Reforming Chinas Foreign Trade System

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Reforming Chinas Foreign Trade System

• Donald J Lewis
• Faculty of Law
• The University of Hong Kong

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Foreign Trade Reforms

• Pre-Reform Era (1949-1978)
• NFTC Monopoly - State Trading
• Mandatory Foreign Trade Plans
• Price and Exchange Controls

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Foreign Trade Reforms

• Trade Reforms Era (I) (1979-1991)
• Decentralization Policy
• Trading firm proliferation - wai mao quan
• Introduction of indirect trade policy
  instruments licences and quotas
• Mandatory and guidance plans - Category I,II
  III commodities
• Price and exchange reforms - foreign exchange
  retention system

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Foreign Trade Reforms

• Trade Reforms Era (II) (1992-2001)
• CCP Socialist Market Economy program
• Pre-WTO Accession drive
• US-PRC MOUs - The Market Access MOU 1992

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Foreign Trade Reforms

• Pre-WTO Accession Drive (1992-2001)
• Incremental tariff reductions
• Adoption of Foreign Trade Law (1994)
• Foreign exchange reforms (1994-96)
• Proliferation of Chinese firms w/ trading rights
  
• Reduction in commodities subject to licences,
  quotas and plans

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Trading Entities in China

• Pre-Reform Era (1949-78)
• Trade monopolies by 16 national foreign trade
  corporations (NFTCs) and local branches
• Exclusive State Trading
• Trade Reforms Era (1979-2001)
• Trading firm expansion direct foreign trade
  rights (wai mao quan)

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Trading Entities in China

• Trading firms include
• NFTCs
• Local FTCs
• State-owned Enterprises (SOEs)
• Foreign Investment Enterprises (FIEs)

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Trading Rights Preliminary Observations

• Direct foreign trade rights
• a trade policy device to encourage exports while
  controlling import volumes
• Restricted scopes of business
• FTCs limited range of tradable commodities
• SOEs/FIEs trade restricted to production
  inputs/outputs no right to on-sell imports

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Trading Rights Preliminary Observations

• State Trading
• a trade policy device to control imports,
  predicated on operator relative exclusivity
• may give rise to de facto quantitative
  restrictions
• In China, two types
• Pure State Trading
• Designated State Trading

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PRC Foreign Trade Law

• 1994 PRC Foreign Trade Law mandates
• Foreign Trade Management System
• Foreign Trade Operators
• Foreign Trade Agency System

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Foreign Trade Management System

• Two-tier System
• Central and Local - MOFTEC and COFTECs
• Most foreign trade activity controlled by Local
  Governments
• Local FTCs and SOEs account for most trade
  transactions by domestic firms State Trading
  continues, but without exclusivity

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Foreign Trade Operators

• FTL mandates the Foreign Trade Operator System
• PRC Enterprises must be registered as FTOs to
  engage in direct foreign trade (wai mao quan)
• Covers trade in goods and technology
• Applicable to PRC legal persons
• Not Applicable to PRC individuals and foreign
  investment enterprises (FIEs)

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Foreign Trade Agency System

• FTL and 1991 Agency Provisions mandate this
  system
• FTOs act as agentsor middlemen for PRC producer
  and end-user enterprises w/out wai mao quan
• FTO and PRC enterprise conclude an entrustment
  contract (wei tuo hetong)
• Only FTOs may enter into and sign international
  sales or purchase contracts

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Joint Venture Trading Companies

• Recall that FIEs cannot be FTOs
• However, since 1996, foreign investors have been
  permitted to establish equity joint ventures
  (EJVs) to engage in direct foreign trade on a
  pilot basis
• Note Central governmental approval and onerous
  capitalization and net asset value tests

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Trading Rights

• Article 5, CPA
• China shall progressively liberalize the
  availability and scope of the right to trade, so
  that within three years after accession, ALL
  enterprises in China shall have the right to
  trade in ALL goods throughoutChina, except for
  thosesubject to state trading.

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Trading Rights

• Enlargement of trading rights required by
  Articles XI (prohibition on quantitative
  restrictions) and III (national treatment for
  imported goods), GATT 1994

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Trading Rights

• Chinas CPA/WPAC commitments
• Right to trade in ALL goods, save for state
  trading
• Right to trade is ONLY right to import and export
  goods
• FIEs do NOT need to establish a separate Trading
  FIE to exercise right to trade
• For FIEs and Trading FIEs, no prior experience or
  minimum capitalization requirements for right to
  trade

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• Schedule for liberalization of right to trade for
  FIEs and domestic Chinese enterprises
• Year 1 JVs with foreign equity minority share
• Year 2 JVs with foreign equity majority share
• Year 3 ALL Enterprises in China
• However, NOTE
• Right to distribute is separate from right to
  trade, and is governed by Chinas GATS
  distribution services commitments
• To distribute imported goods, FIE must use PRC
  distributor or a Distribution FIE

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• Conclusions
• Right to trade is illusory goods stop at the
  border or warehouse. No right to on-sell imported
  goods.
• Distribution companies are the new, second-tier
  wai mao gongsi (foreign trade corporations)
• Trading FIEs may be ineffectual (1996 Policy
  Provisions on Pilot Foreign Trading Equity Joint
  Ventures appear redundant)
• Such restrictions are likely to be WTO
  inconsistent
• However, by Year 3, distribution rights should be
  also be unencumbered

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Further Implications

• Foreign Trade Operator and Agency Systems are
  inconsistent with Chinas Trading Rights
  commitments and with the national treatment
  obligation
• The Future of State Trading
• Subject to GATT, Article XVII discipline
• Designated State Trading phase-out w/in 3 years
  for 245 product categories (Annex 2B)
• Pure State Trading for a limited range of
  products will continue indefinitely (Annex 2A)