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3. Barriers to trade
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3.1 Tariffs and tariff administrative measures

3.1.1 Tariff peak

The overall tariff rate in the US is relatively low. However, the US imposes high tariffs on certain products, which constitute tariff peaks. Currently, 7 percent out of the total tariff headings of the US have a tariff rate three times higher than the average tariff rate, and 4 percent have a tariff rate over 15 percent. High tariffs or tariff peaks are mainly applied to textiles and garments, leather products, rubber products, pottery, footwear and travelware, which are the major export items of China to the US. Within one specific product classification, such as footwear or pottery, usually lower tariff rates are applied to high-priced products, and higher tariff rates to low-priced products. Take products under a single tariff heading as an example. Trunks, suitcases, vanity cases, attache cases, briefcases, school satchels and similar containers with outer surface of leather, of composition leather, or of patent leather are imposed a tariff rate of 8 percent, while those with outer surface of plastics 20 percent. The tariff rate for drinking glasses, other than of glass-ceramics, valued not over $0.30 each is 28.5 percent, while that for drinking glasses, other than of glass-ceramics, valued over $5 each is 5 percent. Golf shoes, under welt footwear for men, youths and boys are imposed a tariff rate of 5 percent, while house slippers, under footwear with outer soles of rubber or plastics, valued not over $3 per pair are 48 percent. Women's or girls' briefs and panties containing silk or silk waste is imposed a tariff rate of 2.1 percent, while women's or girls' underpants with man-made fibers 16 percent. Such tariff structure has put Chinese products, which occupy a large share of the low-end market in the US, at a disadvantage in competition.

3.1.2 Tariff escalation

Tariff escalation is still a serious problem in the US. Some finished products are imposed higher tariff rates tha n semi- finished products. Take products under a single tariff heading as an example. The tariff rate for non-retail-use non-twisted spin eurelon-6 single yarn is 0, while that of unbleached or bleached pure nylon fabric is 13.6 percent, and knit or crocheted T-shirts made of chemical fiber 32 percent. The tariff rate for cultured pearls worked is 0, while that for articles of cultured pearls is 5.5 percent. Wood sawn or chipped lengthwise, sliced or peeled, of a thickness exceeding 6 mm is imposed a zero tariff rate, while wooden forks and spoons under tableware and kitchenware 5.3 percent. Such a tariff structure has considerably hindered China's export of higher-value-added products such as semi- finished or finished products to the US, and has undermined the interests of Chinese enterprises.

3.1.3 Tariff quotas

The US imposes tariff quotas on imports of certain agricultural products in order to control the quantities of import and protect the interests of domestic producers.

Products subject to tariff quotas in fiscal year 2005 included almost all dairy products, sugar and sugar products, peanut and certain peanut products, sweetened cocoa powder, chocolate crumb, infant formula containing oligosaccharides, mixes and doughs, mixed condiments and seasonings, mutton, beef, cotton, etc. High tariffs are imposed on products exceeding the established quota. For instance, the average tariff rate for in-quota nonfat dried milk is 2.2 percent, while that of off-quota is 52.6 percent.

3.2 Import restrictions

In December 2005, the International Trade Administration of the DOC published a final rule notice that extended the Steel Import Monitoring and Analysis (SIMA) system until March 21, 2009. This action also expands the list of covered items to include all basic steel mill products, but it also removes certain downstream steel products, which were formerly covered, such as certain fittings and flanges, certain cold-formed shapes, and certain bars. The SIMA system was originally outlined in the President's March 5, 2002 Proclamation about Steel Safeguards. The monitoring system required all importers of steel products to obtain a license from the DOC prior to completing their Customs import summary documentation to ensure the effectiveness of the safeguard measure. After termination of the safeguard measures, the monitoring system continued in effect until March 21, 2005. According to the provisions of this notice, the data collected on the licenses are made available to the public weekly after the DOC review. The purpose is to provide statistical data on steel imports entering the United States 7 weeks earlier than is otherwise publicly available. SIMA system provides timely information, therefore it is likely that US steel industry and trade associations will speed up the application of the investigation of steel imports in the future. In addition, it is very likely that foreign steel exporters will face more U.S. investigation because of the broad coverage of steel products monitored.

3.3 Barriers to customs procedures

The US Customs requires that exporters should provide additional documents and information on goods waiting for customs clearance. For certain products, such as textiles, clothing or footwear, the information required goes quite beyond that necessary for normal customs clearance. These formalities, which are both complicated and costly, have constituted barriers to exporters, particularly to small exporters.

The US Customs also requests confidential processing information for the imports of textiles and clothing under certain circumstances. For example, when the exterior of a clothing article is made of more than one material, information must be provided on the respective weight, value and surface area of each material. Such requirement has in practice resulted in an increase of cost.

In addition, the liquidation period has been extended up to 210 days, during which the US Customs may still request additional information necessary to establish the classification of the products and the country of origin. The US Customs may extend the liquidation period beyond 210 days without giving a detailed explanation. In some cases a minor problem or error with the invoice is sufficient. As apparel articles often have a short life span (e.g. fashion items must be sold within two to three months) and have to be marketed immediately, if the importer is not able to re-deliver the goods upon Customs' request for final tariff determination, Customs will apply a penalty as high as 100 percent of the value of the goods.

3.4 Technical barriers to trade

The US has a very complicated and decentralized system of technical standards and governing laws. In total, 17 agencies of the federal government and 84 independent organizations have the right to draft technical regulations. State or local governments have also enacted many different technical regulations in the areas of manufacturing, transportation, environmental protection, food and drugs.

The system of certification and conformity assessment in the US is also rather fragmented and complicated. There are currently 55 certification systems in the US, but no centralized quality certification authorities. Government organizations, local government agencies and non-government organizations can all conduct quality certification. In conformity assessment, "third-party" assessment is commonly used in the US, and many have been made a compulsory requirement by legislation at the state or federal level, such as the DOT Certification, UL Certification, and ASME Certification. In the area of energy-saving products certification, Energy Star is a recognized label to indicate standby energy efficiency of electric appliances.

3.4.1 Safety Standard for Cigarette Lighters

In 2004, the US Consumer Product Safety Commission (CPSC) voted to grant the petition from the Lighter Association, Inc. asking the Commission to adopt the voluntary "Standard Consumer Safety Specification for Lighters" (ASTM F-400) as a mandatory standard under the Consumer Product Safety Act (CPSA). In April 2005, a notification named "Safety Standard for Cigarette Lighters; Advance Notice of Proposed Rulemaking" was issued. This advance notice of proposed rulemaking (ANPR) initiates a rulemaking proceeding under the CPSA. One result of the proceeding could be issuance of a rule requiring that cigarette lighters meet certain safety requirements. The ASTM F-400 standard is substantially different from the commonly used ISO9994, which do not have such requirements as contained in Section CR, Appendix A2 of ASTM F-400. This will in practice force Chinese lighter producers to use two standards and has violated the principle of adopting international standards as required by the WTO Agreement on Technical Barriers to Trade. Chinese lighter producers are concerned that if the rule is passed, the implementation of the standards will be time-consuming, and consequent delay could result in huge costs. For example, inspection may take as long as several days in US ports, the cost of which may well be higher than the cost of a lighter. As Chinese- made lighters have an overwhelming market share in the US, China will closely watch the development of this rule.

3.4.2 Standard for the flammability of bedclothes, mattresses and mattress/foundation sets

In January 2005, the US Consumer Product Safety Commission (CPSC) issued the "Standard to Address Open Flame Ignition of Bedclothes; Advance Notice of Proposed Rulemaking" and the "Standard for the Flammability (Open Flame) of Mattresses and Mattress/Foundation Sets; Standard to Address Open Flame Ignition of Bedclothes". Products covered include mattresses and mattress/foundation sets, bedclothes, etc. CPSC is proposing a flammability standard under the authority of the Flammable Fabrics Act which would address open flame ignition of mattresses and mattress and foundation sets ("mattresses/sets"). The proposed requirements will generate a smaller size fire, thus reducing the possibility of flashover occurring. Bedding products covered in this notification include bed sheets, blankets, mattress sets, pillows, down quilts and other bedclothes, which are all major textile items China export to the US. Therefore, China will closely follow the progress of the proposed rule and its possible impact.

3.4.3 Tire testing rules

The new tire testing standard FMVSS139, which requires more stringent safety parameters, will be introduced in the US as of June 1 2007. The new standard will have a major impact on China's export of new pneumatic tires for passenger cars and certain tires for light trucks to the US. It will particularly affect the export of radial tires in terms of high speed and endurance tests. When the new rule takes effect, tires failing to meet the new standard will be denied entry into the US market, while those already in the US market will have to be recalled. The new rule indicates a higher threshold for products destined to be exported to the US.

3.4.4 Energy conservation standards for certain products

In November 2005, the US issued a notice on Energy Conservation Standards for Certain Consumer Products and Commercial and Industrial Equipment, citing consumer protection and energy saving as the aim and the purpose of the notice. The Department of Energy issued the Technical Amendment and placed in the Code of Federal Regulations (CFR), as per product category or equipment description, the energy conservation standards and related definitions that Congress has prescribed in the Energy Policy Act of 2005 for various consumer products and commercial and industrial equipment. A total of 15 categories of products are covered, including fluorescent lamp ballasts, ceiling fans and ceiling fan light kits, low voltage dry-type distribution transformers, commercial package air conditioning and heating equipment, commercial refrigerators, freezers and refrigerator-freezers, commercial clothes washers, etc. The new standards, as per product, will be enforced over the period from 2007 to 2010. As required by the new energy act, energy conservation standards for household appliances such as air-conditioners and refrigerators, which are the major products exported to the US by China, will be raised considerably. China will closely watch the development of the standard issue.

3.4.5 Labeling

The US maintains stringent requirements on food labeling. Most foods are required by the Food and Drug Administration (FDA) to list the content of at least 14 nutrients. The stringent labeling requirement has considerably increased the cost to exporters in developing countries, constituting a practical import restriction to those countries not in a position to conduct food content analysis.

On January 1, 2006, the FDA started to enforce two new mandatory food- labeling requirements. Trans fatty acids are required to be declared in the nutrition label of conventional foods. However, trans fat does not have to be listed if the total fat in a food is less than 0.5 gram per serving. The FDA also requires food labels to clearly state if food products contain any ingredients, no matter how minimal the amount, that contain protein derived from allergenic foods. The new requirements will inevitably increase the burden on Chinese food exports to the US. China raises its concern as to whether these specific labeling requirements are either excessively burdensome or not entirely necessary.

In 2005, the US filed 72 TBT notifications with the WTO, 8 of which are notifications of draft amendments on food labeling, covering vegetables, fruits, eggs, wines, distilled spirits, malt beverages, etc. China will closely watch the progress of these draft regulations.

3.5 Sanitary and phytosanitary measures

In 2005, the US filed 171 SPS measure notifications with the WTO, accounting for 26 percent of the total the WTO received in the year.

3.5.1 Chemical residue limit standard

The US makes or amends regulations and laws governing chemical residue limits standards frequently. In 2005, the US filed with the WTO 35 notifications on the final rules governing the maximum chemical residue limit contained in agricultural products and foods such as grapes, tomatoes, and wheat. Such changes have a major effect on Chinese agricultural products and food processors. Chinese businesses affected are expressing concerns regarding this issue.

3.5.2 Food inspection and quarantine Automatic detention on imports

Section 801(a) of the Federal Food, Drug, and Cosmetic Act (hereinafter referred to as Section 801(a)) authorizes the FDA to place automatic detention on imports posing potential hazards. Automatic detention is appropriate when at least one sample has been found to violate the standard and the violation represents a potentially significant health hazard, or if there exists any information, historical record or notification from other countries, after having been evaluated by the FDA, indicating that a product from a specific geographical area or country could pose a health hazard.

Recommendations for automatic detention can also be based on multiple samples showing violations of the Act but which do not pose a significant public health hazard. If automatic detention is placed on the shipment by the FDA, the shipment must receive inspection by local laboratories upon its arrival in US ports, and cannot be released for sale in the US unless it is inspected and found to be safe and examined and approved by the local branch of the FDA.

The system of automatic detention can, to a certain extent, help to ensure quality and safety of imports into the US. It is deemed, however, by China that the system is unsound in the following aspects:

Sampling for the purpose of automatic detention does not stress representation of the samples. Inspection conclusions made by the FDA or its recognized laboratories are final and request for re- inspection is usually denied even if inspection organizations in exporting countries do not agree with the conclusion.

Moreover, automatic detention can be placed on a certain product from all other countries, or on part of or all producers of a certain product from a certain country, and can be maintained as long as the FDA considers the shipments do not meet required standards, which consequently has a huge adverse impact on the sales and production of businesses affected. In addition, unlike in normal inspections, where the costs are usually covered by the FDA, costs incurred as a result of automatic detention are fully borne by importers, thus greatly increasing exporters' costs as well. In 1989, canned mushrooms from China were placed in automatic detention, which was not removed until 2004. The producers affected suffered a great loss. Bio-terrorism Act

The US promulgated the Public Health Security and Bio-terrorism Preparedness and Response Act (hereinafter referred to as Bio-terrorism Act) in 2002, prescribing stringent guidelines for fighting food-related and bio terrorism. To enforce this Act, the FDA proposed four interim regulations in 2003, namely, Administrative Detention, Establishment and Maintenance of Records, the Registration of Food Facilities, and Prior Notice of Imported Food Shipments, with the first three becoming established final rules in 2004.

While China recognizes the efforts by the FDA to fight against terrorism, it is concerned about the following adverse impact caused thereby.

First, the new regulations will slower customs clearance and increase business costs for exporters.

Secondly, the new regulations have increased uncertainty in the export market. According to the original rules, the FDA is authorized to detain imports pursuant to Section 801(a). Chinese exports have suffered frequent blocks as a result. A total of 2,071 shipments from China had been denied entry into the US market during the period from January to December 2005, up 12 percent over the same period of the previous year, making China the biggest target. The regulation on Administrative Detention will further increase the uncertainty for Chinese products to enter the US market. Generally speaking, the US inspection and quarantine procedures are unduly complicated and are based on inadequate scientific grounds. The overuse of inspection and quarantine and even discriminatory measures have increased the cost of importing relevant products, restrained normal trade and violated Article 5.4 of the WTO Agreement on the Application of Sanitary and Phytosanitary Measures, which provides that "member should, when determining the appropriate level of sanitary or phytosanitary protection, take into account the objective of minimizing negative trade effects".

3.5.3 Progress of the issue of Ya pear export

China and the US signed the 2005-2006 Working Plan of Phytosanitary Measures for Chinese Ya Pear Export to US, and its supplementary provisions in September and in December 2005, respectively. China's export of Ya pears, which was suspended for over 2 years, has been resumed. The US has imposed stringent phytosantary measures on Chinese Ya pears, which have considerably increased costs for Chinese exporters. China will continue the communication and consultation, as well as technical cooperation with the US, to ensure the smooth trade of Ya pears between the two countries.

3.5.4 Risk assessment for ready-to-eat meat and poultry products

Since 2004, the US has sent expert teams to China five times to inspect the processing facilities of ready-to-eat meat and poultry products in China and China's monitoring system for poultry meat remains. Request for on- line public comment on the draft risk assessment recently expired at the end of 2005.

Risk assessment on imports by the US is time-consuming, and burdened with undue requirements at every stage, and thus has practically hindered the export of Chinese ready-to-eat meat and poultry products to the US market. It is China's desire that the US accelerate the risk assessment process, thus resuming the import of China's cooked meat and poultry products at the earliest date possible.

3.5.5 Regulations on prohibiting the use of certain cattle origin materials

After the US Food and Drug Administration (FDA) had issued the rule to prohibit the use of certain cattle material in human food and cosmetics in 2004, the FDA then proposed in October 2005 to amend the agency's regulations to prohibit the use of certain cattle origin materials in the food or feed of all animals. These materials include the following: the brains and spinal cords from cattle 30 months of age and older, the brains and spinal cords from cattle of any age not inspected and passed for human consumption, the entire carcass of cattle not inspected and passed for human consumption if the brains and spinal cords have not been removed, tallow that is derived from the materials prohibited by this proposed rule that contains more than 0.15 percent insoluble impurities, and mechanically separated beef that is derived from the materials prohibited by this proposed rule. These measures will further strengthen existing safeguards designed to help prevent the spread of bovine spongiform encephalopathy (BSE) in US cattle. The proposed regulation has set higher standards for food or feed of animals produced in China.

3.6 Trade remedies

According to the statistics from the US International Trade Commission, in 2005 the US imposed anti-dumping duties on such Chinese products as wooden bedroom furniture, crepe paper, frozen or canned warm-water shrimp and prawns, tissue paper, magnesium, and chlorinated isocyanurates. 4 anti-dumping investigations were initiated against Chinese products, including certain artist canvas, diamond saw blades, lined paper school supplies and carbon and alloy steel wire rod, accounting for 60 percent of the total anti-dumping investigations initiated in the US in 2005. In addition, two anti-circumvention investigations were initiated against petroleum wax candles, as well as 27 safeguard investigations against textile products, and 1 product-specific safeguard investigation against circular welded non-alloy steel pipe. US$570 million-worth Chinese exports were affected by these anti-dumping and safeguard measures initiated in 2005.

Although there were fewer cases of anti-dumping investigations against Chinese products than the previous year, unfair practices by US investigating authorities remain in place.

3.6.1 Existing problems in antidumping investigations against Chinese Products Continued refusal of China's full market economy status

By the end of 2005, the US had continued to refuse the recognition of China's market economy status regardless of the progress and achievements China has made in building its market economy. Because of the aforesaid position of the US government, Chinese exports have suffered heavy losses in dealing with anti-dumping investigations against them. According to a study report entitled Eliminating Non-market Economy Methodology Would Lower Antidumping Duties for Some Chinese Companies released by the U.S. Government Accountability Office (GAO), on average, the rates applied to China were over 20 percentage points higher than those applied to market economy countries. This difference is attributable primarily to the comparatively high country-wide duty rates applied to Chinese companies not eligible for individual rates. These country-wide rates averaged about 98 percent — over 60 percentage points higher than the average duty rates assigned to market economy companies not receiving individual rates. At the 16th meeting of the Sino-US Joint Commission on Commerce and Trade (JCCT) held in 2005, the US agreed to strengthen substantial consultations with China on the issue of China's market economy status. China hopes that the US will, from the broad perspective of bilateral trade and economic relations, reach agreement with China on this issue and grant Chinese exporters fair treatment. Market Oriented Industry (MOI) and surrogate country Market Oriented Industry (MOI)

According to relevant US laws, in antidumping investigations, if the respondent company can prove that its industry meets standards for Market Oriented Industry (MOI), the DOC should adopt the cost data of this respondent company or its industry in calculation of production cost and dumping margin, rather than adopting a Surrogate Country approach. In practice, however, the DOC refuses to grant MOI status to Chinese companies under various pretexts. So far, no Chinese respondent has yet won the MOI status. Surrogate country

To non-market economy countries, the DOC usually uses surrogate country data to determine the normal value and set dumping margins. In practice, India, Pakistan, and Indonesia are usually used as candidates for surrogate country and India is usually a favorite choice because of the easy availability of information in India. In the preliminary results made in 2005 against artist canvas and diamond saw blades, the DOC used India in both cases as the surrogate country regardless of the real situation involved in the two cases. Selection of surrogate price for factors of production

In anti-dumping cases against Chinese products, price data which is widely applicable in surrogate countries is usually used to determine the normal value of a product and set the dumping margin against the affected company. If imported materials are used, under certain conditions, the DOC will use the real import price to calculate the cost of the imported material. These regulations have given great discretionary power to the DOC, which is likely to abuse its power to adopt unfair prices against Chinese producers in determining the normal value of Chinese products. For example, in the anti-dumping case against artist canvas, the DOC insisted on using the price of India's imported cotton fabric, instead of the price of domestically produced Indian cotton fabric as the surrogate price notwithstanding the realities of responding Chinese enterprises. Anti-dumping margins against Chinese producers were artificially raised as a result. New anti-dumping policy of the DOC in 2005

Since January 2005, the DOC has issued new policies and proposals one after another to impose more barriers and make it more difficult for Chinese exporters to deal with US anti-dumping investigations. New procedures for applying weighted-average rates and policy of exporter/producer combination rates

In April 2005, the US DOC issued new policies towards China and other non-market economy countries.

First, new procedures will be applied towards companies that wish to obtain weighted-average rates. The new procedures have become more stringent in terms of timelines, and have also restricted those companies with inadequate or incomplete applications with limited opportunities for "correcting" their applications. The questionna ire also requires exporters to submit documents that are difficult to obtain, such as Customs Declaration Form 7501, and sets stringent requirements for the accuracy of documents submitted.

Secondly, a system of "exporter/producer combination rate" is applied towards companies that have obtained weighted-average rates, which can prevent exporters who have a higher rate from shipping their merchandise through an exporter assigned an average rate.

The above two measures have given the DOC more discretion and have made it more difficult for responding companies to obtain the weighted-average rates, and will have a major impact on future anti-dumping investigations, as well as on producers and exporters who are subject to current anti-dumping orders. New sampling method

A new sampling method was introduced in October 2005 when the DOC conducted its annual administrative review regarding brake rotors from China and certain softwood lumber products from Canada. A random sampling based on the so-called "sales volume probability" was adopted in selecting mandatory respondents.

According to the new method, the top large companies will no longer have a 100 percent probability of being selected as mandatory respondents, but will be assigned an average rate which will be difficult to predict and control. However, small businesses totally unprepared for responding to the whole investigation process are likely to be selected instead, and assigned a high rate due to a lack of resources or inability to respond to the full investigation, or because of its own cost and price problems. Moreover, if part or all of the mandatory respondents are assigned a punitive high rate, the weighted-average rate will be increased considerably, which could place most companies in a dire situation regarding their exports to the US. Meanwhile, the uncertainty in sampling has also increased difficulties in trade. Changes in calculating value of imported materials

At the request of domestic industries, the DOC proposed to amend its method of calculating the value of imported materials starting in May 2005. The current program provides that if most of the materials are imported, i.e. with a percentage over 50 percent, the DOC will continue to use real import price to determine the total consumption of that material. If the percentage of import is less than 50 percent, the actual importing price will only be applied to the imported portion while a surrogate price will be assigned to the domestically-sourced portion. Former practices by the DOC, however, have shown that once the imported part reaches 15 percent-20 percent, real importing price are usually used to determine the consumption of that material. The new policy has considerably raised the percentage requirement, and will make it more difficult for Chinese companies to obtain a lower anti-dumping rate. New Shipper Review Amendment Act to make it more difficult for new exporters

The US Senate has just approved the New Shipper Review Amendment act. The act will take effect when approved by the House of Representatives. According to the new act, importers are required to submit a cash deposit, instead of a bond or security, for entry of merchandise subject to antidumping orders via new shippers. This requirement will create difficulties and higher costs for new shippers in their efforts to export.

The proposed change in calculating the value of imported materials, (which is still under discussion), and the amended policy affecting exporters waiting for approval, will have a substantial impact on Chinese companies responding to anti-dumping investigations and Chinese exports to the US. China will closely follow these developments. Zeroing

In accordance with the Tariff Act of 1930, as amended, the DOC uses zeroing when setting the dumping margin. This methodology has been ruled by the WTO as a violation of the WTO Anti-dumping Agreement. China believes that the US practice has injured Chinese companies' rights under the WTO Anti-dumping Agreement, and that further, the US should correct this action as soon as possible.

3.6.2 Product-specific safeguard measures Legal issues on US product-specific safeguard measures

Section 421 of the US Trade Act of 1974 (hereinafter referred to as Section 421) sets forth regulations on procedures utilized and entities involved in implementing product-specific safeguard measures against various Chinese products. It is deemed by China that Paragraph 16 of the Protocol on the Accession of the People's Republic of China to the WTO does not provide sufficiently detailed procedures and entities with regard to investigations related to product-specific safeguard measures and enforcement thereof. It is China's further contention that Section 421 does not provide detailed regulations related to several important concepts and procedures relating to product-specific safeguard measures. In particular, Section 421 is inconsistent with relevant WTO rules relating to the definition of "significant cause", the criteria to determine the timeline for "rapid increase" or the conditions for the increase, the definition of "other related factors", the definition of "similar or directly competitive products", etc. China hopes that the US will make the necessary corrections, modifications and amendments to Section 421 so as to bring it in line with the corresponding and relevant WTO rules. US investigations for product-specific safeguard measures

In 2005, the ITC initiated a product-specific safeguard measure investigation against Chinese circular welded non-alloy steel pipe in accordance with Section 421. The ITC, in complete disregard to the fact that no disruption has been caused to the US market, and further, in the absence of any established causality, has ruled that the Chinese product has caused inj ury or threat of injury to the domestic industry in the US, and citing China's general overcapacity of steel as a reason, proposed to the US President various safeguard measures against the specific product. This practice of the ITC is against China's WTO commitments and further, is a serious violation of the WTO's non-discrimination principle.

On December 30, 2005, the US President decided not to impose safeguard measures against China's steel pipe.

3.6.3 Special restrictive measures on Chinese textile products (Paragraph 242)

In April 2005, the US Court of Appeals for the Federal Circuit overruled the preliminary injunction made by the US Court of International Trade in December 2004 enjoining the interagency Committee for the Implementation of Textile Agreements (CITA) from further accepting, considering, or otherwise proceeding on requests for safeguard measures on textile products from China based on the threat of market disruption as provided under paragraph 242 of the Report of the Working Party on the Accession of China. During the year, CITA, based on market disruption, or the threat of market disruption, initiated several investigations against Chinese textile products in order to restrict their import. These investigations were initiated by the CITA directly, or at the request and petition of the US textile industry. The investigation proceedings, which had been suspended since 2004, were thus resumed. By the end of October 2005, 24 textile products, the export of which to the US had reached US$4 billion in 2004, had been placed under investigation. The final ruling by CITA subjected 9 products to quota, including cotton knit shirts and blouses, cotton trousers, cotton and man-made fiber underwear, man- made fiber knit shirts and blouses, man-made fiber trousers, cotton yarn of combed fibers, men's and boys' cotton and man-made fiber woven shirts, cotton and man- made fiber brassieres and other body supporting garments, and other synthetic filament fabric.

In the US investigation proceedings, there exist unreasonable and unfair practices which are clearly inconsistent with China's WTO commitments and which are in violation of various WTO rules. For instance, there is much confusion with regards to the conditions for entities to enforce safeguard measures, enforcement procedures, determination of causality, eligibility of petitioner, the information requirement for petitioners, identification of similar products, and proof of injury. Starting from October 2004, grounds for imposing quotas on textile products have been expanded from "market disruption" to "the threat of market disruption", thus allowing even more discretion by way of US rulings, and drastically lowering the threshold in allowing the imposition of quotas and permitting the entire proceeding to be conducted too hastily. As a result, Chinese textile products are confronted with even more severe and substantial threats. China has expressed on many occasions its hope that the US could fully recognize the adverse impact the abuse of special textiles safeguard measures has on bilateral trade and economic ties. Further, China has called on the US to refrain from unnecessarily utilizing paragraph 242, and that in accordance with relevant WTO principles, make all necessary corrections, modifications, and amendments to the Procedures for Considering Requests from the Public for Textile and Apparel Safeguard Actions on Imports from China made by CITA.

Seven rounds of negotiations have been conducted between China and the US on textile trade issues since June 2005. On November 8, 2005, the two sides finally reached an agreement and signed the Memorandum of Understanding between the Governments of the United Sates of America and the People's Republic of China Concerning Trade in Textile and Apparel Products. In the agreement, China and the US agreed on the maximum export amount for 21 categories of textile products from China by the end of 2008. The US committed not to pursue any safeguard actions as provided for by Paragraph 242 with respect to products that were integrated before 2002. In categories not covered by the agreement, the US will exercise restraint in the application of its right under Paragraph 242. The US dropped all safeguard measure investigations since the signing of the agreement and on November 22 2005, the US Bureau of Customs and Border Protection was ordered to allow prompt entry to all embargoed Chinese merchandise.

3.7 Government procurement

The Buy American Act of 1933 is the main legal authority for US regulations on government procurement. Many discriminatory provisions exist in this law, such as prohibiting certain public agencies from purchasing foreign products and services, applying special standards to local products, requiring preferential price terms for local suppliers, etc. The Buy American Act of 1933 restricts the purchase of supplies by government agencies to those defined as "domestic-end-products", i.e. the article is manufactured in the United States, and the cost of domestic components exceeds 50 percent of the cost of all the components. In making tenders, the bidder must show whether his or her products are domestic products or foreign products. The Act does not directly prohibit the purchase of foreign products by government agencies. It Stipulates clearly, however, that in evaluating price offers, a 6 percent margin should be added to foreign products. If the lowest domestic offer is from a small business or a business located in a region with surplus labor force, the added margin considered is 12 percent. For purchases by the Defense Department the price difference must be of at least 50 percent. Such discriminatory provisions have constituted barriers for Chinese companies to obtain US government procurement contracts. China expresses its concern over this issue.

In addition, many other federal laws also contain requirements to buy American goods. These laws include various fund appropriation regulations, road and transportation laws enacted by the US General Services Administration (GSA), the US National Aeronautics and Space Administration (NASA), and the Tennessee Valley Authority (TVA), as well as the Clean Water Act of 1997, the Rural Electrification Act of 1936, and the Rural Electrification Act of 1938. Many of these laws and regulations contain provisions governing financing for federal purchases from states or local areas, but are nevertheless exempt from the relevant GATT or WTO Government Procurement Agreement after the US submitted application to the WTO.

State governments also have their own government procurement regulations, most of which use the same principles contained in the Buy American Act of 1933. These state- level restrictions have also constituted discrimination against foreign products, particularly in the areas of steel, coal, automobiles, printed products and related services.

3.8 Export restrictions

The US, under the Export Administration Act of 1979, has long maintained control over the export of products for military use or products with potential dual uses to China, and also over the export of high technology to China in high tech sectors, such as wireless products, chips, software, security products and radar, and has set forth specific requirements for domestic production, sales and research and development of high tech products. The phasing out of export controls over relevant products has remained one of the important issues for trade negotiations between China and the US. In 2005, the US stated that on the basis of its obligations under the Wassenaar Arrangement, it was proposing a new export control rule against China to apply a new export licensing system against items with military end use and end users not covered in the Controlled List. To avoid adverse impact of the new rule on trade of high technology between China and the US, China has on many occasions raised this issue with the US. There is also strong opposition from the high tech industry in the US.

3.8.1 Export license administration

The DOC exercises control over the export and re-export of American products through export licensing. The US ranks export destinations in China by levels of cooperation in export licensing. Easiest to deal with are Western subsidiaries operating in China, followed by new Chinese entities that operate on a transparent Western business model. After that are companies that were spun off from Chinese research institutes and, finally, companies that have done work for Chinese military or security forces.

Generally, the average time needed for obtaining a license from submission of the application to the issuance of the license is three months at shortest, and one year at the longest, much more lengthy than in other countries, such as Germany and Japan. This time-consuming process has in fact increased the cost of exporting to China. While most of China's applications for licenses are approved, stringent conditions are attached, such as follow-up verification to ensure the use of exported equipment in permitted fields. The US government also sets forth specific requirements for commercial contracts, requiring that all contracts which US high technology exporters sign with Chinese clients carry a clause which reads, "All exports must identify the end use or end-user, and allow for on-site verification by the US for the end use and end user of the technology or product". In 2004, China and the US signed the Memorandum of Understanding on on-site verification of end-users. On the basis of the MOU, the US has made several requests for coming to China to conduct on-site verification of suspected products.

In addition to the export licensing system, if there are foreign natural persons involved in projects of controlled technology, the DOC also requires that unless American companies and other organizations have obtained its approval, foreign persons from certain countries are not allowed to participate. Of nearly 1,000 deemed export license applications filed in the fiscal year of 2003-2004, about 400 of them were for technology involving work performed by people from China.

3.8.2 Controlled list

The US government maintains control over the destinations and end- users of export items through the use of the lists such as the Specially Designated Nationals List (SDN), the Specially Designated Global Terrorists List (SDGT), the Denied Persons List, the Debarred Parties List and the Embargoed Countries List. Export to countries, individuals, or organizations identified on the lists are prohibited or restricted. In 2005, 19 Chinese entities remain on the Warning List made pursuant to Supplement No. 4 to Part 744 of the Export Administration Regulation (EAR), with this number rising to a 50 percent share of the total, thus making China the biggest target now under close scrutiny by the US. Moreover, in 2005, two Chinese citizens were included on the Denied Persons List by the US Department of Defense, and are thus prohibited from trading with American companies for a term of three years. Several Chinese citizens from Hong Kong SAR were added to the Specially Designated Nationals List of the Office of Foreign Assets Control of the US Department of Treasury. Eight Hong Kong companies were added by the US Department of Commerce as the Unverified Company, and were assigned a "red flag" warning mark in transactions requiring license and review.

3.8.3 Sanctions

The US government regards the export administration system established and enforced by China as inadequate for US non-proliferation standards. Therefore, the US government often uses "proliferation of weapons" as the pretext to impose sanctions on Chinese companies. Out of 114 sanctions imposed by US Department of Defense on controlled items in the period from 2001 to 2004, 79 were against Chinese companies, nearly all imposed on the basis of non-proliferation. Companies having links with the Chinese military are the main target of US control and sanctions. In January 2005, the US State Department imposed sanctions on seven mainland Chinese companies, on one Taiwanese company, and one Chinese citizen under the pretext of "aiding Iran's efforts to develop ballistic missiles and having violated the Iran Nonproliferation Act 2000". The two- year- long sanctions, which will expire after December 27 2006, prohibits the companies from doing business with the US government and will also prevent them from receiving export licenses required to buy certain U.S. controlled equipment. On November 23 2005, the Bush administration, on the basis of "credible information" that six Chinese companies had transferred material for making missiles and weapons of massive destruction to Iran in violation of the Iran Nonproliferation Act, imposed sanctions on these six Chinese companies. It is held by China that the Chinese government has consistently pursued a responsible and committed attitude towards the issue of proliferation prevention, and has taken a series of effective measures to strengthen its export control. Unwarranted sanctions on Chinese companies by the US government invoking its domestic laws are unreasonable, and will not be beneficial to the bilateral cooperation in proliferation prevention. China expresses its dissatisfaction and opposition to these continuous sanctions by the US, and urges the US to promptly cease these actions.

3.9 Subsidies

3.9.1 Agricultural subsidies

The Farm Security and Rural Investment Act of 2002 (FSRI 2002) provides the legal framework governing agricultural subsidies and investment from 2002 through 2007. In fiscal year 2005, the US government, pursuant to the Act, has increased subsidies to promote export of agricultural products and provide support to domestic agriculture.

In the area of export support, the fund, which has aimed to promote the export of agricultural products and to improve their competitiveness in the international market, has kept an upward momentum over the past five years. In fiscal year 2005, the US government spent US$ 4.528 billion on Export Credit Guarantee Programs, up US$812 million over the previous year, and spent US$188 million on Export Enhancement Programs, maintaining the same level as the previous year. The amounts included US$140 million spent on Market Access Programs, US$34 million spent on Foreign Market Development Programs, and US$2 million spent on Quality Samples Programs. The spending on Export Subsidy Programs reached US$34 million, including US$28 million on Export Enhancement Programs, while in 2004, the spending was only US$3 million on Dairy Export Incentive Program. In the area of domestic support, in fiscal year 2005, the US government spent US$5.347 billion on Direct Payments, up 1 percent over the same period for the previous year, and US$ 3.942 billion on Counter-cyclical Payments, up 387 percent over the same period for the previous year. In addition, US$638 million worth of sales subsidies were provided to cotton, an amount almost double the figure of the previous year. FSRI 2002 was ruled by the WTO in 2004 as being partly inconsistent with the WTO agreement. Although the US had declared in June 2005 its intention to amend its Export Credit Guarantee Program (GSM-102), Intermediate Export Credit Guarantee Program (GSM-103) and Supplier Credit Guarantee Program (SCGP) to implement the WTO ruling, the US has still provided huge subsidies to its agricultural industry compared with fiscal year 2004. China hopes that the US will revise its domestic policy to fully implement the relevant WTO rulings at the earliest date possible.

3.9.2 Other subsidies

In October 2004, the Job Creation Act of 2004 was passed in the US to implement the earlier WTO rulings on illegal export subsidies granted to domestic companies under the US Foreign Sales Corporation Act and the Extraterritorial Income Act. The Job Creation Act of 2004 has conditionally repealed the former tax breaks and, in order to compensate any losses thereby incurred by US domestic companies, and has at the same time created a new tax deduction applicable to manufacturers. The new law provides that taxable overseas income repatriated by US companies to US territory for employee training, fixed assets, research and investment will be applied a tax rate of 5.25 percent, instead of 35 percent. A series of preferential measures are also granted to small and medium sized enterprises. For example, for small businesses, the new law provides a 15-year recovery period and straight-line depreciation for qualified leasehold improvement property.

It is maintained by China that the Job Creation Act of 2004 is unreasonable in the following ways:

First, a transition relief is provided until the end of 2006 to tax breaks established under the Extraterritorial Income Act. Relevant WTO rulings were not properly implemented due to these illegal export subsidies made to US companies. China hopes to see an end to such practices.

Secondly, the Act provides eligible domestic manufacturers a deduction on their taxable gross income. The deduction would be phased in over six years: 3 percent in 2005-2206, 6 percent for 2007-2009, and 9 percent for 2010 and thereafter. The deduction is available not only to manufacturers, but has been unreasonably expanded to cover sectors such as film and video, construction engineering, and software development. It is estimated that the new Act will provide US$76 billion of domestic support to US companies, far above the original US$50 billion provided under the US Foreign Sales Corporation Act and the Extraterritorial Income Act. China expresses great concern with regards to the potential impact this tax reduction program will have on Chinese manufacturers.

3.10 Barriers to trade in services

A great number of restrictive measures exist in the US market for trade in services. Those measures stand as barriers for export of services to the US.

3.10.1 Professional services

Professional services refer to services such as legal consultancy, accounting, auditing, architecture & relevant engineering, consulting, etc. The disparity among states and lack of transparency in the administrative system has constituted barriers to foreign professional service providers.

3.10.2 Telecommunications services

Great progress has been made in market access since the WTO Agreement on Basic Telecommunications Services was implemented in 1998. However, restrictions remain regarding market access to the US; for instance, investment restrictions, lengthy approval procedures, and conditional market entry. In addition, as each state has the right to stipulate regulations on the rates and approval conditions for non-wireless basic telecommunications services inside its borders, and further, as these regulations usually vary from state to state, many difficulties are created for foreign operators.

3.10.3 Insurance

The regulations regarding market access vary from state to state. Each state has its own legal structure governing insurance, maintaining different requirements for registration, indemnity and business operations.

In business operations, there exists the issue of not granting national treatment. Foreign insurers are also discriminated against regarding the requirements for registered capital, taxation and management fees.

3.10.4 Banking

With regard to market access, the US places stringent restrictions on the market network and business scope of foreign banks. If a foreign bank wants to set up a new branch, it has to once again go through the application procedures although it has already established itself in the US. Very often, the US financial regulation authorities do not grant retail business licenses to foreign banks. By 2005, only three Chinese banks, namely, Bank of China, Bank of Communication and CITIC Bank had established branches in the US. Many Chinese bankers have expressed concerns over the difficulties in applying for an approval to establish branches or representative offices in the US. In addition, the restrictions on mergers, acquisitions and the holding of majority stakes of US banks by foreign banks are very rigorous in the US, which has seriously and negatively affected the business of foreign banks.

With regard to business operations, there also exists the issue of non-compliance with national treatment. Branches of foreign banks are not allowed to take retail deposits that are less than $100,000 each. This business can only be handled by its subsidiaries in the US. Foreign bank branches established after December 19, 1991, are not allowed to join the federal deposit insurance system, which results in the deposits in foreign banks not being covered by U.S. deposit insurance. These measures have seriously restrained the development of foreign banks in the US.

3.10.5 Marine transportation and domestic water transportation

Marine transportation is one of the most protected sectors in the US. The Merchant Marine Act of 1920 places restrictions on coastal shipping and domestic transportation by foreign vessels. Domestic transportation can only be operated by US vessels. Ownership by foreign individuals, companies or governments of shipping companies engaged in coastal and freshwater transportation in the US is limited at 25 percent. If foreign ownership is over 25 percent, shipping companies will be denied rights to undertake such transportation. Sale of vessels registered in the US to foreign companies without the authorization of the Secretary of Transportation is a violation of law and such companies are held liable by US laws. Transportation covered by the Federal expenditure must also be undertaken by US vessels.

3.11 Unjustifiable protection of intellectual property right

An important trend in US foreign trade policy is to strengthen the fight against violations of US intellectual property by foreign companies in the exportation of products to the US. The governing law in this regard is Section 337 of the Ta riff Act of 1930, as amended, under which the ITC conducts investigations into asserted unfair trade practices in imports, and imposes remedy measures such as general exclusion orders, limited exclusion orders, cease and desist orders. In practice, the main target of a Section 337 investigation is any violations of US intellectual property by foreign companies in the exportation of products to the US, particularly infringements on US patents.

In recent years, Section 337 investigations involving Chinese products have risen rapidly. In 2005, among the 29 Section 337 investigations initiated by the ITC in 2005, seven were filed involving certain products from China. Products involved were network controllers, rubber anti-degradants, components thereof, and products; color television receivers and color display monitors; pool cues with self-aligning joint assemblies and components; audio processing integrated circuits, and products containing parts thereof; laminated floor panels; laser bar code scanners and scan engines, and components thereof.

As early as in 1989, it was ruled in the GATT Panel report that Section 337 of the Tariff Act of 1930, as amended, and practices in Section 337 investigations were not consistent with Paragraph 3, Article 4 of GATT in according national treatment to imports in the application of domestic laws and regulations, nor with Paragraph (d) of Article XX on general exceptions to the protection of IPR. Although Section 337 was later amended, no substantial changes were made. China maintains that Section 337 of the Tariff Act of 1930 is in many aspects still inconsistent with Paragraph 3, Article 4 of GATT and relevant provisions of TRIPS, and discriminates against imports in investigations. The inconsistencies are reflected in several aspects. First, Section337 has provided double remedies to US products by discriminating against foreign companies and violating the principle of national treatment. Secondly, the criteria for the adoption of a general exclusion order are unduly low and unclear, thus creating great uncertainty and arbitrariness that have unjustifiably hurt the interests of the foreign exporters. Third, certain Section 337 investigations only name the country of origin of investigated products without naming investigated companies, which in fact has deprived involved foreign companies the right to respond, and have undermined the interests of the involved foreign companies. Fourth, the authorization by Section 337 to ITC to self- initiate Section 337 investigation has insufficient grounds, and is inconsistent with TRIPS. China expresses great concern over this issue and the resulting adverse impact these actions have on China's normal trade with the US.

3.12 Other barriers

There have been three main changes to US visa policy since the September 11 terrorist attacks. First is the requirement for bio identification such as index finger scans. Second is the expansion of interviews to cover students and business visa applicants, who in the past were not required to give in-person interviews. Third is the additional requirement to evaluate the security risk presented by the applicant. As a result, visa applications take longer to process. Some waiting periods in certain cities can be as long as 80 to 100 days just to get an interview. Due to the lack of visa officers, applications have been kept in backlog and delay. Moreover, due to the lack of transparency in visa procedures and great discretion by visa officers, there exists great uncertainty in visa applications. Many eligible applicants have been refused and normal business visits to the US are hindered.

The US government has also expanded use of the Technology Alert List, which refers visa application involving non-sensitive technology sectors such as automation for additional clearance. Every year, an average of 2 percent of all visa applications, or 160,000 cases are referred for clearance. China, India and other Asian countries are those under strict examination and review. The increasingly strict visa policy has made it difficult for Chinese companies to establish commercial links with US companies and has injured Chinese companies' interest. Beginning from June 20 2005, the US started to grant one- year- valid multiple-entry visas, rather than 6-month-valid multiple-entry visas, to Chinese citizens on business or travel trips to the US. China welcomes this move and hopes that the US will continue to improve its visa policy by increasing staff, raising visa issuance efficiency, transparency and predictability so as to ensure the normal commercial exchanges between the two countries.

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