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USTR Highlights Mainland Chinese Policies, Other Concerns in Annual Trade Barrier Reports

The Office of the U.S. Trade Representative recently issued its annual National Trade Estimate report, which describes significant foreign barriers to U.S. exports of goods and services, foreign direct investment and electronic commerce as well as the actions being taken to address those barriers. The NTE report covers significant barriers, including those that may be consistent with international trade rules (e.g., very high tariffs), affecting U.S. exports to 61 countries, the European Union, Hong Kong and certain other locations.

This report includes technical barriers, such as product standards and testing, labelling 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, the report includes information on barriers to digital trade. These include restrictions on cross-border data flows in mainland China, India and South Korea; digital services taxes in the EU; data localisation requirements in mainland China, Kenya, India, Indonesia, Nigeria, Russia, Saudi Arabia, Turkey and Vietnam; tariffs on digital products in Indonesia; and restrictions on on-line advertising in Vietnam.

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/2019_National_Trade_Estimate_Report.pdf.

Mainland China

Mainland China continued to pursue a wide array of industrial policies in 2018 aimed at limiting market access for imported goods, foreign manufacturers and foreign services suppliers, while offering substantial government guidance, resources and regulatory support to mainland Chinese industries. According to USTR, the beneficiaries of these constantly evolving policies are not only state-owned enterprises but also other mainland Chinese companies attempting to move up the economic value chain.

The report discuses a range of issues related to tariffs, technology transfer and the Made in China 2025 industrial plan, indigenous innovation, investment restrictions, secure and controllable information and communication technology policies, encryption, subsidies, excess capacity, export restraints, value-added tax rebates for exports, mainland China’s import ban on remanufactured products and recyclable materials, standards, discriminatory testing and documentation requirements for imported cosmetics and personal care products, government procurement, trade remedies, intellectual property rights, services, agriculture, transparency and mainland China’s legal framework.

Among other things, the report highlights mainland China’s imposition of additional tariffs on a range of U.S. products in retaliation for the additional tariffs imposed by the United States under Section 232 of the Trade Expansion Act of 1962 and Section 301 of the Trade Act of 1974. It discusses on-going efforts by the U.S. government to address long-standing concerns in the area of technology transfer through Section 301 enforcement and describes the Made in China 2025 plan as “emblematic of China’s evolving and increasingly sophisticated approach to ‘indigenous innovation,’ which is evident in numerous supporting and related industrial plans.” The goal of these plans, according to the report, is to “replace foreign technologies, products and services with Chinese technologies, products and services in the China market through any means possible so as to equip Chinese companies to dominate international markets.”

The report contends that policies aimed at promoting indigenous innovation continue to represent an important component of mainland China’s industrialisation efforts. Despite intensive bi-lateral engagement and numerous commitments, USTR  believes mainland China continues to pursue a range of policies that require or favour the ownership or development of intellectual property in the mainland. Beijing is also accused of seeking to protect many domestic industries through a restrictive investment regime that adversely affects foreign investors in key services sectors, agriculture, extractive industries and certain manufacturing sectors. Many aspects of mainland China’s current investment regime continue to cause foreign investors great concern, including a lack of substantial liberalisation evidenced by the continued application of foreign equity caps and joint venture requirements, the maintenance of a case-by-case administrative approval system for a broad range of investments, the evolving potential for a new and overly broad national security review mechanism, and the increasingly adverse impact of mainland China’s Cybersecurity Law and related implementing measures.

The report further claims that mainland China remains a difficult and unpredictable market for U.S. agricultural exporters largely because of inconsistent enforcement of regulations and selective intervention in the market by domestic regulatory authorities. U.S. authorities argue that the failure of mainland Chinese regulators to routinely follow science-based, international standards and guidelines further complicates and impedes agricultural trade. On services, the report asserts that the prospects for U.S. service suppliers in the mainland should be promising, given the size of the mainland Chinese market. Nevertheless, while the United States maintained a US$40.2 billion surplus in trade in services with the mainland in 2017, the U.S. share of mainland China’s services market remained well below the U.S. share of the global services market. The report also criticises mainland China’s record in various other areas, including transparency, as well as various aspects of its legal regime.

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, a judicial system that supports enforcement efforts with deterrent fines and criminal sentences, and youth education programmes that discourage IPR-infringing activities, the report again points out that Hong Kong’s “failure to modernize its copyright system has allowed it to become vulnerable to digital copyright piracy.” According to the report, in the absence of an updated copyright system the Hong Kong Customs and Excise Department has stepped up enforcement actions against digital piracy. An additional concern is that, although HKCED routinely seizes IPR-infringing products arriving from mainland China and elsewhere, U.S. 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 markets outside of Hong Kong.

U.S. authorities also believe despite assurances to the contrary from Hong Kong authorities that the standards for infant formula under the Hong Kong Code of Marketing of Formula Milk and Related Products and Food Products for Infants and Young Children will become de facto mandatory if the Hong Kong Hospital Authority requires it as part of any tender. The United States will continue to monitor this issue even though U.S. industry did not raise any new or additional concerns over the past year.

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