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China International Trading Lawyer Provides: China trade laws seen as step in right direction
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China has taken a major legal step in leveling the foreign-trade playing field and normalizing trade. It has passed laws that will make it easier for foreign firms to compete on an equal basis with Chinese companies and for the first time giving individuals, Chinese and foreign, the right to engage in trade. While the new Foreign Trade Law significantly improves the legal environment for exports from China and slashes red tape, much work needs to be done in improving the handling of foreign exports to China, according to business people and economists interviewed by Asia Times Online.

The package of new laws and amendments strengthened the government's hand in dealing with what it considers possible abuses by foreign parties of the open market, such as dumping, and unfair terms in granting technology licenses. Internationally, it is a common practice to have such laws to protect them.

Foreign competition, and the prospect of more, has its downside for some Chinese business in the nation's market-oriented economy. One example:

Shopping at Beijing's largest duty-free store, the Beijing Foreign Goods Store, was once the routine of thousands of Chinese returning from their overseas trips. But for Wang Jin, a sales manager with a local information-technology (IT) company, a recent trip to that bazaar was, to say the least, a disappointment. "I thought I could save some bucks by buying some furniture or electronics goods at the shop. But I didn't find a good selection of goods. Plus, prices were not very attractive," Wang said. "In terms of variety, the duty-free shop barely compares with even mid-sized department stores in Beijing."

Wang said she had many reasons to complain. And the shop's recent relocation proved Wang was not alone. Situated on Beijing's busy North Fourth Ring Road, the duty-free shop used to dominate a landmark building, and it once advertised to all passers-by with its grand neon sign. After a recent facelift to the building, however, the duty-free store emptied out its floors for computer businesses, and it relocated to the building's annex.

The original building, insiders say, had become much too big for the shop, as the market has shrunk considerably since China entered the World Trade Organization on December 11, 2001. That's because of foreign competition. China's WTO entry - with emphasis on equal and fair treatment for all players and no unfair barriers to foreign competition - has resulted in substantial reductions in import duties, which have affected the store's competitiveness. It no longer has a pricing advantage. Even the local residents may not have noticed the duty-free shop's transformation, since few people bother to search for bargains there.

So it's tough for the duty-free shop, but the situation is even more challenging for China's leaders who must rebuild the nation's legal framework to facilitate foreign trade. On April 6, the Standing Committee of the National People's Congress, China's legislature, promulgated amendments to the nation's Foreign Trade Law. The new law took effect on July 1, but it will take a while to assess how well the laws are being implemented.

The new legislation contains 70 articles and 11 chapters, 26 articles more than the earlier laws implemented in 1994

Implementation is the key
So far so good. "The implementation of the revised Foreign Trade Law has proceeded smoothly and on schedule, in a manner that takes account of developments in the order of world trade and serves to ensure compliance with China's WTO market access commitments and national treatment obligations," lawyer Diarmuid S O'Brien of Sanders & Dempsey LLP in Beijing told Asia Times Online.

The US law firm Morrison & Foerster said in a recent report that the Foreign Trade Law amendments represent not only the implementation of China's existing WTO commitments, but also a significant and symbolic step toward granting full Chinese market access to foreign-invested enterprises.

"Rectifying the Foreign Trade Law is necessary now that the trade environment in China is completely different from that in 1994," said Zhang Hanlin, a senior trade expert with Beijing-based University of International Business and Economics (UIBE) and also a member of the revising committee for the new trade law. The old law, he said, reflected the administrative needs of the then-booming foreign-trade business. Therefore, it was intended to give the government the legal tools required to supervise and manage the foreign-trade sector.

In comparison, Zhang said, the new law focuses on the need for normal foreign trade, particularly after the nation's WTO accession in December 2001.

"The new trade law is a very encouraging sign that China is serious about its commitment to the principle of free trade," Professor Michael P Malloy at the Sacramento, California-based University of the Pacific's McGeorge School of Law told Asia Times Online. "The resulting competition-based foreign-trade activity should make China a stronger and more secure participant in foreign trade under the free-trade system of the WTO. The new law is consistent with China's commitments to the WTO to create a 'transparent' legal system with respect to foreign trade - a system where the official rules governing participation in the trade sector are public and fair in their application," Malloy said.

The situation, however, is not yet ideal from the standpoint of foreign businesses. "Technical standards imposed by China need to be adjusted to eliminate distorting trade effects that exclude imports from the Chinese markets," said Malloy.

Experts say one of the most noteworthy changes in the new law is that it broadens the scope of foreign-trade operators to individuals, including foreigners. In the past, individuals in China were prohibited from conducting foreign trade.

"This is a most welcome amendment and complies with China's commitment to ensure that foreign individuals and enterprises are accorded treatment no less favorable than that accorded to enterprises in China with respect to the right to trade," said lawyer O'Brien in Beijing.

Recognizing human rights in individual trade
"It's also a strategic change in China's legal system, and it embodies the recognition of human rights," said Zhang Hanlin, the senior trade expert at Beijing's University of International Business and economics. "I never would have expected it under the previous economic system."

Legal expert Dieter DeSmet recently wrote in an article on China's Foreign Trade Law, saying that the new spirit is rooted in legislators' recognition of the universal trend of individuals to conduct foreign trade in technology fields, international services and border trade activities. "Undoubtedly, the influence of the WTO rules, which incorporate liberal ideas, and China's WTO commitments, to provide all foreign individuals and companies with treatment that is at least equal to that of their Chinese counterparts, have been the motor behind this important change," he wrote in a special report of Wenger Vieli Belser, a Swiss law firm.

Edward Smith, deputy chairman of the China-Australia Chamber of Commerce, estimated that the further opening of foreign trade to individuals and small-medium enterprises will create new business opportunities and expand China's foreign trade, both in imports and exports.

Does that mean China's 1.3 billion residents will flood the foreign trade market in search of fortune? "I do not think so," Zhang said. It's not for the inexperienced, nor the faint of heart. In addition, China's rigid foreign-exchange administration system prevents many people from easily starting foreign-trade businesses. Currently, the Chinese currency, the yuan, is not convertible under the capital account.

According to an official with the Beijing Municipal Bureau of Commerce, speaking on condition of anonymity, the bureau received more than 50 applications each day for registrations on foreign-trade business after the new law was implemented. Most of the applicants are private firms, not individuals.

Experts said the new law also makes it easy for a trade operator to conduct foreign trade. Legally registered foreign-trade operators may now enjoy trading in both goods and technology without any requirement for official approval, a move that complies with China's commitment to eliminate its system of examination and approval within three years of accession, said O'Brien.

In acceding to the World Trade Organization, China committed to granting all enterprises international trading rights after December 11, 2004. Registration serves solely as a record, and administrative approval is no longer required for a firm to conduct foreign-trade business.

Some goods exempt, but state monopoly relaxed
O'Brien said that while China's WTO trade-liberalization commitments do not apply to goods subject to state trading, there has been a relaxation of the state trading monopoly over essential commodities such as petroleum, fertilizer, sugar and cotton. A certain ratio of trade in these commodities is to be open to non-state trading companies.

While the revised law does not detail the specific commodities, it requires the Ministry of Commerce (MOFCOM) to publish a catalogue identifying the commodities that are subject to state trading. The new law permits the implementation of an automatic licensing system for catalogued freely traded goods.

In its pre-accession report, the WTO had complained that China's cumbersome licensing system, especially provisions as to registration, in effect acted as a constraint on trade.

But while the import and export of freely traded goods will not be subject to registration requirements, trade in technologies will continue to be subject to such requirements, O'Brien said.

The new law also contains clauses, not in the previous legislation, focusing on the ways of maintaining fair trade order. There are new provisions against monopolistic activities, unfair competition and other behavior that disturbs the orderly conduct of foreign trade. Providing relief and redress is also addressed in the new law so that China's businesses that conduct foreign trade can utilize anti-subsidy and anti-dumping measures under the WTO framework to safeguard their own interests in international trade affairs.

The new law lists the circumstances under which the state may impose restrictions or prohibit the imports or exports of goods and technologies under the WTO rules.

"The old [legislation] did not put sufficient emphasis on protecting normal foreign trade and the domestic industry," said Zhang, the trade expert. "So, the revised law makes changes in accordance with the WTO rules. It also promotes China's development in trade and safeguards the nation's economy."

To respond promptly to sudden changes in foreign trade and to provide better services to the operators, the revised law also contains clauses regarding the establishment of an early-warning system, a public information service system, a statistics mechanism and publicity about illegal operations.

The new law has teeth, but will it bite?
Compared with the only punishment provided in the previous legislation - withdrawal of an operating permit - the new law strengthens sanctions against illegal operations, by adopting more severe financial and criminal punishment.

The new law also contains clauses aimed at protecting intellectual property rights in trade, which is common in many countries' business laws, and clauses designed to protect the rights of both domestic and foreign property owners. Some foreign observers say it doesn't go far enough to protect foreign intellectual property. "More effective protection for foreign intellectual property and more openness in trade in services originating in other member WTO member states must be achieved before China can be said to be in full compliance with WTO principles," Malloy said.

Experts said the revised law will have a very positive effect and influence on trade relations between China and its trading partners, and overall has been broadly welcomed by the international business community. "Given China's exponential rise as a global trader, the effect of the revised law cannot be underestimated," O'Brien said.

Nine articles in the new law detail China's efforts to promote foreign-trade development strategies through improving the services of financial institutions serving foreign traders, the development of trade development and risk funds, promoting contracting for overseas projects, and recognizing the contributions of chambers of commerce and also Chinese agencies for the promotion of international trade.

Particularly, "it is important to realize that healthy and mutually respectful US-China trade relations are vital to the interests of both countries", Malloy said. "The two countries are important trading partners for each other, and improvement in one aspect of their trade relations will encourage each to continue to work cooperatively toward resolution of concerns that may still exist in other aspects of those relations."

Aiming to live up to WTO commitments
Experts said rectifying the Foreign Trade Law demonstrates that China is aiming to live up to its WTO commitments, and to promote the healthy development of foreign trade in accordance with WTO rules. However, they added, implementation and enforcement of the new legislation will be crucial.

"China has done a magnificent job in implementing its commitments toward WTO so far. But timely implementation, especially of the trading and distribution rights, is very important," said Joerg Wuttke, chairman of the German Chamber of Commerce in China.

Malloy said: "We must see whether the law in its practical operation does promote a transparent system of rules, whether the requirement of multiple registrations is fairly administered, and whether the new law helps to eliminate distortions in pricing and trade practices.

"In addition, the increased competition among foreign trade operators might indirectly encourage severe price-cutting in foreign-trade transactions that could lead to claims of dumping by other WTO member states. However, these are issues that cannot be resolved by reference to the provisions of the Foreign Trade Law alone; we need to see how the law operates in practice."

Experts noted that in addition to the new amendments, there might be still further rectifications, which are subject to concern and discussions.

"Unfortunately, the provisions devoted to the protection of intellectual property rights [IPR] only address the matter vis-a-vis imports into China," said O'Brien, suggesting that language be added to include reference to IPR protection with respect to exports. "Moreover, the treatment of the foreign-trade order does not detail MOFCOM's assessment of what constitutes monopolistic action and abuse of market dominance."

O'Brien said the law also fails to treat the important issue of procedural transparency, especially MOFCOM's role in, and the manner of, undertaking trade investigations. This is extremely important as such investigations include probes into the effect of imported goods and technologies on domestic competitiveness, trade barriers, evasion of trade remedies, and anti-dumping and countervailing measures.

Summing it up
The new landscape was summed up by Carson Wen, a Hong Kong-based lawyer for the US law firm Heller Ehrman White & McAuliffe, interviewed by Asia Times Online. He joined the National People's Congress Standing Committee's meeting last December when the draft Foreign Trade Law was discussed.

"The objective of the new law, which replaces the 1994 Foreign Trade Law, is primarily to enable China to comply with its WTO commitments. For example, upon the new law taking effect, the hitherto restrictions on the entry of foreign-invested enterprises and foreign companies in the trade and distribution sectors - previously a highly restricted and protected sector in China - have been removed. This opens up a whole new horizon of business opportunities for foreign interests, the impact of which can be enormous.

"The new law at the same time also introduced or strengthened the PRC [People's Republic of China] government's ability to deal with possible abuses by foreign parties of the open market, such as dumping and unfair terms in technology licenses. These are necessary for the healthy operation of China's now open market brought about by its entry into the WTO and most major economies would have similar measures under their laws."

Wen said the new law should be beneficial to the further development of trade relations between China and the United States. "There are bound to be frictions and disputes between two very major trading nations. China in the past dealt with such issues through administrative means and policy measures that were often less than transparent; the new law provides for a legal platform for such issues to be resolved. The opening up of the foreign-trade sector to large and small American companies will also result in a new landscape for US participation in the Chinese market," he said.

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