, Chinese Industrial Soceity Ater Mao,(1982).World Bank, A World Bank Country Study: China-Between Planand Market, (1990).Hadden, Company Law & Capitalism, (1977).Fei Zongwei, Xu Jie, China's Economic Law Text, (1990).D. Gale Johnson, Progress of Economic Reform in the People'sRepublic of China, (1982).ARTICLESRobert G. Heinstein, China and the GATT: Legal and PolicyIssues by China's Participation in the InternationalAgreement on Tariffs and Trade, 18 Law and Policy inInternational Business, at 371-415, (1986).Chong-chou Li, Resumption of China's GATT Membership, 21Journal of World Trade, at 25-48, (1987).Feng Yu-shu, China's Membership of GATT:^A PracticalProposal, 22 Journal of World Trade, at 53-70, 1988.Roy Baban, State Trading and the GATT, 11 Journal of WorldTrade, at 334, (1977).Grzybowski, Socialist Countries in GATT,^28 AmericanJournal of Comparative Law, at 539, (1980).M.M. Kostecki, Hungary and GATT, 8 Journal of World TradeLaw, at 401, (1974).Bohdan Laczkowski, Poland's Accession to GATT, 5 Journal ofWorld Trade Law, at 110, (1971).James M. Reuland, GATT and State Trading Countries, 9Journal of World Trade Law, at 318, (1975).Eliza R. Patterson, Improving GATT Rules for NonmarketEconomies, 20 Journal of World Trade Law, at 185-205,(1986).Patrizio Merciai, Safeguard Measures in GATT, 15 Journal ofWorld Trade Law, at 41-66, (1981)Edmond Ianni, The International Treatment of State Trading,16 Journal of World Trade Law, at 481, (1982).William P. Alford, When is China Paraguay? - An Examinationof the Application of the Antidumping and Countervailing14Duty Laws of the United States to China and other Non-marketEconomy Nations, 61 Southern California Law Review, at 79-126, (1987).James V. Feinerman, The Evolving Chinese Enterprise, Syr. J.Int'l L. & Com. at 204-214, (1989).Paul Schroeder, Rebuilding China's Securities Markets, TheChina Business Review, at 20-21, (1991).Clement Shum, The State-owned Industrial Enterprise Law inthe People's Republic of China, Business Law Review, at 125-146, (1989).Henry Zheng, An Introduction to the Labour Law of thePeople's Republic of China, 28 Harvard International LawJournal, at 385-432, (1987).Jamie P. Horsley, The Regulation of China's Foreign Trade,in The Law of Foreign Trade and Investment in the People'sRepublic of China, at 6-31, (1988).John J. Sullivan, U.S. Trade Laws Hinder the Developments ofU.S. - People's Republic of China Trade, 22 Columbia Journalof Transnational Law, at 135, (1983).14Madelyn C. Ross, Foreign Trade Offensive, China BusinessReview, at 34-36, (July-August 1987).Karl P. Herbst, Export Incentives and the GATT People'sRepublic of China Practices, Remarks delivered to theAmerican Chamber of Commerce in Hong Kong, (September 10,1986).John Kamm, Import Controls in the P.R.C., Remarks deliveredto the American Chamber of Commerce in Hong Kong,(September 10, 1986).Kenneth T.K. Wong, The New Import Quality Control Measures,10 East Asian Executive Reports, (1988).Chu, Communist China's Attitude toward the United Nations: ALegal Analysis, 62 American Journal of International Law, at20, 1968.Natalie G.^Lichtenstein,^China's Participation inInternational Organization, The China Business Review, at28-35, (May-June 1979).Paul D.MacKenzie, China's Application to the GATT: StateTrading and the Problem of market Access, 24 Jounal of WorldTrade, at 133-158, (1990).14OTHER PUBLICATIONSPeople's Republic of China-United States: Memorandum ofUnderstanding Concerning Market Access, (Singed atWashington, October 10, 1992), Cite as 31 I.L.M. 1274(1992).China's Status as a Contracting Party Memorandum on China'sForeign Trade Regime, Intertrade, February 1987.The Sino-U.S. Trade Agreement (Signed on July, 1979), Citein The China Business Review, at 24-26, (July-August, 1979).NEWSPAPERS, MAGAZINES, REPORTSIntertrade (guoji maoyi)International Trade Issues (guoji maoyi wenti)China Economic News (zhongguo jinji xinwen)China DataBase Economics and Foreign Trade (zhonguo jinji yuwaimao shuju)The State Council Gazette of the People's Republic of China(zhonghua renmin gongheguo guowuyuan gongbao)People's Daily (renmin ribao)Economic Daily (jinji ribao)The World Economic Herald (shijie jinji daobao)International Business (guoji shangbao)China Trade Report, Hong KongThe China Business ReviewFar East Economic ReviewEast Asia Executive ReportsWashington PostNew York TimeslE


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