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USTR Highlights Concerns in Annual Trade Barrier Reports

The Office of the U.S. Trade Representative 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 in 58 countries, the European Union, Hong Kong, Taiwan and one regional body.

Sections on Bangladesh, Algeria and Tunisia were added this year to reflect the growing importance of these countries as markets for U.S. exports, while sections on Iraq and Uzbekistan were removed due to the relatively small size of their markets, a lack of progress in government-to-government engagement, and the absence of major trade complaints from representatives of U.S. goods and services sectors. 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/2016-NTE-Report-FINAL.pdf.

Mainland China

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 data, including the companies’ intellectual property. 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 update and amend its trade secrets-related laws and regulations, particularly the Anti-Unfair Competition Law, as well as to consider issuing judicial guidance to strengthen its trade secrets regime. At the November 2015 JCCT meeting mainland China announced that it is in the process of amending this law and intends to issue model or guiding court cases and clarify rules on preliminary injunctions, evidence preservation orders and damages.
  • The United States continues to engage mainland China on a range of patent and technology transfer concerns relating to pharmaceuticals. Beijing has committed to permit supplemental data supporting pharmaceutical patent applications but the report indicates that it appears this commitment has not been fully implemented. 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 recently unveiled proposals in the pharmaceuticals sector that seek to promote government directed indigenous innovation and technology transfer through the provision of regulatory preferences.
  • Sales of legitimate IP-intensive goods and services, including software and audio-visual products, remain disproportionately low compared to similar markets with stronger IPR protection and enforcement. Sales of legitimate software to the mainland Chinese government by U.S. companies have seen only a modest increase, while losses by U.S. software companies from the use of pirated software by state-owned enterprises and other enterprises remain very high.
  • On-line piracy in mainland China is widespread and continues on a large scale, affecting industries distributing legitimate music, motion pictures, books and journals, software and video games. Increased enforcement activities have yet to slow on-line sales of pirated goods. Similarly, although rights holders report increased enforcement efforts by government authorities, counterfeiting affecting a wide range of goods remains widespread. The United States believes that Beijing still needs to improve its regulation of the manufacture of active pharmaceutical ingredients to prevent their use in counterfeit and substandard medications.
  • 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 that 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, 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.”
  • 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. Currently, the principal challenge involves a range of discriminatory indigenous innovation preferences that proliferate outside of the government procurement context.
  • 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 14 years ago mainland China has not yet submitted to the WTO a complete notification of subsidies maintained by the central government or a notification with any of its sub-central government subsidies.
  • 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 that these practices have caused tremendous disruption, uncertainty and unfairness 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 2015. 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.
  • 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, technical regulations and conformity assessment procedures. 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. With respect to conformity assessment for telecom equipment, there continues to be a lack of transparency in mainland China's testing and certification procedures for mobile phones as well as redundant testing requirements that affect U.S. telecom companies’ market access.
  • The United States continues to press mainland China to fulfil its commitment to accede to the WTO’s Government Procurement Agreement and open up its vast government procurement market to the United States and other GPA parties. To date, however, the United States, the European Union and other GPA parties have viewed mainland China’s offers of coverage as highly disappointing in scope and coverage.
  • Mainland China seeks to protect many domestic industries through a restrictive investment regime that adversely affects foreign investors in numerous manufacturing and services sectors. Despite making certain 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.
  • Regulatory authorities in some instances seem to be pursuing antidumping and countervailing 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.
  • 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.
  • 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. 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 2015 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 eight 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, in 2015 mainland China suspended imports of all U.S.-origin poultry and poultry products in direct response to recent outbreaks of highly pathogenic avian influenza in the United States. Mainland China continued to impose avian influenza-related import restrictions that are inconsistent with OIE guidelines despite successful U.S. mitigation measures.
  • In 2015 delays persisted in mainland China’s approvals of agricultural products derived from biotechnology, resulting in increased uncertainty among technology providers, farmers and traders of U.S. corn, soy and alfalfa.
  • 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.

Hong Kong

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 and a judicial system that supports enforcement efforts, the report points out that Hong Kong’s failure to update the 1997 Copyright Ordinance has made it vulnerable to some forms of IPR infringement such as end-user business software piracy and on-line copyright piracy facilitated by the rapid growth of unauthorised file sharing over peer-to-peer networks. 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.

The report expresses some concern about two potential SPS barriers in Hong Kong. On the one hand, Hong Kong in August 2014 implemented a positive pesticide maximum residue limit regulation that prohibits the sale and importation of food containing a pesticide not on the list unless it is shown that consumption of the food would not be dangerous or prejudicial to health. USTR observes that the United States continues to work with the Hong Kong food safety authority to include additional U.S. approved pesticides on the list. 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.

Content provided by Picture: HKTDC Research
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