September 18, 2015 Trade Policy Staff Committee Office of the US Trade Representative 600 17th Street NW Washington, DC 20510 Re: China’s WTO Compliance, FR Doc. 2015-19523 To the members of the TPSC: The US-China Business Council (USCBC) is pleased to submit its analysis of China’s compliance with its World Trade Organization (WTO) commitments for your October 7, 2015 hearing. USCBC is in regular contact with your agencies regarding the concerns our members have about the business operating environment in China. This submission is a summary of key WTO-related issues US companies face in China. Also attached are recent USCBC reports on several of the issues, including comments that USCBC has submitted on recent Chinese laws and regulations: USCBC Reports USCBC Annual Membership Survey, September 2015 USCBC Economic Reform Scorecard, June 2015 USCBC Report on Competition Policy and Enforcement in China, May 2015 USCBC Report on Indigenous Innovation and Government Procurement, May 2015 USCBC China Regulatory Transparency Scorecard, March 2015 USCBC Board Priorities Statement, January 2015 USCBC Comments USCBC comment letter on competition and intellectual property, September 2015 Multi-association comments on CBRC draft regulations, September 2015 USCBC comment letter on the Cybersecurity Law, August 2015 USCBC comment letter on the NGO Management Law, June 2015 USCBC comment letter on the National Security Law, June 2015 Multi-association letter on CBRC policies, April 2015 USCBC comment letter on the Foreign Investment Law, February 2015 USCBC Special 301 Submission, February 2015 USA HEAD OFFICE 1818 N Street, NW Suite 200 Washington, DC 20036 BEIJING Tel: 202-429-0340 Fax: 202-775-2476 Email: [email protected] www.uschina.org SHANGHAI USCBC submission September 18, 2015 Page 2 China remains a priority market for American companies, despite the slowing economy and challenging business environment. By USCBC calculations, China is a $400 billion market for American manufacturers, service providers, and farmers1. Though American companies have come under greater pressure due to rising costs and growing competition, 85 percent of USCBC members operating in China are profitable and close to half saw double-digit revenue growth last year. China, along with the US, will be a significant driver of global economic growth in the years ahead, and continue to be a strong contributor to US economic and job growth. While China presents important opportunities for American companies, the market also presents significant challenges. As USCBC has reported in the past, China is often in compliance with the letter of its WTO commitments, but not the spirit. American companies face many challenges in China as a result, from using national security provisions as a means to favor domestic companies to the lack of transparency and due process in competition-related investigations. As a result of these challenges and others, more American companies are becoming increasingly uncertain about China’s future policy direction. To address the challenges American companies face in China, it is imperative that the United States continue and deepen its robust, high-level engagement with China. Through the US-China Strategic and Economic Dialogue (S&ED) and the US-China Joint Commission on Commerce and Trade (JCCT), we have seen steady progress on a number of issues. As the United States and China continue their work in these forums—and through negotiations on a Bilateral Investment Treaty (BIT)—we hope further progress can be made in opening China’s market and in creating a more level playing field for American companies. In recent months, the bilateral relationship has faced heightened tensions. We should not allow tensions to erode the strong economic relationship between our two countries. While our countries may not see eye-to-eye on all political and strategic matters, our economic relationship is one that benefits both nations. Toward that end, we recommend that the US government reiterate its intention to honor the provisions of China’s Accession Protocol to the World Trade Organization (WTO) and treat China as a market economy starting in December 2016, 15 years after its accession to the WTO. Doing so would be an important reinforcement of the United States’ commitment to both the rule of law established under the WTO and to our commercial relationship with China. Market Access Barriers and the BIT The overwhelming majority of US companies are doing business in China to access the Chinese market. However, China’s continued prohibitions on investment in nearly 40 sectors limits the types of operations many companies can maintain and the services they can provide there. For instance, foreign law firms are severely restricted in their China practices.2 These restrictions— and others—make the opportunities that would be provided by a US-China BIT critical. These 1 Estimate combines US exports to China and sales of US affiliates in China, with adjustments to eliminate double- counting, and includes US exports that pass through Hong Kong to China. 2 See “US-China Business Council Brief: Legal Market Access Issues in China,” June 2013, Available at http://uschina.org/reports/legal-services-market-access-report-2013 USCBC submission September 18, 2015 Page 3 negotiations are an opportunity to address many of the challenges USCBC members face in China and to expand critical market access for American enterprises. USCBC strongly supports the Obama administration’s continued work on the BIT negotiations. The BIT has the potential to eliminate significant barriers in the China market, and remains the top priority in the US-China economic relationship. To win the support from USCBC members and US industry that will be necessary for its enactment, the BIT must significantly reduce foreign ownership barriers and cover all aspects of China’s economy except a narrow list of excluded sectors. We encourage US negotiators to ensure that China’s final negative list offer is not simply a duplicate of their current list of ownership restrictions, but an ambitious offer that opens up China’s market broadly. The BIT will not solve all of the concerns that American companies have in China, but it will provide additional tools to address them. At the same time, the United States must continue to press for market openings and equal treatment prior to the enactment of a BIT. Toward that end, USCBC continues to encourage China to reduce current foreign-investment restrictions immediately — not simply at the end of the BIT negotiations. Doing so will help demonstrate China’s seriousness about its economic reforms, and build crucial support in the United States for the BIT negotiations. Such support will be vital for ultimate approval and implementation of the agreement by the US Senate. Intellectual Property Rights Though China has made progress in protecting investors’ intellectual property (IP), the issue remains a top concern for USCBC members. Companies are concerned with all types of IP, including patents, trademarks, copyrights, and trade secrets. While China has taken some steps year-to-year to improve its IP environment, gains have been modest, with members noting small improvements each year. Concerns remain across all industries, particularly in regards to insufficient IPR enforcement. Together, these issues impact US companies’ bottom lines and diminish the likelihood that companies will create new or expand existing investments in China, especially in innovative industries that China’s policymakers have said they want to promote. While there is no single fix to address the range of challenges companies face in China, companies see common themes in their recommendations to the Chinese government on this issue. First, China should take steps to prevent IPR infringement before it occurs by adopting and implementing tougher deterrents. Such deterrents will not only strengthen protections on US companies’ IP in China, but they will also help China become the more competitive global market it desires to be. China can create effective deterrents in two key ways: by increasing the effective level of fines and damages for IPR infringement, and by replacing the current value- based thresholds for criminal prosecution with a system that applies criminal penalties for commercial-scale infringement, in line with WTO practices. Taking such steps will help American and Chinese companies retain the profits they have earned, allowing them to invest in new products and hire more workers in both markets. USCBC submission September 18, 2015 Page 4 China should also take additional steps to address issues related to specific areas of IPR. Some of these areas include: Increasing resources at the central and local levels to combat IPR infringement; Improving trade secret protection through legislative and enforcement reforms; Establishing and implementing clear and enforceable regulations and policies in IPR- related areas such as competition, standards, taxation, and R&D; Working with industry representatives to discuss outstanding issues with draft policies, such as the draft Service Invention Regulations, Patent Law, Copyright Law, and IP abuse regulations; Creating innovation and government procurement policies that do not discriminate against a company’s IPR based on location of ownership; Restricting the use of compulsory licenses; Promoting better protection of trademarks and copyrights through traditional means and over Internet platforms; and Removing