This is a guest post by Zhiguo YU, partner at Zhong Lun Law Firm, fellow of Institute of International Dispute Settlement, Tsinghua University and the Institute of International Economic Law, Georgetown Law Center, and arbitrator of Tianjin Arbitration Commission.
1. INTRODUCTION
Trade barrier investigations in China are designed to address the negative effects of foreign acts, policies, and practices that burden or restrict Chinese trade, services, intellectual property and overseas investment[1]. Unlike trade remedy investigations such as antidumping, countervailing and safeguards, which are ‘defensive in nature’, the Chinese government regards trade barrier investigations as ‘defensive and offensive in balance’[2].
China has not been an active user of its trade barrier investigation rules. So far, there have been only two trade barrier cases, one of which has led to an affirmative determination and subsequent actions to enforce the determination. However, in the future, China may enforce its barrier investigations regulations more actively.
This piece presents a general overview of China’s trade and investment barrier investigations. It reviews two past investigations, explores some critical procedural and substantive aspects of the investigation process, and offers a detailed analysis of the measure in force and its future application.
2. BACKGROUND
Since China's accession to the WTO in 2001, Chinese exports have experienced unprecedented exponential growth, and Chinese products and services appeared at every corner of the global market. At the same time, more and more trade barriers encountered by Chinese exports were recorded by the Ministry of Commerce. According to Report on Trade and Investment Environment by Country in 2005, the Ministry of Commerce declared “some partners frequently put up barriers to obstruct Chinese trade and investment and to protect their markets and industries”, and “in the future, Chinese enterprises will face increasingly severe trade and investment environment at the international market.”
In addition, China expressed concerns about the effectiveness of WTO rules to eliminate trade and investment barriers. The WTO and its predecessor GATT have long been working on establishing international rules to regulate administrative measures by members which may influence international trade and investment to promote the formation of an open and fair global trade environment. However, due to the diversity, complexity, concealment of various barriers, and procedurally complex and time-consuming remedy measures under the WTO framework to address trade barriers, the various trade and investment barriers in place have not been fully and effectually regulated or eradicated in practice[3].
To address this issue, China established a barrier investigation mechanism, and strengthened the enforcement of its foreign trade law to maintain a fair and reasonable global trade market. The establishment of a barrier investigation mechanism signified the switch of Chinese trade policy from a passive to a more active approach[4].
In December 2002, China promulgated its provisional rule of investigations on trade barriers. Two years later, its updated version, the Investigation Rules of Foreign Trade Barrier (referred to as the Rule hereinafter) entered into force. Compared with the provisional one, the Rule clarifies the definition of trade barrier and consequently expands its jurisdiction over trade obstacles as well as investment and intellectual property rights related barriers.
3. LEGAL FRAMEWORK
The legal framework of China’s barrier investigations includes two major parts.
The Foreign Trade Law, as the top of the hierarchy of rules governing Chinese trade administration, sets out the framework for trade investigations in general. In its amendment in 2004, the brand new chapter 7 authorises the Ministry of Commerce to carry out several types of trade investigations, including trade barrier investigations. Subparagraph (ii) of its Article 37 reads, ‘investigations against trade barrier of other country or region’.
Also, to protect intellectual property rights, the Foreign Trade Law directs[5] the competent administration body to take appropriate measures, including the prohibition of the importation of subject imports deemed to have infringed specific intellectual property rights, to restore the foreign trade order.
Investigation Rules of Foreign Trade Barrier of the Ministry of Commerce provides procedural and substantive rules on how China implements its trade and investment barrier investigations. It consists of five chapters, regarding principles, petition, initiation, investigation, measures and miscellaneous aspects of the rules respectively.
The evolution from 2002’s provisional version to the current regulation shows the greater ambition of Chinese authority in combating foreign trade and investment barriers by expanding the jurisdiction of this rule from only Chinese goods exports to trade, services, intellectual property and foreign direct investment, which are all covered.
Normally, this kind of investigation is initiated by complaints from the domestic industry or other qualified entities. And in principle, the Chinese government has the mandate to self-initiate a probe according to the Rule[6]. The Trade Remedy and Investigation Bureau of the Ministry of Commerce serves as the investigating authority. Therefore, this agency could theoretically launch barrier probes against foreign measures, policies or actions infringing China’s trade, investment and intellectual property interests under Chinese law.
4. BRIEF SUMMARY OF THE TWO TRADE BARRIERS INVESTIGATION CASES
So far, China’s investigating authority has only carried out two investigations on foreign trade barriers, one against the Japanese laver import quota policy in 2004 and the other against the U.S. renewable energy policy in 2011.
(1) Japan laver quota policy investigation
On 25th February 2004, Jiangsu Laver Association alleged that import administrative measures by the Japan government against Chinese laver were inconsistent with relevant WTO rules[7], and had caused unreasonable restrictions and obstacles to export Chinese laver to the Japanese market. Therefore, the petitioners argued that Japan laver quota policy constituted a trade barrier under Chinese law.
On 22nd April, the Ministry of Commerce issued a public notice to commence investigating procedures and notified the Japanese government and enterprises. A week later, the investigating authority circulated questionnaires to the Japanese government and relevant laver enterprises.
On 21st October, the Ministry determined that it would suspend the investigating procedures and to hold bilateral consultations with the Japanese government.
On 1st March 2005, the Ministry issued its termination notice without any specific determinations on the existence of the subject barrier. The stated reason for the termination decision was that the Japanese government had completely performed its obligations and commitments, revised the subject policy, and consequently removed the alleged trade barrier.
(2) U.S. renewable energy policy investigation
The investigating procedure was commenced on 25th November 2011 in response to petitions from the chamber and association of Chinese new energy producers and exporters. The petitioners argued that some of the U.S. supportive measures concerning the new energy industry had violated its obligation under WTO, and placed unreasonable obstacles to restrict Chinese relevant goods and services from entering the American market. As a consequence, the Chinese renewable energy industry suffered a decrease in the volume of Chinese new energy exports to the U.S. and damaged the competitiveness of Chinese producers.
The Ministry of Commerce, having reviewed the petition, decided to probe into six alleged state-level programs, most of which were supportive measures encouraging production and consumption of renewable energy products.
On 24th May 2012, the Ministry released two public notices; one is to extend the investigating procedures, the other to publicise its preliminary determinations. At that point, no consequent measures were applied or recommended.
On 20th August, the investigating authority issued a final determination: all six subject measures were prohibited subsidies under the WTO Agreement on Subsidy and Countervailing Measures (SCM Agreement). Therefore the concerning measures were inconsistent with the SCM Agreement, and also violated Article 3 of GATT 1994. It seemed that the U.S. government did not propose or participate in a bilateral consultation in this case, according to the case record. The determination states that “the Commerce Ministry will adopt relevant legal measures, demands that the United States cancel parts of the measures that violate World Trade Organization rules and give Chinese renewable energy firms fair treatment.” No subsequent measures or WTO actions were taken.
5. ANALYSIS OF THE RULE AND THE PRACTICES
5.1 Definition of Trade Barrier
Article 3 of the Rule provides guidance on the definition of trade barrier and enumerates several features of trade barriers. In brief, in the legislators’ opinion, trade barriers fall into two main categories. The first category is violation or inconsistency with bilateral or multilateral economic and trade treaties or agreements, which some experts regarded as ‘law-incompatible barriers’. The second is those measures and practices causing adverse impacts to Chinese exports or services, the competitiveness of Chinese exports or services, or hindering goods or service transports to China regardless of the legality of alleged acts, policies and practices. This category is also dubbed as ‘law-compatible barriers’[8].
Law-incompatible barriers. Subparagraph 1 of Article 3 introduces two kinds of law incompatible barriers: active violation of the treaty, and passive inaction to perform the obligation under the international accord. The only criterion, in this case, is the breach of the international treaty or agreement by failing to perform expected obligations. Other international trade agreements besides those between China and the alleged country (or region) cannot serve as a legal criterion to decide the existence of barriers. Whether or not the alleged measure or practice have caused adverse impact to Chinese exports or services, or hindered foreign goods or services exported into China, is irrelevant in this case.
Undoubtedly, from China’s perspective, that measure and practice which positively violates bilateral or multilateral economic and trade agreements or treaties, under Article 3, constitutes a trade barrier. Therefore investigations and consequent remedies should be provided under this case. In the same vein, failure to perform the obligations under bilateral or multilateral accords so that Chinese legal rights and interests have been damaged gives rise to the other kind of barriers.
In the two cases described above, the authority determined that the subject measures and practices were law-incompatible barriers.
Law compatible barrier. In circumstances when the alleged country or region has no bilateral or multilateral economic and trade treaty with China, or the alleged policy does not qualify as violations or failure to implement the obligation, the alleged policy and measure may also constitute a trade barrier if they have caused adverse impacts on Chinese exports and imports, or to the competitiveness of Chinese goods and services in international markets.
In a nutshell, measures, policies, and actions that negate Chinese trade rights or interests by creating or maintaining barriers may fall under the jurisdiction of China’s barrier investigations regulations.
5.2 Eligibility of Petitioner
Article 5 of the Rule sets out the eligibility of petitioners for the investigations. Two groups of legal and natural persons are entitled to apply for barrier probes. The first group is domestic enterprises or domestic industry. The other includes legal entities, natural persons, or other organisations who can work on behalf of the domestic enterprise or domestic industry.
The domestic enterprise appears to be a qualified petitioner in both groups. Domestic producers or a group of domestic producers have two options in this case: either apply on its or their own, or represent the domestic industry to file a petition. Without requirements of representativeness of Chinese industry, domestic enterprises initiating on their own seem to be the economic and convenient approach to apply. In the two previous cases, all the petitioners were associations or chambers of Chinese producers and exporters.
Another concern is the lack of identification of natural persons as eligible petitioners. Since the movement of natural persons constitutes one of the major parts of trade in services, and natural persons could often be substantially and independently involved in goods trade, it is reasonable and justifiable to have natural persons entitled to file barrier petitions. In the future, there may be cases filed by natural persons against services, intellectual and exports barriers.
The other prerequisite of being qualified applicants is that the Rule requires the domestic enterprises or industry shall have direct linkages with the production and supply of services associated with alleged barriers. There is no detailed explanation of the direct linkage between the potential petitioner and the production and operation of the product or services in the provision. Some expect that producers or exporters of the products and services whose trade was affected by the alleged measures were directly linked to the measures. In the same vein, upstream and downstream enterprises could also meet the threshold because they are closely tied to the production of the product impacted by the measures under investigation. Other interested parties who would like to resort to the Rule shall, as a rule of thumb, prove the direct linkage with the products or services under consideration.
Importantly, any organisation who would like to apply for a barriers investigation on behalf of domestic industry might have to demonstrate standing in the first place. However, there is no specific guidance on the representativeness of domestic industry in both the Rule and the practice. In the Japan laver quota policy investigation, the authority applied the standing rule similar to those in Antidumping Regulation and Countervailing Regulation, by examining the output of the petitioner and its output ratio to the total production of laver in China[9]. In the U.S. renewable energy policy case, the mere fact that petitioners, either chamber or association of Chinese new energy producers, had member companies who were manufacturers and exporters of Chinese renewable energy products, satisfied the authority that chambers and associations met the standing requirement and stood as qualified and eligible petitioners[10]. In the investigation, the authority did not examine the production of petitioners or its ratio to total output. By not even mentioning the issue in the determination, it was assumed that there was no standing issue at all. After reviewing the Rule and the leading cases, it could reasonably be assumed that not every standing issue could be under consideration in the investigations by the authority. If it has been considered, similar standards to those in the Antidumping Regulations could be applied here.
5.3 How the Authority Examines the Received Petitions
In practice, the Ministry normally checks the accuracy and adequacy of the petition at hand. First, the petitioner shall satisfy the authority as to the accuracy of the evidentiary materials submitted to the authority. If not, a false description or invalid evidentiary materials could result in the refusal of the petition by the authority. Then, the petitioner shall guarantee, to the best of its ability, that it will furnish all evidentiary materials substantiating the existence of the alleged measure or practice, and the adverse impact caused by that measure and practice. In the circumstances that the petitioner cannot provide adequate materials, a well-prepared document shall be provided in explaining the reasons for failure.
Within 60 days after the acceptance of the petition and relevant materials, the Ministry of Commerce shall review the petition and determine whether to initiate the investigation or not. In case the petition does not meet the requirements of accuracy and adequacy, or the alleged measure or practice does not constitute a barrier at all, the authority shall notify the petitioner with a written letter explaining the reasons for refusal.
5.4 Investigating Approaches
The Rule stipulates that the authority will collect evidence through a questionnaire, on the spot verification, hearings, and in some cases technical and expert consultations. But the Rule is silent on how the interested parties and even the public make their opinions known to the authority, let alone to provide a positive and substantive contribution to the investigation.
It is debatable whether the Ministry and the Rule provide ample opportunity for investigation participants to defend their interests in investigating procedures. In practice, the public and even the participants have limited resources and ability to know the essential facts on which decisions will be based, and to place their comments and evidentiary materials in the case record.
The first difficulty is the lack of access to case records. On the one hand, there is no similar provision like the interested parties’ definition that is part of trade remedy regulations. Hence, people or enterprises who believe they have direct or indirect interests in the investigation have no way to be directly involved in the process on its face. On the other hand, case records, including responses to questionnaires, voluntary information or comments submitted by interested parties or the public, seem restricted from being accessed by the public. Similarly, there are no legal obligations to investigating authorities to release case records to the public. In the first case, the Japan laver quota policy probe, people had no clue what kind of specific information was in the hands of the authority and that the determination relied on. Because case records of current antidumping investigations can be reviewed online or physically viewed at the office of the Ministry of Commerce, the difficulties of accessing barrier investigation records seemed to reflect the reluctance of the authority to release case records for the public’s reference. In the second case, the U.S. renewable energy policy probe, transparency appeared to be remarkably improved. As repeatedly requested by the U.S. government, the authority not only directly exposed relevant records to the U.S. government but also released a catalogue of case records on its official website. And both the provisional and final determination outlined the core information of case records and responded to comments on some key issues.
The interested parties may have difficulties providing comments as well. Besides questionnaires, the Ministry would, theoretically, collect relevant information from government officials and experts via public hearings. Since no public hearing was held in the previous two cases, the possibility of submitting comments through hearings remains unclear. The public or organisations who would like to be involved in the investigation are not entitled to participate in the investigation by the Rule.
When a specific participant of the investigation refuses to provide information, as the U.S. government did in the renewable energy policy case, the authority would have no choice but to rely heavily on the evidentiary materials from its opponents to conclude the probe.
5.5 Is the Investigation Six Months Long?
Normally, the investigation shall be concluded within six months after the date of initiation. In special circumstances, the investigation may be extended by no more than three months, but the Rule makes clear that the duration cannot last longer than nine months.
Interestingly, the duration of a case may theoretically be far longer than six months or 9 months (after extension) if a suspension proceeding is introduced into the procedure. During an investigation, the Ministry of Commerce may decide to suspend the probe when the accused country is committed to, within a reasonable period, cancellation or adjustment of the subject measure and practice, or the provision of adequate compensation, or the performance of obligations under economic and trade agreements and treaties. The reason for suspension may be that the authority would leave enough time for the accused country to remove subject measures or the adverse impacts. For that, the duration of the suspension seems quite flexible, and the authority may wield its discretion to determine the duration of suspension on a case-by-case basis. In the Japan laver quota policy case, the Ministry of Commerce commenced the investigation on 22nd April 2004. And before six months elapsed after initiation of the notice, on 21st October 2004, the authority publicly suspended the investigation. On 1st March 2005, the Ministry of Commerce announced that it would terminate the probe. The whole time span of the case lasted almost 11 months, significantly longer than six months (in this case, no extension of investigation has been decided and applied).
5.6 The Investigation Scope Could Be Reasonably Extended
The investigation scope is often one of the core issues of an investigation. There is no restriction in the Rule to prevent the authority from extending the investigation scope to other measures or practices, similar to how things work in countervailing duty investigations when newly-alleged subsidy programs are incorporated into an ongoing investigation. In the Japan laver quota policy case, the petitioner and the Japanese government raised arguments on the scope of the laver to be examined. Along with the processing in the laver industry, there were also dried laver, baked laver, and seasoned laver. And the original alleged laver quota policy had no relation with the baked laver. During the investigation, the Ministry of Commerce decided to integrate the baked laver issue into the consideration, and the Japanese government agreed to include the baked laver issue in the consultations[11].
5.7 Administrative and Judicial Review
Similar to other administrative decisions, the determination of barrier investigations and its resultant measures would normally be subject to administrative reconsideration and judicial review by the People’s Court within sixty days after the issuance of the administrative order or the public notice.
More interestingly, in the bilateral resolution of the laver quota policy case, the Chinese government and the Japanese government agreed on an annual session regarding the sanitary standards, trade and production of the laver products. In a sense, this could be considered an informal annual review of the implementing measure.
6. MEASURES AND WTO CONSISTENCY
As a rule, the Ministry of Commerce shall determine whether subject measures and practices constitute a trade barrier under Chinese law, and as a consequence, whether it should take appropriate measures. The Rule authorises three kinds of measures and actions.
The immediate approach is bilateral consultation. In the Japan laver quota policy probe, the Chinese and Japanese governments had held three rounds of bilateral consultations and finally reached a bilateral solution. Both governments afterwards agreed to set up a working mechanism and hold regular sessions, annually, to facilitate the laver trade between the two countries. The topics covered by the mechanism are not limited to the investigated quota policies, but also issues such as the latest developments of the regional and global industries, changes in relevant import regulations, and requirements of import inspection. From the example of the laver dispute between the two countries, it is reasonable to assume the bilateral consultation approach is the top preference of the Chinese Government.
The second choice is to refer the issue to multilateral dispute settlement. So far, none of the Chinese investigations resulted in referral to the WTO dispute settlement mechanism or other international arbitration[12]. However, the final findings of the trade barrier investigations could be probative evidence in related trade investigations. A relevant example is the US — Renewable Energy (DS 510) dispute brought by India to the WTO DSB. In India’s request for consultations, the main allegations and supporting evidentiary materials were, in large part, transplanted from Chinese barrier investigation findings about the U.S. renewable energy policy cases. Obviously, as its findings could be used in WTO dispute settlement procedures by other Members, China could use its allegation and request for consultations on its trade barrier findings in the same way.
The last option is referred to as ‘other proper measures’, a term articulated in the Regulation. Some speculate that suspension of the application of concessions or other obligations under international economic and trade agreements concerns may be an example of this kind of measure, similar to the cross-retaliation mechanism in DSU of WTO. In a similar vein, China is open to wielding other trade and investment administrative tools as a consequent measure to offset the adverse impacts of the alleged barriers. This approach may also cover special duties, such as AD and CVD duties. In the final determination of the U.S. renewable energy policy case, the Ministry of Commerce determined that all subject programs constituted prohibited subsidies under the SCM Agreement. It seems that the authority did not rule out the possibility of launching a countervailing duty investigation against American renewable energy products based on the determination at hand. And if a positive determination is reached, China may levy countervailing duties on imported American solar products.
It is clear that China’s government, from the legislative body to the investigating authority, attaches great importance to WTO consistency of the Rule and the practices.
From the legislative perspective, the legislators regard the violation of bilateral and multilateral economic and trade treaties and agreements as the major criterion to determine whether there is a trade or investment obstacle. Furthermore, the legislature tried not to use ambiguous terms like unreasonable and unfair in the definition of the subject barrier, and attempted to restrict the investigating authority’s discretion to avoid overly arbitrary interpretation and enforcement of the Rule. Because Chinese trade and investment treaties, to a large extent, are established on a WTO-centered basis, it is reasonable to assume that WTO consistency enjoys top preference in this legislation.
From the practical side, the investigating authority usually terminates an ongoing probe when alleged measures, policies and practices are brought into accord with the bilateral and multilateral treaties and agreements, which, to a large extent, are usually consistent with WTO rules. In addition, China has never used the Rule as a legal basis for unilateral actions, which may not be WTO consistent. In other words, WTO consistency, for both alleged foreign acts and Chinese investigations, is the highest policy goal in trade and investment barrier probes. Once an alleged violation of the international economic and trade treaty disappeared, the Chinese authority would immediately drop the case.
Further, even in choosing the final measures, bilateral solutions and the WTO Dispute Settlement Mechanism stand as the preferred option by the Chinese government.
From these three aspects, we can conclude that WTO consistency is paramount in China’s barrier investigations.
7. SUMMARY AND FUTURE APPLICATION
Regarding trade and investment barrier investigations, China has established a complete structure of rules and made several enforcement attempts. Chinese trade barrier laws and practices were based on the idea of WTO consistency and were applied in constrained manner and on limited occasions. Although the Rule has much to be improved, such as due process and transparency principles, the implementation of the Rule has been carried out in a balanced and non-aggressive way.
How might China’s trade and investment barriers investigations and measures be applied in the future? It is true China has had few applications of its trade barrier regulations in the past. However, it is unreasonable to conclude that China is reluctant to enforce its barrier investigations regulations in the future. A more realistic application may occur when intellectual property infringement is caused by imports. As IP disputes appear more frequently, the possibility of enforcing the IP section of trade law rises accordingly.
Some people are concerned that China may take unilateral measures through its trade barrier investigations. The Chinese government does have the mandate authorised by Chinese laws and regulations to take unilateral measures to counteract the effects and impacts of foreign trade policies. Article 47 of the Foreign Trade Law stipulates that China has the right to suspend or terminate its performance of relevant obligations in compliance with relevant treaties and agreements. And Article 33 of the Rule authorises the Ministry of Commerce to take appropriate measures, which could be regarded as encompassing unilateral countermeasures to diminish or minimise the adverse impacts of the concerned measures and practices. However, unilateralism is not a usual option of China’s trade policy and legal practice. On various occasions, Chinese official statements opine that maintaining a multilateral trade mechanism is the top priority of Chinese trade policies. In my opinion, the possibility of Chinese unilateral trade measures is remote for now.
[1] Mr. Li Chenggang, then deputy director general of Bureau of Fair Trade of Ministry of Commerce of China, Trade and Investment Barrier Investigation, China Daily, http://unn.people.com.cn/GB/22220/35841/35843/2777423.html
[2]Mr. Li Chenggang, then deputy director general of Bureau of Fair Trade of Ministry of Commerce of China, Lecture on Trade and Investment Barrier Investigation, at China University of Political Science and Law, 13th Oct 2004.
[3] Mr. Li Chenggang, then deputy director general of Bureau of Fair Trade of Ministry of Commerce of China, Trade and Investment Barrier Investigation, China Daily, http://unn.people.com.cn/GB/22220/35841/35843/2777423.html
[4] Trade barrier investigation rule signifies policy changes, Shanghai Securities News, 19th November 2004, http://finance.sina.com.cn/futuremarket/fmnews/20041119/09251166596.shtml.
[5] Article 29 of the Foreign Trade Law.
[6]The ex-officio provisions in Chinese antidumping law and trade barrier investigation Rule are quite similar. And recently, China, for the first time in history, has self-initiated an antidumping and a countervailing duty investigation against imported American Sorghum, on 4th February 2018.
[7]Jiangsu laver fights against Japanese government, 21ST CENTURY BUSINESS HERALD, 30th April 2004. According to the attorney, the petitioner believed that the Japanese import quota policy violates the non-discrimination principle.
[8]Shi Xiaoli, professor of China University of Political Science and Law, Research about the substantive rules of China’s foreign trade barriers investigation system, Law Science Magazine, 7th edition in 2008, page 25.
[9]See Final determination on Japan Laver Quota Policy, public notice No. 10, 2005.
[10] See Final determination on U.S. Renewable Energy Policy, public notice No. 52, 2012.
[11]See Final determination on Japan Laver Quota Policy, public notice No. 10, 2005.
[12]After China and Japan reached agreement on the laver issue, Korea filed a WTO dispute settlement complaint concerning Japanese laver import policy. Japan — Import Quotas on Dried Laver and Seasoned Laver, DS 323.
