Q: What are the main trade barriers in China? How can Singaporean firms tackle such trade barriers?
A: Since China joined the World Trade Organization (WTO) in 2001, tariff barriers have gone down quickly. As of November 2011, its average tariff has been reduced from the pre-accession level of 15.3 per cent to 9.8 per cent, which is one of the lowest among developing countries. Moreover, under the China-Singapore Free Trade Agreement, 97 per cent of the products from Singapore now enter China duty-free.
Of course, the low tariff level doesn’t mean that the Chinese trade regime is free from problems; quite the contrary. There have been many problems in the Chinese trade regulatory framework and they have a significant impact on foreign firms trading with the country.
For example, when China joined the WTO, it agreed to treat imports of complete vehicles and automobile parts differently with tariffs of 25 per cent and 10 per cent, respectively.
However, in an effort to boost the development of the local automobile industry, China introduced policies in 2004 which deemed imported automobile parts as complete vehicles under certain conditions.
Furthermore, in addition to the 10 per cent tariff, such imports were subject to an additional charge of 15 per cent, which effectively raised the tariffs for the automobile parts to 25 per cent.
After several unsuccessful attempts to resolve the issue with the Chinese government, exporters of automobile parts persuaded the governments of the US, EU and Canada to bring a formal complaint against China in the WTO in 2006. Trying to defend itself, China first tried to argue that the extra 15 per cent is an internal tax. In the alternative, it argued that it is a tariff measure.
However, the WTO dispute settlement panel ruled against China on both counts.
First, the panel argued, if the measure is an internal tax, then China would violate the national treatment obligation under Article III of the General Agreement on Tariffs and Trade (GATT), which prohibits WTO members from imposing a tax on foreign imports but not on domestically produced products.
Second, if the 15 per cent is a tariff, then China would violate the tariff binding obligation under Article II of the GATT, which prohibits countries from imposing a tariff higher than that which was agreed in the WTO. In conclusion, the panel ruled that the Chinese policies violated WTO commitments and must be changed.
This case provides some interesting lessons for firms trading with China:
First is the complexity of the regulatory framework in China. Based on their experience at home, many Singaporean firms tend to believe that the trade regulations in China are uniform and consistent like in Singapore, but this is not the case. As a huge country, China has many ministries, commissions and agencies at the central government level, as well as several layers of local governments. Like in a piece of complicated machinery, the coordination among the different parts of the government apparatus is difficult and may not work well all the time.
In this case, for example, the decision to impose an additional charge on imported automobile parts was made by the National Development and Reform Commission (NDRC), which is arguably the most powerful agency in the central government. Before the introduction of the policy, China’s trade ministry - the Ministry of Commerce (MOFCOM) - actually tried to persuade the NDRC to abandon the plan, citing concerns of WTO violation. However, as the NDRC is more powerful, it ignored the advice of MOFCOM and went ahead with the policy.
Thus, for Singaporean firms wishing to trade with China, they should not only pay attention to the policies by MOFCOM, but also those of other government agencies as well. Of course, for SMEs, it might be impractical to follow closely all the regulatory developments in China on a daily basis. Instead, they might wish to consult the various trade associations, or regulatory experts in the field. To help the SMEs, the trade associations shall consider organising occasional seminars to brief SMEs on the latest developments.
Second, what is the best approach to tackle such trade barriers? There are several possibilities. First would be administrative litigation against the government - but given the close relationship between the government and judiciary in China, this is not an attractive option. The second option would be lobbying, either through the firms themselves or through the government of the home country - but again the lobbying costs would be prohibitive for SMEs. A third option is through dispute settlement in international forums such as the WTO or the International Centre for Settlement of Investment Disputes (ICSID). As this case has shown, an international dispute settlement mechanism can be very effective in tackling trade barriers, and SMEs might wish to consider this possibility if all else fails.
Henry Gao is an associate professor of law at SMU and Dongfang Scholar Chair Professor at Shanghai Institute of Foreign Trade.
With law degrees from China, the UK and US, he has worked at the WTO Secretariat in Geneva and has been consulted on trade issues by the World Bank, Apec, ADB, the Asean Secretariat and governments of various countries, including China.
2 comments:
Trading with China? Be careful
By HENRY GAO
11 April 2012
Q: What are the main trade barriers in China? How can Singaporean firms tackle such trade barriers?
A: Since China joined the World Trade Organization (WTO) in 2001, tariff barriers have gone down quickly. As of November 2011, its average tariff has been reduced from the pre-accession level of 15.3 per cent to 9.8 per cent, which is one of the lowest among developing countries. Moreover, under the China-Singapore Free Trade Agreement, 97 per cent of the products from Singapore now enter China duty-free.
Of course, the low tariff level doesn’t mean that the Chinese trade regime is free from problems; quite the contrary. There have been many problems in the Chinese trade regulatory framework and they have a significant impact on foreign firms trading with the country.
For example, when China joined the WTO, it agreed to treat imports of complete vehicles and automobile parts differently with tariffs of 25 per cent and 10 per cent, respectively.
However, in an effort to boost the development of the local automobile industry, China introduced policies in 2004 which deemed imported automobile parts as complete vehicles under certain conditions.
Furthermore, in addition to the 10 per cent tariff, such imports were subject to an additional charge of 15 per cent, which effectively raised the tariffs for the automobile parts to 25 per cent.
After several unsuccessful attempts to resolve the issue with the Chinese government, exporters of automobile parts persuaded the governments of the US, EU and Canada to bring a formal complaint against China in the WTO in 2006. Trying to defend itself, China first tried to argue that the extra 15 per cent is an internal tax. In the alternative, it argued that it is a tariff measure.
However, the WTO dispute settlement panel ruled against China on both counts.
First, the panel argued, if the measure is an internal tax, then China would violate the national treatment obligation under Article III of the General Agreement on Tariffs and Trade (GATT), which prohibits WTO members from imposing a tax on foreign imports but not on domestically produced products.
Second, if the 15 per cent is a tariff, then China would violate the tariff binding obligation under Article II of the GATT, which prohibits countries from imposing a tariff higher than that which was agreed in the WTO. In conclusion, the panel ruled that the Chinese policies violated WTO commitments and must be changed.
This case provides some interesting lessons for firms trading with China:
First is the complexity of the regulatory framework in China. Based on their experience at home, many Singaporean firms tend to believe that the trade regulations in China are uniform and consistent like in Singapore, but this is not the case. As a huge country, China has many ministries, commissions and agencies at the central government level, as well as several layers of local governments. Like in a piece of complicated machinery, the coordination among the different parts of the government apparatus is difficult and may not work well all the time.
In this case, for example, the decision to impose an additional charge on imported automobile parts was made by the National Development and Reform Commission (NDRC), which is arguably the most powerful agency in the central government. Before the introduction of the policy, China’s trade ministry - the Ministry of Commerce (MOFCOM) - actually tried to persuade the NDRC to abandon the plan, citing concerns of WTO violation. However, as the NDRC is more powerful, it ignored the advice of MOFCOM and went ahead with the policy.
Thus, for Singaporean firms wishing to trade with China, they should not only pay attention to the policies by MOFCOM, but also those of other government agencies as well. Of course, for SMEs, it might be impractical to follow closely all the regulatory developments in China on a daily basis. Instead, they might wish to consult the various trade associations, or regulatory experts in the field. To help the SMEs, the trade associations shall consider organising occasional seminars to brief SMEs on the latest developments.
Second, what is the best approach to tackle such trade barriers? There are several possibilities. First would be administrative litigation against the government - but given the close relationship between the government and judiciary in China, this is not an attractive option. The second option would be lobbying, either through the firms themselves or through the government of the home country - but again the lobbying costs would be prohibitive for SMEs. A third option is through dispute settlement in international forums such as the WTO or the International Centre for Settlement of Investment Disputes (ICSID). As this case has shown, an international dispute settlement mechanism can be very effective in tackling trade barriers, and SMEs might wish to consider this possibility if all else fails.
Henry Gao is an associate professor of law at SMU and Dongfang Scholar Chair Professor at Shanghai Institute of Foreign Trade.
With law degrees from China, the UK and US, he has worked at the WTO Secretariat in Geneva and has been consulted on trade issues by the World Bank, Apec, ADB, the Asean Secretariat and governments of various countries, including China.
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