13 April 2017
USTR Highlights Concerns in Annual Trade Barrier Reports
USTR issued on 31 March its annual National Trade Estimate report, which describes significant foreign barriers to U.S. exports of goods and services, foreign direct investment and intellectual property rights protection as well as the actions being taken to address those barriers. The NTE report covers the most important barriers, including those that may be consistent with international trade rules (e.g., very high tariffs), affecting U.S. exports to 58 countries, the European Union, Hong Kong, Taiwan and one regional body.
This year’s report again includes technical barriers, such as product standards and testing and certification requirements; sanitary and phytosanitary barriers, which include measures used to ensure that foods and beverages are safe for consumers and to protect animals and plants from pests and diseases; and barriers to exports of telecommunication goods and services. In addition, to highlight the growing and evolving trade using or enabled by electronic networks and information and communications technology, relevant country chapters include a dedicated section on barriers to digital trade. This section covers those barriers formerly categorised under “electronic commerce” and will highlight on-going and emerging barriers such as restrictions and other discriminatory practices affecting cross-border data flows, digital products, Internet-enabled services and other restrictive technology requirements.
Some of the more notable highlights of the NTE report related to mainland China and Hong Kong are outlined below. A copy of the report is available at https://ustr.gov/sites/default/files/files/reports/2017/NTE/2017%20NTE.pdf.
The NTE report addresses many of the same issues that have been raised time and again by U.S. officials in recent years, including these well-known complaints.
- The protection and enforcement of trade secrets remain a serious problem that has attained a higher profile in recent years. USTR contends that offenders in many cases continue to operate with impunity and is troubled about reports that actors affiliated with the mainland Chinese government and military have infiltrated the computer systems of U.S. companies to steal terabytes of data, including the companies’ intellectual property, for the purpose of providing commercial advantages to mainland Chinese enterprises. To help address these challenges, the United States has secured commitments from Beijing not to condone this type of state-sponsored misappropriation of trade secrets and has urged mainland China to make key amendments to its trade secrets-related laws and regulations, particularly the Anti-Unfair Competition Law. Beijing has also committed to issue judicial guidance to strengthen its trade secrets regime and U.S. authorities have urged their counterparts in the mainland to take actions to address this problem across the range of state-sponsored actors while promoting public awareness of this issue. Mainland China confirmed at the November 2016 JCCT meeting that it is strengthening its trade secrets regime regarding the availability of evidence preservation orders and damages based on market value as well as the issuance of a judicial interpretation on preliminary injunctions.
- USTR is particularly concerned about the continuing registration of trademarks in bad faith. Although Beijing has taken steps to address this problem, U.S. companies across a range of industry sectors continue to face mainland Chinese applicants registering their marks and “holding them for ransom” or seeking to establish a business building off the global reputation of U.S. companies. Mainland China noted at the November 2016 JCCT meeting that it is taking further steps to combat bad faith trademark filings.
- The United States continues to engage mainland China on a range of patent and technology transfer concerns relating to pharmaceuticals. Mainland China circulated for public comment in October 2016 proposed revisions to its Patent Examination Guidelines, which include a proposal to clarify that examiners must consider in their examination process certain post-filing supplemental data. USTR indicates that if this proposal is implemented it would represent an important step toward the supplemental data practices in the United States and other jurisdictions. Many other concerns remain in this area, including the need to provide effective protection against unfair commercial use of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products and to provide effective enforcement against infringement of pharmaceutical patents. A serious and emerging concern that arose in 2015 emanates from mainland China’s proposals in the pharmaceutical sector that seek to promote government directed indigenous innovation and technology transfer through the provision of regulatory preferences.
- On-line piracy in mainland China continues on a large scale, affecting a wide range of industries distributing legitimate music, motion pictures, books and journals, software and video games. While increased enforcement activities have helped stem the flow of on-line sales of some pirated offerings, U.S. authorities believe much more sustained action and attention is needed to make a more meaningful difference for content creators and rights holders. At the same time, the U.S. has urged mainland China to revise existing rules that have proven to be counterproductive, such as new rules on the review of foreign television content that disrupt legitimate commerce while inadvertently creating conditions that allow for pirated content to displace legitimate content on-line. Similarly, quotas on foreign video content available on on-line platforms limit distribution options and drive consumers to illegitimate sites.
- Counterfeiting ostensibly remains widespread in the mainland, affecting a wide range of goods. USTR believes Beijing still needs to improve its regulation of the manufacture of active pharmaceutical ingredients to prevent their use in counterfeit and substandard medications. At the July 2014 S&ED meeting, mainland China agreed to develop and seriously consider amendments to the Drug Administration Law that will require regulatory control of the manufacturers of bulk chemicals that can be used as active pharmaceutical ingredients. Mainland China further agreed at the June 2015 S&ED meeting to publish revisions to the Drug Administration Law in draft form for public comment and to take into account the opinions of the United States and other relevant stakeholders. To date, mainland China has not amended this law, reportedly due to the prioritisation of reforming the drug regulatory system to reduce the drug approval lag.
- Mainland China continues to pursue industrial policies that seek to limit market access for imported goods, foreign manufacturers and foreign service suppliers while offering substantial government guidance, resources and regulatory support to domestic industries. U.S. officials believe the principal beneficiaries of these policies are state-owned enterprises as well as other favoured domestic companies attempting to move up the economic value chain.
- In 2015 and 2016, global concerns heightened over a series of mainland Chinese measures that would impose severe restrictions on a wide range of U.S. and other foreign information communication technology products and services with an apparent long-term goal of replacing foreign ICT products and services. Concerns centred on requirements that ICT equipment and other ICT products and services in critical sectors be “secure and controllable.” Mainland China has agreed to a set of principles for trade in information technologies, reiterating at the November 2016 JCCT meeting that its secure and controllable policies are not to unnecessarily limit or prevent commercial sales opportunities for foreign suppliers or unnecessarily impose nationality based conditions and restrictions on commercial ICT purchases, sales or uses.
- Despite the substantial progress achieved in recent years, policies aimed at promoting “indigenous innovation” continue to represent an important component of mainland China’s industrialisation efforts. At the November 2016 JCCT meeting, in response to U.S. concerns regarding the continued issuance of inconsistent measures, mainland China announced that its State Council had issued a document requiring all local regions and all agencies to “further clean up related measures linking indigenous innovation policy to the provision of government procurement preference.”
- While some long-standing concerns regarding technology transfer remain unaddressed and new ones have emerged, such as tying government preferences to the localisation of technology in the mainland and granting regulatory review and approval preferences to innovative drug manufacturers that shift their production to the mainland, some progress has been made in select areas.
- Mainland China continues to deploy a combination of export restraints, including export quotas, export licencing, minimum export prices, export duties and other restrictions, on a number of raw material inputs where it holds the leverage of being among the world’s leading producers. Through these export restraints it appears that mainland China is able to provide substantial economic advantages to a wide range of downstream domestic producers at the expense of foreign downstream producers while creating incentives for foreign downstream producers to move their operations, technologies and jobs to the mainland.
- Mainland China has continued to provide a range of injurious subsidies to its domestic industries, some of which appear to be prohibited under WTO rules. Since joining the multi-lateral body 15 years ago mainland China has not yet submitted to the WTO a complete notification of subsidies maintained by the central government and it did not notify a single sub-central government subsidy until July 2016, when it provided information only on sub-central government subsidies that the United States had challenged as prohibited subsidies in a WTO case.
- Mainland Chinese government actions and financial support in manufacturing industries like steel and aluminium have contributed to massive excess capacity, with the resulting over-production distorting global markets and hurting producers and workers in the United States as well as in third-country markets such as Canada and Mexico. While Beijing recognises the severe excess capacity problem in the steel and aluminium industries, among others, and has taken steps to try to address this problem, there have been mixed results.
- As in prior years, the mainland Chinese government is attempting to manage the export of many primary, intermediate and downstream products by raising or lowering the value-added tax rebate available upon export. Beijing sometimes reinforces its objectives by imposing or retracting export duties. USTR believes these practices have caused tremendous disruption and uncertainty in the global markets for some products, particularly downstream products of which mainland China is a leading world producer or exporter such as products made by the steel, aluminium and soda ash industries.
- An array of mainland Chinese policies designed to assist domestic automobile enterprises in developing electric vehicle technologies and in building domestic brands that can succeed in global markets continued to pose challenges in 2016. As with other measures and policies previously discussed, these policies have also generated serious concerns about discrimination based on the country of origin of intellectual property, forced technology transfer, research and development requirements, investment restrictions, and discriminatory treatment of foreign brands and imported vehicles. While U.S. authorities acknowledge that significant progress has been made in addressing some of the challenges posed by these policies, they believe more work remains to be done.
- Mainland China prohibits the importation of remanufactured products, which it typically classifies as used goods. It also maintains restrictions that prevent remanufacturing process inputs (known as cores) from being imported into its customs territory, except special economic zones. The United States contends that these import prohibitions and restrictions undermine the development of industries in many sectors in the mainland, including mining, agriculture, healthcare, transportation and communications, because companies in these industries are unable to purchase high-quality, lower-cost remanufactured products produced outside the country.
- Two principal types of problems harm U.S. companies in the area of standards. First, mainland Chinese government officials in some instances have reportedly pressured foreign companies seeking to participate in the standards-setting process to licence their technology or intellectual property on unfavourable terms. Second, mainland China has continued to pursue unique national standards in a number of high technology areas where international standards already exist, such as 3G and 4G telecommunications standards, Wi-Fi standards and information security standards.
- The United States views mainland China’s offers of coverage to accede to the WTO’s Government Procurement Agreement as insufficient. While a December 2014 revised offer showed progress in a number of areas, including thresholds, entity coverage and services coverage, U.S. authorities believe it remains far from acceptable as significant deficiencies remain in a number of critical areas.
- Mainland China seeks to protect many domestic industries through a restrictive investment regime that adversely affects foreign investors in services sectors, agriculture, extractive industries and manufacturing sectors. Despite making and considering further improvements to its foreign investment regime, the lack of substantial liberalisation, the maintenance of a case-by-case administrative approval system, and the potential for a new and overly broad national security review continue to cause foreign investors great concern. In addition, foreign enterprises report that mainland Chinese government officials may condition investment approval on a requirement that a foreign enterprise transfer technology, conduct research and development in the mainland, satisfy performance requirements relating to exportation or the use of local content, or make valuable, deal-specific commercial concessions. In part to address these investment restrictions, the United States has engaged in negotiations with mainland China to conclude a high-standard bi-lateral investment treaty.
- Regulatory authorities in some instances seem to be pursuing AD and CV duty investigations and imposing duties for the purpose of striking back at trading partners that have exercised their WTO rights against mainland China even when necessary legal and factual support for the duties is absent. The U.S. response has been the filing and prosecution of three WTO disputes. USTR states that the decisions reached by the WTO in these disputes confirm that Beijing failed to abide by WTO disciplines when imposing the duties at issue.
- As in previous years, regulators continue to use discriminatory regulatory processes, informal bans on entry and expansion, overly burdensome licencing and operating requirements and other means to frustrate efforts by U.S. suppliers of banking, insurance, telecom, Internet-related, audio-visual, express delivery, legal and other services to achieve their full market potential in the mainland. Some sectors, including electronic payment services and theatrical film distribution, have been the subject of WTO dispute settlement. While mainland China declared an intent to further liberalise a number of services sectors in its Third Plenum Decision, few concrete steps have been taken.
- Mainland China’s Internet regulatory regime is restrictive and non-transparent, affecting a broad range of commercial services activities conducted via the Internet. In addition, mainland China’s treatment of foreign companies seeking to participate in the development of cloud computing services, including computer data and storage services provided over the Internet, raises concerns.
- Seemingly capricious practices by customs and quarantine agencies delay or halt shipments of agricultural products into the mainland. In addition, SPS measures with questionable scientific bases and a generally opaque regulatory regime frequently create difficulties and uncertainty for traders in agricultural commodities. With Beijing moving forward with implementation of its 2015 Food Safety Law, new regulations and new concerns such as burdensome and unnecessary requirements for official certification of low-risk food exports are on the increase. Moreover, market access promised through the tariff-rate quota system set up pursuant to mainland China’s WTO accession agreement has yet to be fully realised.
- In 2016 beef, poultry and pork products were affected by questionable SPS measures implemented by mainland Chinese regulatory authorities. For example, mainland China continued to block the importation of U.S. beef and beef products more than nine years after these products had been declared safe to trade under international scientific guidelines established by the World Organisation for Animal Health and despite the further fact that in 2013 the United States received the lowest risk status from the OIE. Regarding poultry, mainland China continues to impose an unwarranted and unscientific avian influenza-related import suspension on U.S. poultry due to an outbreak of high-pathogenic avian influenza, which has now been eliminated in the United States. Moreover, Beijing continues to maintain overly restrictive pathogen and residue requirements for raw meat and poultry.
- Overall delays in mainland China’s approval process for agricultural products derived from biotechnology worsened in 2016, creating increased uncertainty among traders and resulting in adverse trade impact particularly for U.S. corn exports. In addition, the asynchrony between mainland China’s product approvals and the product approvals made by other countries has widened.
- In recent years mainland China has been significantly increasing domestic subsidies and other support measures for its agricultural sector. Mainland China has established a direct payment programme, instituted minimum support prices for basic commodities and sharply increased input subsidies. Beijing has also implemented a cotton reserve system based on minimum purchase prices as well as cotton target price programmes.
- Some, albeit not all, central government entities publish trade-related measures in a single official journal. As a result, while trade-related administrative regulations and departmental rules are more commonly (but still not regularly) published in the journal, it is less common for other measures such as opinions, circulars, orders, directives and notices to be published even though they are in fact all binding legal measures. In addition, mainland China does not normally publish in the journal certain types of trade-related measures, such as subsidy measures, nor does it normally publish sub-central government trade-related measures.
- In addition to the area of transparency, several other areas of mainland China’s legal framework can adversely affect the ability of the United States and U.S. exporters and investors to access or invest in the mainland. Key areas include administrative licencing, competition policy, the treatment of non-governmental organisations, commercial dispute resolution, labour laws and laws governing land use. The report adds that corruption among mainland Chinese government officials, enabled in part by mainland China’s incomplete adoption of the rule of law, is also a key concern.
The report again describes Hong Kong as a “duty-free port, with few barriers to trade in goods and services and few restrictions on foreign capital flows and investment,” and indicates that the Hong Kong government “pursues a market-oriented approach to commerce.”
While the United States continues to believe that Hong Kong generally provides robust IPR protection and enforcement and maintains a dedicated and effective enforcement capacity, a judicial system that supports enforcement efforts with deterrent fines and criminal sentences, and youth education programmes that discourage IPR-infringing activities, the report points out that Hong Kong’s failure to update its copyright system has made it vulnerable to digital copyright piracy. An additional concern is that, although the Hong Kong Customs and Excise Department routinely seizes IPR infringing products arriving from mainland China and elsewhere, stakeholders report that counterfeit pharmaceuticals, luxury goods and other infringing products continue to transit Hong Kong in significant quantities destined for both the local market and places outside of Hong Kong.
U.S. authorities also believe the standards for infant formula set under Hong Kong’s October 2012 draft Code of Marketing and Quality of Formula Milk and Related Products and Food Products for Infants & Young Children may be more restrictive than relevant international standards and could have a significant negative impact on sales of food products for infants and young children.