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Provisional Translation

Recommendations for Expanding Economic and Trade Ties with China Following Its Accession to the World Trade Organization

Part II. Barriers to Business Activities:
Improvements Requested by the Japanese Business Community

May 20, 2003
Nippon Keidanren
(Japan Business Federation)

Since joining the WTO, China has removed a wide range of trade and investment barriers. Japan's business community fully welcomes these initiatives because they have greatly improved the business environment.

That said, Japanese corporations are still faced with many barriers to business in China. Nippon Keidanren strongly urges the Chinese government to remove the barriers listed below. Doing so would further invigorate Japan-China economic and trade relations.

We also believe that improvements in China's investment climate would boost both domestic and foreign investments, thereby contributing strongly to its economic growth.

The following list of trade barriers was compiled from information obtained from about 20 member companies of The Working Group on Trade With China* during hearings held from January to March 2003, and from information obtained from questionnaires sent to all Nippon Keidanren member companies in February 2003.

* The Working Group on Trade With China was formed in January 2003 as a subordinate organization of Committee on China, Nippon Keidanren.

1. Trade in Goods

Nippon Keidanren strongly urges the Chinese government to promote trade in goods: especially by ensuring the transparency of relevant laws and regulations and the transparency of compliance procedures; ensuring that such laws, regulations and procedures are applied without discrimination, granting trading and distribution rights, reducing tariffs, and safeguarding intellectual property rights.

(1) General rules

* Transparency of laws, regulations, and compliance procedures; avoidance of violating National Treatment:

Information on new laws and regulations should be released to the general public. This should include information on the procedures taken when drawing up the laws and regulations (including detailed rules concerning their implementation and enforcement), and when ultimately applying them. When the government draws up such laws and regulations, it should provide opportunities for all interested parties, including FIEs, to make public comments, and it should carefully consider those comments. We also urge that the laws and regulations be applied in a way that avoids violating National Treatment.

* A smooth enforcement of new laws and regulations with unhurried transition:

After new laws and regulations come into effect, we ask that a sufficient period of time be allotted before they are enforced. We also ask that their enforcement not be retroactive, and that government officials not enforce laws or regulations in an arbitrary manner.

* Legislation applied uniformly at national and regional levels:

The Chinese central government should apply laws and regulations uniformly throughout the entire country. For example, knowledge of some laws and regulations has not filtered down to some regions of the country. In addition, there have been many cases in which, even at the central government level, the interpretation and application of certain laws and regulations varied, depending on the ministry or department involved. We request that opinions regarding legislation be uniform, whether the point at issue be interpretation or enforcement.

* Improvement to the administration of justice, with a view to guaranteeing the independence and rights of the judiciary:

We ask that the administration of justice remain independent from government organs, and that the relevant government authorities enforce decisions made by the courts.

* Observance of commitment to grant all FIEs trading and distribution rights (rights to conduct retail and wholesale sales within China, and operate franchise services); open-market policies that reflect actual business conditions:

Trading rights are to be granted to all FIEs in China, including those with total foreign equity share, within three years of China's accession to the WTO. Distribution rights are, with a few exceptions, to be granted to FIEs operating in almost all sectors in China, within three years of China's accession to the WTO, as part of the liberalization of distribution services. We request that this opening be implemented according to schedule, and that the detailed rules governing this opening be clearly stated. Distribution rights for wholesale industries are to be granted to companies with a foreign equity minority share within one year of accession, but relevant regulations have still not been compiled. We recommend that the relevant regulations and ordinances will be compiled or amended without delay. We also strongly urge the removal of the stipulation that the granting of these rights must be conditional upon such factors as minimum trade levels and high capitalization levels. This removal is necessary to ensure that the conditions reflect actual business conditions.

With regard to trading rights, umbrella enterprises have the right to export products of affiliated companies, but there have been cases where applications for the right to import goods have been rejected, even though ordinances permitted the enterprises to operate within their scope of business.

Detailed rules governing the granting of distribution rights to umbrella enterprises are not clear, and the application of those rules lacks transparency. We request that these problems be resolved.

* A single ministry or department to have jurisdiction over the granting of licenses and permits, and procedures for same:

When a decision is made regarding the issuing of a license or permit, or when a government authority wields control - even the required minimal control - over a business operation, a number of different ministries and departments may be involved, depending on the business situation. This may occur even when a single corporation is making the application. We ask that, whenever possible, such authority be concentrated in a single ministry or department - for example, the recently reorganized Ministry of Commerce.

(2) Tariffs

Japan's business community welcomes China's commitment either to greatly reduce or remove tariffs within the next few years. But tariffs on some items are still not being reduced, as promised when China joined the WTO. We call on the government to correct this situation. We also strongly urge it to promote further liberalization during the new round of WTO negotiations.

* Strict adherence to commitments made when joining the WTO:

There has been a delay in reducing tariffs for some products. We request that tariffs be reduced or removed according to schedule. The situation should be rectified immediately in cases where China has clearly not observed commitments it made when joining the WTO, such as commitments involving certain duties and high unit tax for photosensitive materials.

* Further tariff reduction:

After the expiry of the transitional period, high tariffs of 10% or more are to be imposed on some materials, parts and products (e.g., audiovisual equipment, flat panel display color TVs, plasma and LCD panels for color TVs, projection screens, projectors, analog and digital copiers, cameras (single-lens reflex cameras, film cameras), lenses, keyboards, electric light bulbs, batteries, microelectronic machines, resonators, diesel engines, tractors, forklifts, discharge tubes for hot cathode fluorescent lamps, woven fabrics made from artificial and staple fibers, and air conditioner components. We strongly urge a further reduction in such tariffs, and request that this reduction be agreed to during the new round of negotiations, or as a voluntary step toward liberalization. We also request that tariffs of 10% or less be reduced or removed without delay. Furthermore, with regard to royalties for the use of trademarks, software etc., we request the elimination of customs duties that are imposed retroactively.

(3) Intellectual property rights

Japan's business community strongly requests that intellectual property rights be protected effectively throughout China. Under the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, protected intellectual property rights include: copyrights, trademarks, geographical indications, industrial designs, patents, layout designs of integrated circuits, and undisclosed information. China has enacted laws to protect intellectual property rights, including patents, trademarks and copyrights, with basic provisions for criminal and civil penalties, yet other problems - such as insufficient penalties - still exist. Another major problem is that intellectual property rights are not firmly protected on-site. Japanese corporations have sustained serious damage because of the non-protection of trademarks, industrial design rights, patents and copyrights. We therefore request that the Chinese government adopt the following measures:

* Stronger penalties and more appropriate legal procedures:

Laws protecting intellectual property rights do not impose sufficient penalties on violators. We request that this situation be rectified, for example, by raising minimum fines when administrative penalties are imposed, by increasing the scope of criminal penalties, and by raising the amount of compensation awarded for damages. Legal procedures should include, for example, a legal system under which seized copies are completely destroyed, with the infringing entity taking responsibility for their destruction. In addition, we ask that consideration be given to ensuring that intellectual property right litigation be heard in metropolitan courts which have specialized knowledge in such matters. Furthermore, we request that when technical license agreements are made, Chinese enterprises not be given preferential treatment over FIEs, as is now the case.

* Strict enforcement of intellectual property rights:

The Chinese government should establish a system enforcing the exercise of intellectual property rights in all regions of the country. As specific examples, we strongly urge that redress be facilitated as part of the administration of criminal and civil justice, and that administrative and customs controls be greatly strengthened. When administrative controls are applied, the various relevant ministries and departments should coordinate efforts and harmonize enforcement measures. Enforcement should be non-discriminatory for both domestic enterprises and FIEs. We also call for measures to be taken without delay to prevent future damage to intellectual property right holders.

* Screening standards for intellectual property right acquisition (particularly trademarks, industrial designs and patents) to conform to international standards, to be transparent, and to be applied without discrimination; screening procedures to be simplified and implemented without delay:

Chinese screening standards governing the acquisition of intellectual property rights should be clear, they should conform to international standards and should be applied without discrimination to domestic enterprises and FIEs alike. Those meeting the standards should be granted intellectual property rights, by establishing speedy screening system. The Chinese government has broad authority to force consent for the use of some patents, even though corporate secrets may be involved. We strongly recommend that this situation be remedied.

(4) Other considerations

The Japanese business community calls on the Chinese government to strictly abide by all WTO agreements, both substantively and procedurally, mindful of precedent already established through settlement of WTO-related disputes. Nippon Keidanren strongly urges that unnecessary trade barriers, in the form of so-called non-tariff measures, not be created through domestic regulations that exceed levels agreed to under the WTO. We expect China to be especially vigilant in respecting international standards and honoring agreements such as the Technical Barriers to Trade (TBT) Agreement, and the Sanitary and Phytosanitary Measures (SPS) Agreement.

Many of China's domestic regulations are not in conflict with WTO agreements. But, as noted above, they lack transparency and clarity, and there is an impression that excessive restrictions are placed primarily on FIEs. We urge that those regulations be liberalized in the long view.

* Trade relief measures based on strict standards:

Nippon Keidanren believes that some of the Chinese government's safeguards for steel products may violate WTO agreements. There are also concerns that anti-dumping investigations and countermeasures targeting some chemical goods may not conform to WTO agreements. We strongly request that the Chinese government interpret the WTO agreements in an extremely objective manner, and abide by those agreements when implementing trade relief measures.

* Standards and norms to conform to international ones, and to be clear and simple:

When China formulates domestic standards and norms, it should exert only the minimum control necessary. We ask that domestic standards and norms conform to international ones, and that they be clear and simple. When they are formulated, we ask that the process be highly transparent. (We made a similar request regarding the formulation of general laws and regulations.)

* Strict adherence to individual WTO commitments:

Motor vehicle import quotas are set in a non-transparent manner, and there are suspicions that this violates WTO commitments. We request that this situation be rectified.

* Reform of domestic taxation systems, and swift refund of the value-added tax:

We request a simplification of all domestic taxation systems and tax collection procedures, including those for value-added tax. We would especially like to see refund procedures for value-added tax streamlined, and the refunds provided without fail.

* Abolition of pre-export inspections of used equipment:

According to an ordinance controlling the import of used equipment, after May 1, 2003, used equipment cannot be imported into China until the importer submits to a competency inspection, and the equipment is inspected before export to determine whether it conforms to China's national standards. This requirement is basically a trade barrier preventing the export of used equipment, and should be removed.

* Relaxation of domestic standards:

The introduction and enforcement of domestic standards should not result in the creation of unnecessary trade barriers. Strict domestic standards not seen in other countries are applied against products of a number of industries - as one example, there are restrictions on the issuance of city license plates for motorcycles. We ask that this type of situation be removed over the mid-term.

* Participation in the Government Procurement Agreement:

We strongly urge the Chinese government to join the Government Procurement Agreement, which has been signed by a number of WTO member countries.

2. Investment

Japan's business community calls on the Chinese government to take the following steps by fully honoring its WTO commitments, further liberalizing its markets, respecting WTO investment rules, amending Japan-China agreements on investment, and promoting further domestic structural reform. We also call on China to liberalize mode 3 trade in each service sector, within the framework of the GATS (General Agreement on Trade in Service).

* Compliance with the WTO Agreement on Trade-Related Investment Measures (TRIM); prohibition of performance requirements:

Nippon Keidanren requests that no performance requirement mentioned in the TRIM Agreement or WTO commitments be used as a condition for investment approval. In some sectors, technical transfers and the use of local-content components are encouraged, but such measures can, in effect, be performance requirements and should therefore be eliminated.

* Transparency of laws and regulations:

We ask that investment-related laws and regulations be transparent, in the same way that general laws and regulations, and their compliance procedures, should also be transparent. China's investment-related laws and regulations are generally applied to FIEs, just as detailed laws, regulations, and complex rules are applied in specific regions to certain industries. We ask that all of these laws and regulations be transparent and that an opportunity for public comment be provided.

* Relaxation or elimination of limits on investment in prohibited and restricted industries:

In China, industries are classified according to in which direct foreign investment is encouraged, permitted, restricted or prohibited. We request that the list of industries in which such investment is prohibited be minimal, and include only industries such as those involving national security. We also ask that further liberalization measures be taken in ways such as removing foreign investment rate limits for restricted industries.

* Simplification of licensing system:

In consideration of China's current socioeconomic situation, a licensing system for investments in permitted industries is unavoidable for some sectors over the short term. However, licensing standards should be clear and should be applied without discrimination to either state enterprises or FIEs. Licensing standards should not be devised in such a way that, when put into practice, they discriminate against FIEs, and excessive conditions should not be imposed. In addition, any corporation satisfying the standards should be granted a license without delay. Over the mid-term, the licensing system should be abolished for as many sectors as possible, and liberalization should be achieved through a registration system that replaces the licensing system.

* Removal of restrictions:

In the case of industries in which foreign investment is restricted or permitted, restrictions still remain - numerical restrictions, such as the percentage of foreign investment allowed, the number of outlets, and the percentage of Chinese employees; and restrictions on business scope, such as geographical limitations. These restrictions should be phased out for as many sectors as possible, and foreign capital should be free to establish companies in all sectors over the mid-term.

* Liberalization of foreign remittances:

In many cases, the overseas remittance of profits, dividends and other monies from China is basically restricted by foreign exchange controls. We strongly urge that the relevant legislation be observed, and that the liberalized, smooth remittance of money abroad be permitted.

3. Trade in Services

(1) General rules

* Revision of laws, regulations and administrative guidelines to ensure that commitments are honored:

China plans a progressive liberalization for almost all of its service sectors to honor its commitment to liberalize services. This liberalization will involve such steps as expanding the number of regions to be liberalized, increasing the allowable percentage of foreign investment and alleviating restrictions on total production. We ask that China progressively revise its laws, regulations and administrative guidelines so that it completely honors its final commitment to liberalization.

* Information on new laws, regulations and administrative guidelines to be provided rapidly before their adoption, and the public be given an opportunity to comment on them:

To honor its commitments, the government has compiled a great number of new laws, regulations, administrative guidelines and measures dealing with trade in services. However, in some cases these initiatives are being enacted before their content is announced, and before the public has an opportunity to suggest changes. We therefore request that the content of laws, regulations and administrative guidelines be communicated without delay before they are promulgated, that the public be given ample opportunity to comment on them and that they be highly transparent.

* Laws and regulations concerning trade in services to be transparent:

Some laws and regulations that have been adopted or are scheduled to be adopted in accordance with China's WTO commitments lack transparency and, when applied, depend on the discretion of officials. We ask for a high level of transparency when laws and regulations are adopted, applied and interpreted.

* Licensing procedures to be non-discriminatory for domestic enterprises and FIEs:

In some cases, licensing procedures discriminate against FIEs. We request that licensing procedures be applied without discrimination.

* Prohibition of arbitrary or sudden changes in regulations:

On occasion, some regulations and administrative guidelines affecting foreign capital have been introduced or changed arbitrarily, in order to honor other WTO commitments. In other cases, the interpretation of such laws or regulations has changed suddenly. We request the termination of this type of treatment, to ensure a predictable environment for business operations.

* Authority and jurisdiction over licensing to be rationalized and harmonized:

Service industries are obliged to obtain several licenses for a single business operation, and several government ministries or departments have jurisdiction over the granting of those licenses. We request that this situation be rationalized, and that authority and jurisdiction over licensing be placed, as much as possible, in the hands of a single office.

* Streamlined licensing procedures:

Even after a license application has been received, the office may take several years to actually grant it. We strongly urge that licensing procedures be streamlined. We also ask that a definite reason be given for licensing delays and rejections.

* Uniformity among central and regional government organs:

The interpretation of laws and regulations varies, sometimes between the central and local governments, and other times among regional governments or between ministries and autonomous cities. Even among central government ministries and departments, China's WTO commitments are interpreted differently, as are the laws and regulations adopted to honor those commitments. We request that the application and interpretation of laws and regulations be uniform throughout the country.

* Liberalization to respond to greater demand for services:

China's economic development has boosted consumer demand and created a more varied consumer market. For example, motor vehicles are increasing in number, consumerism is growing, and the Chinese people are showing a greater interest in foreign travel. We expect that foreign service industries will be actively used to satisfy these growing demands, but this will require improvements in the motor vehicle insurance system, development of a delay-free distribution system, etc.

(2) Major service sectors

(a) Financial services

We expect that the Chinese government will resolutely fulfill its WTO commitment to progressively eliminate geographical and client restrictions on yuan-based transactions. (Such restrictions are to be completely eliminated after 5 years.)

We request that the Chinese government resolutely honor its WTO commitment to eliminate client restrictions on foreign-currency-based transactions. We request, especially, the rapid elimination of the many restrictions which affect clients, and which hinder the pursuit of business. Such restrictions include: (i) a single corporation cannot open more than one bank account; (ii) FIEs in China, and their branches and offices, can open a bank account only in the district in which they are registered, and which is under the jurisdiction of the relevant government bureau controlling foreign exchange; and (iii) a single corporation can hold only a certain amount of foreign currency outside a capital account, and if its holdings exceed this limit, it must convert the excess into yuan.

There is a limit of 8% on the ratio of net worth to deposits, in the case of yuan-based transactions, and a loan ratio limit of 40% (presently under review) in the inter-bank market. These and similar restrictions do not take into account the different situations that companies experience at their local base of operations, and can result in discrimination against FIEs. We therefore ask for improvements in the yuan-based transaction market.

[Life and non-life insurance]

We request that China completely eliminate geographical restrictions by December 2004, in accordance with its WTO commitments, and that it honor other insurance-related WTO commitments, including the progressive elimination of underwriting restrictions.

China is modifying its laws in order to honor WTO commitments, such as the January 2003 amendments to legislation on insurance. However, ordinances and some regulations controlling foreign insurance companies lack transparency. We request that this situation be remedied.

With regard to life insurance, we request that the Chinese government (i) relax limits on the percentage of foreign capital invested in joint venture life-insurance companies; and (ii) permit life insurance companies that are completely owned by foreign capital to promote their business in China through branch offices.

Foreign non-life insurance companies are not permitted to offer motor vehicle insurance (third-party liability insurance, vehicle insurance, etc). Because the number of vehicles in China is expected to rise rapidly, one issue that needs to be addressed in the future is the complete opening of China's motor-vehicle insurance market to foreign non-life insurance companies that have valuable expertise in the field.

We request the abolition of regulations that prohibit contracts denominated in a foreign currency.

(b) Transportation and logistics-related services

Forwarding licenses are granted by the Ministry of Commerce (formerly the Ministry of Foreign Trade and Economic Cooperation), while Non-Vessel Owning Common Carrier (NVOCC) licenses are granted by the Ministry of Transport. However, the jurisdictional boundary between the two ministries is blurred. We request that jurisdictional matters be clarified, or that one ministry be given jurisdiction over both types of licenses.

Interpretations regarding the application of laws and regulations sometimes vary - for example, the government office in charge of marine customs duties and the state bureau in charge of tax collection have different views of what constitutes a bonded area. These differences hinder business, and we ask that both organs coordinate their efforts.

We request that jurisdiction over the granting of transportation / logistics-related permits and licenses be rationalized, or placed under one government bureau, in order to permit the efficient, unified oversight of logistical matters.

The white paper on China's maritime transport describes in some detail the future process of further market opening, but does not clarify how the future will differ from the present, nor does it give clear examples of the process. We request that further detailed plans be provided.

We request the rapid abolition of restrictions preventing FIEs from promoting maritime transport businesses.

Licenses (scope-of-activities permits) granted to Japanese shipping companies operating out of China are restricted in scope. We request that the permitted scope be the same as that granted to Chinese shipping companies operating out of Japan.

(c) Construction and related engineering services

Since December 2002, when China began enforcing the new Administrative Regulations on Foreign Invested Construction Companies, foreign construction companies have been legally permitted to establish corporate entities wholly controlled by foreign capital, and to establish Sino-foreign joint ventures in which they hold more than 50% of the equity. These changes were put into effect in accordance with WTO commitments. However, the conditions FIEs must satisfy before they can establish such an entity are so strict that it is practically impossible for them to do so. We request the relaxation or complete removal of the following conditions:

  1. FIEs with 100% foreign equity, and Sino-foreign joint ventures, are only permitted to undertake a construction project if the project is wholly financed by foreign investment and/or grants, or jointly constructed with at least 50% foreign investment;
  2. The company is required to control a large amount of capital for each tiered grade;
  3. Net assets worth more than the capital are required, and many full-time employees must be hired;
  4. The company's status, which should be defined by such factors as extent of construction experience in Japan, is not considered when its tiered grade is established.

Detailed rules and regulations, which apply in the various regions and which are all relevant to the above-mentioned Administrative Regulations, have not been promulgated in written form, and application of the Regulations lacks transparency. We request that this situation be remedied without delay.

(d) Distribution services

Distribution services are an extremely important sector, now that domestic demand is rising rapidly. They are also a driving force for more economic growth. We therefore hope that foreign distribution companies will be given opportunities to participate fully in the distribution market. We also urge China to clearly indicate its WTO commitment schedule for progressively relaxing or eliminating restrictions on wholesale and retail business, foreign investment rates for franchises, geographical restrictions and the scope of business activities. We urge that the vague wording, regarding the three-year time frame for eliminating restrictions on foreign investment rates for franchises, be made clearer.

Developing a better distribution system requires the creation of an efficient supply chain, but this is hindered by limits on value-added tax refunds and long delays in the refund process. We call for improvements.

The permit system for franchise contracts lacks transparency. We strongly urge that this situation be rectified.

Royalties are fixed at 0.3% of sales, but the definition of a royalty is vague. Royalty amounts should be determined among corporations, not through legislation. It must be pointed out that Chinese enterprises are not limited in the same way. We ask that the payment of royalties be liberalized.

(e) Telecommunications services

As FIEs expand their operations in China, they experience a growing need for effective telecommunications services that form the infrastructure for other services. Within China, demand for telecommunications services - whether high-speed data services, services provided for a domestic sales network, or mobile communications - is growing dramatically. To satisfy these needs, a service supply system of consistently high quality is required. We therefore request that China further liberalize this market in accordance with its WTO commitments, to keep up with the changing economic situation and allow competition among telecommunications companies.

In 2003, companies with up to 50% foreign equity will be permitted to offer VAN (Value Added Network) and paging services. Companies with up to 49% foreign equity will be able to offer mobile telecommunications services starting in 2004, and to offer basic domestic and international telecommunications services (including resale) starting in 2007. We ask that such companies be permitted to invest a majority share of the equity.

Demand for Internet services is rising. We request a clear schedule for the opening of this market.

Improvements in the telecommunications infrastructure are essential for the smooth operations of foreign manufacturers and other FIEs. We request that restrictions on the importing of telecommunications equipment to China be relaxed.

We request that the telecommunications resale market be opened to foreign telecommunications companies.

We request the relaxation of conditions governing new entries into China's market, especially the limit of capital.

The procedures for establishing an FIE in China lack transparency. We request that this be remedied.

(f) Tourism services

China has promised to permit the establishment of wholly owned tourism-related FIEs and their branch offices before 2005. However, such companies would not be permitted to cater to the demands of Chinese nationals for overseas travel (including to Hong Kong, Macao and Taiwan). We ask that this restriction be removed.

When establishing a business in the travel industry, such as a hotel, it is essential that companies form horizontal tie-ups with enterprises in other industrial sectors, such as construction, electrical machinery and appliances. However, a wide range of restrictions still create high barriers that inhibit FIEs from establishing joint ventures among themselves. We request that such restrictions be relaxed in order to promote further development of tourist-related services.

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