Abstract
This paper explores the implications of recently signed trade and investment agreements for reform in China. To that end, it reviews the historical experience of WTO accession and provides a preliminary analysis of the consequences the new agreements could have on further opening up and domestic structural reforms.
Recent Trade and Investment Agreements and Their Implications for Reform1
This paper explores the implications of recently signed trade and investment agreements for reform in China. To that end, it reviews the historical experience of WTO accession and provides a preliminary analysis of the consequences the new agreements could have on further opening up and domestic structural reforms.
A. Introduction
1. China has recently signed a series of trade and investment agreements with key trading partners, including the “Economic and Trade Agreement” (Phase I Deal) with the U.S.; the “Regional Comprehensive Economic Partnership” (RCEP) with 14 countries in the Asia Pacific Region which is expected to enter into force in January 2022; and the Upgraded Free Trade Agreement with New Zealand. Agreement in Principle has been reached with the European Union on the “Comprehensive Agreement on Investment” (CAI) 2. On September 16, 2021, China formally applied to join the “Comprehensive and Progressive Agreement for Trans-Pacific Partnership” (CPTPP). This followed the 10 bilateral free trade agreements (FTAs) China has signed since 2010, as its efforts to pursue FTAs has gained momentum in recent years.
2. These agreements, to varying degrees, include commitments to reforms that will directly impact the domestic market. This may be because the agreements mandate reform or because the agreements trigger non-mandated, complementary reforms—for example, because an external agreement to allow market access for foreign firms provides a rationale and/or political momentum for lowering barriers to entry also for domestic firms. The academic literature has stressed that non-mandated reforms can be associated with longer-standing priorities already been on the national agenda or efforts of reform-oriented policymakers welcoming the binding mandate provided by an external agreement (Maggi and Rodriguez-Clare, 2007) 3. Against this backdrop, this paper discusses the China’s WTO accession experience and analyses the consequences of recently agreed investment and trade agreements on domestic structural reforms.
B. China’s Reform Experience in the Context of WTO Accession
3. The WTO accession process brought a series of reforms. Before joining the WTO, China’s high tariffs and nontariff barriers insulated some of its critical sectors from international competition (Lardy, 2001). As a condition for WTO membership, China took substantial policy steps that involved opening up these protected sectors (including those heavily protected sectors such as such as automobiles and petrochemicals), significantly reducing tariffs and non-tariff barriers, and liberalizing the right to trade.4
One of the most significant reforms was the amendment of the Foreign Trade Law in 2004. Under the new law, the trade approval system implemented since 1979 was cancelled, and the “designated trade” approach was abolished by 2004.5 In doing so, China fulfilled its commitment to liberalize trading rights within three years after accession.
The average applied Most Favored Nation (MFN) tariff was reduced from 15.3 percent in 2001 to 7.1 percent in 2021, fulfilling China’s commitment to bring the average level to under 10 percent. China reduced average tariffs on agricultural products to 12.7 percent in 2021 (less than one fourth of the world average), a reduction exceeding its commitment.
Non-tariff measures were lowered, including the discontinuation of import quotas in 2004 and the progressive reduction of import prohibitions and licensing.
China took steps to simplify its administration of other border control measures, such as standards, sanitary and phytosanitary measures, and contingency measures.
4. In line with the WTO agreement, China overhauled parts of its legislative and regulatory systems to bring relevant domestic laws and policies into compliance with the international trading system. Important steps included:
China amended laws regulating the quality of products, commodity inspection, customs, adjusted rules governing pharmaceutical products, and made changes to its copyright, patent, and trademarks laws (WTO, 2006).
China overhauled certain national institutions to strengthen the state’s regulatory capacity. The new General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) took the lead in reviewing all of China’s existing over 21,000 standards and technical regulations, abolishing about 1,400 of them, and revising over 9,000 others for conformity with WTO rules (Tan, 2021).
5. China also embarked on complementary reforms. Efforts were made to develop private enterprise in certain sectors. The amendments to the Company Law eased the establishment of private companies, especially small and medium-sized enterprises. The 2005 guidelines issued by the State Council permitted private investment in several industries previously restricted to the public sector, including electric power and other utilities, railways, civil aviation, and oil.
6. The structural reforms associated directly with the WTO access and complementary efforts have addressed key domestic needs. Since its WTO accession, China has achieved significant progress in opening up, and made commendable efforts in streamlining business administration, relaxing hukou restrictions, and developing capital markets.
7. That said, despite the progress made in the context of WTO accession, China’s domestic structural reform agenda is far from complete (IMF, 2021). Progress in real-sector reform has been slow, especially in the areas of SOE reform and competitive neutrality. This comes at significant domestic costs—for example, the services industry, with its large presence of SOEs, remains far away from the global productivity frontier. Important reform steps include: (i) Listed SOEs continue to enjoy privileged access to credit and other resources, despite their significantly lower productivity than POEs in the same sector. Removing preferential access to credit and implicit guarantees for SOEs would ensure competitive neutrality between private and state-owned firms and help raise productivity overall. (ii) Decisive steps are needed to lower entry barriers for domestic and external firms and promote efficient market-based resource reallocation. (iii) There is also scope for further reforms to unify product markets by removing local protections, improving labor market flexibility through more comprehensive hukou reforms that allow for greater labor mobility. (iv) Moreover, China’s export regime remains complex. On the one hand, only a small number of export commodities are levied within the scope of China’s WTO commitments. On the other hand, export quotas still exist. There are export prohibitions and export licensing such as those specified in the 2020 Export Control Law.
C. Key Reform Provisions in Recent Trade and Investment Agreements
8. Recent trade and investment agreements contain reform commitments in a number of areas that may eventually contribute to progress on domestic reforms. These include: (i) market access, (ii) intellectual property right protection, (iii) services trade, (iv) government procurement, (v) climate and labor policies and (vi) competition policy and SOEs. It is important to note, however, not all commitments summarized in this section are enforceable under the dispute settlement mechanism in their respective agreements. Moreover, the reform commitments associated with the CAI are subject to the negotiation process being completed.
Market Access for Foreign Investors
9. The gradual emergence of the negative list approach has been an important marker of increased market accessibility for foreign investors. The first “Catalogue of Industries for Guiding Foreign Investment” was introduced in 1995, with market access for foreign investors divided into four categories: “encouraged,” “permitted,” “restricted,” and “prohibited.” The scope of the “encouraged” category was gradually expanded after several revisions. In 2019, the “Catalogue of Industries for Encouraging Foreign Investment” was introduced, which combined the “encouraged” market sectors in the “Catalogue of Industries for Guiding Foreign Investment” and the “Catalogue of Priority Industries for Foreign Investment in Central and Western China”. The negative list approach for foreign investors was first discussed when US and China started the negotiation of a Bilateral Investment Treaty in 2013. The first official negative list1 for foreign investors at the national level was introduced in 2015 following the establishment of the pilot free trade zone (FTZ), with two separate but mostly overlapping lists being implemented in the FTZs and nationwide currently. The preferred list and negative list are implemented simultaneously and revised by the National Development and Reform Commission jointly with the Ministry of Commerce and other relevant government bodies. The negative lists have been shrinking in size since 2017, with number of sectors with restrictions falling from 90 in 2017 to 33 in 2020 in the national version, and from 122 to 30 in the FTZ version. The most significant progress was made in removing foreign equity caps and the requirement of joint ventures in the auto sectors and financial services.
10. China’s commitments in the context of new trade and investment agreements in the area of market access include:
Moving from a white list practice to a non-expanding negative list (RCEP). The practice for market entry of foreign investors in the RCEP marks significant progress in China’s ongoing opening up of its domestic market.
Liberalization of foreign investments (CAI). The agreement in principle of the CAI, which is yet to be ratified, embedded a more detailed level of market access than a negative list. Section II (Liberalization of Investment) Article 2 (Market Access) of the CAI explicitly prohibits joint venture requirements, and numerical caps on number of enterprises, amount of business transactions, total output and employment in business areas open to investors from the European Union. In addition, Annex III (Schedule for China) details sectoral limitations on foreign investment, the commitments in the CAI suggest a much higher level of openness to EU investors than those in both versions of the negative lists. For example, for communication services, the 2020 version of the national negative list requires medical services to be joint ventures. In contrast, CAI Annex III (Schedule for China) sub-sector II.h only requires “establishment of hospitals or clinics to be subject to quantitative limitations in line with China’s needs”. The schedule of commitments foresees a hybrid approach for the implementation, with a negative list approach in relation to the MFN treatment, and a positive list approach in sectors subject to economic needs test.
11. China’s reform commitments have the potential to improve market access not only for foreign but also for private domestic investors for the sectors outside the negative list, once RCEP enters into force, as market access is increasingly governed by the negative list rather than business ownership. The pace of reform is expected to be rapid in the manufacturing sectors which have fewer restrictions in the negative list, while services sector opening is likely to gain traction after the CAI is ratified given that the standstill and ratchet mechanism2 has already been agreed upon in the recently upgraded FTA between China and New Zealand.
Intellectual Property Right (IPR) Protection
12. China’s IPR protection relies mostly on traditional legal systems. Four dedicated IP regional courts have been established since 2014, 24 IP tribunals have been established since 2017, and an IP tribunal in the Supreme People’s Court was created in 2019. The establishment of dedicated IP courts/tribunals improved professionalism, consistency, and efficiency of the trials through the traditional legal system. It also helped deal with jurisdictional challenges for cross region IP cases. However, the penalties awarded remained low compared to the legal costs involved despite the relatively high win rates for rights holders. Bian (2018)3 found that the IPR protection system is actually stronger than commonly thought, with high rates of winning the litigation, but the damages awarded were very low. A recent study by Anjie Law Firm (2019)4 suggests that damage awarded to patent holders have been increasing; and heavy criminal penalties on IPR violations are to be introduced.5
13. China’s commitments in this area include:
Detailed action plan (Phase I). The US-China Phase I Agreement focused on strengthening the legal and regulatory frameworks for IPR protections. Chapter 1 (Intellectual Property) requires China to publish a detailed ‘Action Plan’ for strengthening IPR protection. In addition, it also commits China to increase IP enforcement actions in a number of areas, such as counterfeit goods and pharmaceuticals, protection of trade and business secrets, and regularly publish data on the impact of those actions. China also agreed to raise penalties for IP theft.
Streamlined IPR enforcement (RCEP). RCEP focuses on the IPR of cross border goods and its enforcement. Chapter 11 (Intellectual Property) of the RCEP detailed the protection of IPR for tradable goods, which include copyright, trademark, patents, geographical indications, and genetic resources. It streamlined and aligned the enforcement procedure of IPR protection by authorizing customs in cross border trade and courts in civil judicial procedures when rights holders file complaints.
Prohibited transfer of technology and business secrets (CAI). The CAI goes beyond prior commitments by prohibiting disclosure of confidential information. Section II (Liberalization of Investment) Article 3 (Performance Requirements) would specifically protect foreign investors from any form of involuntary technology transfer and disclosure of confidential business information, including to regulatory bodies and local authorities.
14. IPR protection has been improving in recent years, yet further reform, both legislative and procedural, is needed in order to meet the commitments made in RCEP and the yet-to-be ratified CAI. Lester and Zhu (2021) assess that China has addressed many of the IPR related concerns in the Phase I agreement with the US through revisions to its legislative and regulatory framework1, and data disclosure.2 If followed through, the commitments China made are likely to result in more efficient and less costly resolution of IPR related disputes, making it more likely that higher penalties for IPR infringement appear in court rulings. The measures would eventually facilitate healthier competition among market participants, and encourage innovation and IPR development domestically.
Services Trade
15. The existing practice for cross border services providers still mostly follows a case-by-case approach. For example, in 2018, the Shanghai municipal government piloted a negative list for services trade in the Shanghai FTZ.3 The Hainan Free Trade Port (FTP) has introduced China’s first formal negative list in services trade and lowered the number of restricted service sectors from 159 in the Shanghai FTZ to 70.4 However, a negative list for services trade has yet to be published at the national level.
16. China’s commitments in this area include:
Adopt a non-expanding negative list (RCEP). Adopting the non-expanding negative list practice within 6 years was mandated in the RCEP, with fewer restrictions, lower entry and licensing requirements as agreed in Chapter 8 (Trade in Services). At least 65 percent of service sectors will be fully open to members of the RCEP, with increased shareholdings in several services sectors, with significant implications in areas such as education, financial and cultural services for China.
Mandated standstill and ratchet mechanism (Upgraded China New Zealand FTA). Chapter 9 (Trade in Services) of the recent Upgrade of the China-New Zealand FTA remains on a white list approach, though with access expanded in some areas. However, the provisions mandated the standstill and ratchet mechanism, through the MFN treatment to each party, which means if New Zealand or China makes any commitments to future trading partners in specific sectors, the other party will automatically benefit from this enhance treatment as well. Both parties also agreed to commence negotiation of a negative list based services framework within two years of entry into force, likely to be shorter than the six-year limit mandated in the RCEP.
17. The commitments made in more recent agreements show that the approach of opening up is converging to the international standard. The non-expanding negative list approach and the standstill and ratchet mechanism agreed in the most recent China-New Zealand FTA are likely to be the standard terms in the (bi)multilateral agreements in the future as it is more difficult to retract than to expand once agreed with one trading partner. Meanwhile, domestic private service providers are likely to enjoy a more leveled access to previously restricted service sectors at home and overseas markets.
Government Procurement
18. China started its negotiation on accession to the WTO Government Procurement Agreement (GPA) in 2007, and submitted six revised offers since then. In its latest submission in 2019, China included 26 provincial level authorities, permanent thresholds correspond to those used by most parties, more SOEs and services sectors, and an offer on defense procurement.
19. China’s commitments in this area include:
Higher transparency (RCEP). RCEP Chapter 16 (Government Procurement) requires higher transparency on government procurement, through publishing laws and regulations on government procurement. It is a step forward since no government procurement provisions were included in the bilateral FTAs currently existing between any two members at the time of signing. However, disputes arising under the Government Procurement chapter are not covered by the Dispute Settlement Mechanism under RCEP. Going forward, the chapter foresees the opportunity for more extensive revisions every five years once China completes its GPA accession.
Regulations to ensure integrity in public procurement (Upgraded China New Zealand FTA). Chapter 20 (Government Procurement) of the Upgrade of the China-New Zealand FTA commits to have laws and policies in place to conduct procurement with integrity and to prevent corruption. The chapter also includes a built-in agreement to enter into market access negotiations with New Zealand once China completes its accession to the WTO GPA or if it were to negotiate market access on government procurement with another country.
20. China’s accession to the WTO GPA would lead to more progress on opening up the government procurement sector than the recent trade agreements would imply. The ratification of the RCEP, and the Upgraded China-New Zealand FTA. focused on higher transparency in the government procurement regulation and process, instead of liberalization of the market.
21. Recent domestic reform proposals could bring Chinese laws closer to GPA requirements and might be a positive sign regarding China’s efforts to join the GPA itself. China proposed a major revision to its Government Procurement Law (GPL) in 2021.5 In October 2021, the authorities instructed local governments to correct discrimination of foreign companies as supplier candidates, a de facto barrier to foreign companies’ participation in government procurement. As the trade policy expert Jean Heilman Grier analyzes6, the proposed version sets evaluation of bidding entities on lowest price or comprehensive scoring, which is consistent with the “most advantageous tender” rule in the GPA. It also requires suppliers participating in a government procurement to have the ability to undertake a procurement, and conditions on excluding a supplier from a procurement, such as tax evasion, both are consistent with GPA practices. The proposed revision also improves clarity and transparency on the conditions and procedure for different government procurement methods and related dispute settlement procedures. Other revisions would imply additional steps to conform with GPA requirements, such as the 20-day minimum tendering period in contrast to the 40-day requirement in the GPA. Overall, the revised GPL has the potential to bring China’s procurement system closer to conforming with the GPA.
Climate and Labor Policies
22. China as pledged to peak carbon emission by 2030, and achieve carbon neutrality by 2060, but the implementation of its climate strategy is at its early stages.
23. China’s commitments in this area include:
Binding provisions on environment and labor standards (CAI). Binding and enforceable provisions on environment and labor standards are included in Chapter IV (Investment and Sustainable Development) of the CAI. The commitments mostly reaffirmed the voluntary commitments made in the WTO, ILO and in the Paris Accord. China also committed to effectively implement the ILO’s Conventions it has ratified.
24. The binding climate and environment commitments China made is likely to complement domestic climate policies in the transition to a greener economy.
Competition Policy and State-Owned-Enterprises (SOEs)
25. The potential for reforms of the SOE sector and to ensure competitive neutrality between SOEs and private firms remains high. This includes, for example, access to credit and markets. SOEs may also benefit from possible undisclosed subsidies in various forms (IMF, 2020).
26. China’s commitments in this area include:
Strengthened competition law enforcement (RCEP). Chapter 13 (Competition) of RCEP includes obligations to adopt or maintain competition laws and to establish independent competition authorities to enforce antitrust laws. It also includes provisions on higher transparency and enforcement of competition laws.
Higher transparency for all businesses, including SOEs (CAI). Under the CAI, China would agree, in principle, to improve transparency on subsidies, standard setting and licensing in Section III (Regulatory Framework) of the CAI. The agreement requires all business entities, including SOEs, to behave in accordance with commercial considerations and not to discriminate in their purchases and sales of goods or services. China also commits explicitly to provide, upon request, specific information to allow for the assessment of whether the behavior of a specific business, including SOE, complies with the agreed obligations in Section III Article 4 of the CAI.
Fairer competition law enforcement (Upgraded China New Zealand FTA). Chapter 21 (Competition Policy) of the Upgrade of the China-New Zealand FTA, committed to the principles of transparency, non-discrimination, and procedural fairness in competition law enforcement.
27. Improving international competition can stimulate the reform of China’s domestic market, including by and help ensure a level playing field for all market participants, including SOEs, foreign and private domestic enterprises.
Dispute Settlement Mechanism
28. The extent to which the commitments discussed in this section will not all be enforceable through the dispute settlement mechanisms set out in the respective agreements. RCEP employs a standard state-state dispute settlement system. However, e-commerce7, competition8 and government procurement related disputes are excluded from the dispute resolution mechanism. Chapter 10 (Investment) Article 18 requires discussion of investor-state dispute settlement mechanism to commence no later than two years after the date of entry into force of RCEP, and the discussion shall last for no more than three years. The CAI pushes this forward by implementing a robust state-state dispute settlement system. The agreement also foresees an institutional framework for monitoring the implementation of the commitments, including regular political oversight, an ad hoc fast engagement mechanism for serious and urgent issues, and a regular dialogue with involvement of key stakeholders such as businesses, civil societies and other organizations.
D. Qualitative Impact Assessment of Trade and Investment Agreements
29. To varying degrees, the recent trade and investment agreements have the potential to support the continued opening up of the Chinese market, improve IPR protection, and SOE reform.
Significant liberalization of investment and promotion of equal market access. The binding commitments in RCEP and the potential CAI, together with the non-expanding negative list and the standstill and rachet mechanism adopted in Upgraded China New Zealand FTA, hold the promise of more transparent and predictable domestic policies on market access, and dispute settlement procedures. The current negative list met, to some extent, the negative list requirements in the RCEP, but falls short of that agreed in the potential CAI. The evolution of the negative list over the past 5 years reflects the gradual transition to a more open market, which marked progress made in parallel with the then ongoing RCEP negotiations. The increased transparency, predictability and stability of policy can be expected to lead to further revisions and reforms in domestic laws and regulations for investors to enjoy equal market access.
Opening up of the services trade is likely to accelerate. Both RCEP and the Upgraded China New Zealand FTA include notable commitments to an opening up the still mostly closed services trade to foreign service providers. The introduction of the first negative list for services trade in Hainan FTP in 2021 is an encouraging step forward, and it is possible that the national negative list for the services trade will follow and shrink in size in over time, if the momentum observed over the evolution of the negative lists for foreign investors in the past years were to continue.
IPR protection may be strengthened through revisions in regulations, simplified enforcement and higher penalties. The recent developments have mostly come in the form of revisions in IPR related regulations, including the amendment of the criminal law and the patent law. Increased cases of higher damages awarded for IPR infringements in recent years also point to progress in the right direction. However, the high cost of the current IPR litigation process and the still low compensations despite recent increases, suggest there is still large room for improvement. The commitments in the RCEP and potential CAI promise more efficient and low-cost forms of IPR protection enforcement for goods and services trade and foreign investment. Simplification of domestic IPR related arbitration and litigation process, and a market-based evaluation of damages to IPR holders would help equalize level of protection between the current domestic IPR system and those implied by the recent investment and trade agreements. A more efficient and a more balanced cost benefit IPR protection legal system would lead to a better environment for domestic innovation and knowledge creation.
Mandated higher transparency of competition policy and SOEs commercial behavior marks a step in the right direction. RCEP demands higher transparency from competition laws and enforcement. The potential CAI imposes enforceable mechanisms on SOEs behavior under commercial consideration9 in purchase and sale of goods or services. It is a step forward in requiring SOE to purchase or sell non-discriminately, with only commercial considerations such as price or quality. The higher standard on SOE behavior may lead to reforms on clearer division of SOE’s commercial and non-commercial responsibilities, which may foster competitive neutrality. A study by the Development Research Center of the State Council (DRC, 2020) on China’s stance in response to the reform on WTO rules for SOEs concluded that additional domestic reforms could be a way to reduce external pressures. The study called for lower objections to commercial consideration principles for some SOEs who have commercial responsibilities. The report also advised on raising transparency for SOEs, and to absorb the regulatory shock to SOEs through continued deepening of reform. The commitments in the recent agreements—which are in line with the DRC (2020) study – suggest a positive direction for SOE reforms.
E. Potential Implications of China’s Accession to the CPTPP
30. Similar to the RCEP, the CPTPP belongs to a new generation of free trade agreements which not only regulate trade of goods and services, but also encompass requirements related to market access and fair competition. With regard to trade, China’s possible accession to the CPTPP could involve additional commitments in the form of a standstill and ratchet mechanism for the non-expanding negative list for both manufacturing and services. Market access (e.g., investment negative lists) is a matter for negotiation with existing CPTPP members and could lead to further lower entry barriers for foreign investors. China’s commerce ministry (MOFCOM, 2021) has indicated that “China will commit to allowing unprecedented level of access to its markets to join the CPTPP.” Other key areas could potentially include10:
IPR protection: The provisions in Chapter 18 (Intellectual Property) of the current CPTPP agreement require protection and enforcement of IPR across almost all areas. In the case of China, joining the CPTPP will likely require broadening the field of intellectual property protection—for example, non-traditional trademarks in Article 18.18, including sound and scent marks. Some of China’s IPR protection standards fall behind those in the CPTPP, such as damage compensation for copyright and trademark infringements. Laws and regulations (including copyright law and patent law) would likely need to be aligned with the CPTPP and the enforcement regime would need to be strengthened.
Services trade: The CPTPP Chapter 10 (Cross Border Trade in Services) requires higher levels of protection, predictability, and transparency on cross border services trade. It also includes general obligations to secure a level playing field specifically for foreign financial institutions, as well as dispute resolution provisions tailored to financial services. China’s cross-border service trade is less open than the average level of CPTPP members. For example, the number of restricted service sectors in China is higher than that of CPTPP members. Therefore, joining the CPTPP will likely require further service trade opening, including in finance as well as in telecommunications and transportation.
Government procurement: The CPTPP Chapter 15 (Government Procurement) outlines more stringent obligations on government procurement than existing agreements signed by China, such as national treatment of foreign suppliers, transparency of rules and procedures, impartiality of among participants, and accountability where suppliers may challenge an alleged breach of the rules through domestic review procedures. The CPTPP’s government procurement procedural provisions largely repeat provisions of the WTO GPA with minor modifications. In line with China’s latest efforts to conform with the GPA requirements, CPTPP accession would hold the potential of faster progress in this area than what is implied in recent trade and investment agreements and facilitate a more open, transparent, and fair playing field in government procurement process.
SOE and competition policy: The provisions on SOE behavior in the CPTPP are also more stringent than existing agreements. Chapter 17 (State-owned Enterprises and Designated Monopolies) require SOEs to act in accordance with commercial considerations except when providing a public service; and to buy and sell goods and services in a non-discriminatory manner. The CPTPP prohibits a member country from causing harm to the interests of another member country through non-commercial assistance provided to SOEs. Certain information regarding SOEs is required to be disclosed to encourage good corporate governance. This suggests that a potential accession of China would require additional SOE reforms. For example, China would likely need to ensure that transactions between state-owned banks and SOEs conform to the principle of competitive neutrality and eliminate any anti-competitive subsidies provided to SOEs. Many of these reforms are consistent with China’s stated reform agenda (Zhang, 2020).
Climate and labor: The CPTPP contains a binding commitment to International Labor Organization (ILO) labor standards in its Chapter 19 (Labor) and on climate in its Chapter 20 (Environment). The CPTPP environmental rules cover trade in endangered species of wild animals and plants and the protection of the ozone layer, where China has not yet established relevant laws. Similarly, if China is to join the CPTPP, it would need to revise its labor law and improve its labor legal system, incorporating additional international labor standards that strengthen labor rights.
F. Conclusions
31. Chinese authorities have made meaningful commitments in recent trade and investment agreements on further opening up of the domestic market. Based on the experience of China’s WTO accession, these commitments could help achieve significant progress in the areas of market access, IPR protection, and further liberalization in services trade. Given that the CPTPP entails more stringent requirements along a number of dimensions, a potential accession to the CPTPP would provide further opportunity for reforms aligned with China’s stated reform agenda.
32. At the same time, by joining a new generation of regional agreements—the RCEP and, going forward, potentially the CPTPP—China can play a positive role in shaping future international trade and investment negotiations as well as the evolution of multilateral trade rules in the context of the WTO reform discussions.11
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Prepared by Yiqun Wu (SPR) and Fan Zhang (RES). We would like to thank Brad McDonald and Elizabeth Van Heuvelen for very helpful comments and suggestions.
The EU-China Investment Agreement was agreed in principle on December 30, 2020. In May 2021, the European Parliament took formal action to pause the ratification process. The text, which this paper refers to, was published by the European Commission for information purposes only and may undergo further modifications as a result of the process of legal and technical revision. This text is without prejudice to the final outcome of the agreement between the EU and China.
See Bagwell and Staiger (1999) for theory; and Broda, Limão, and Weinstein (2008) and Bagwell and Staiger (2006) for empirical evidence. Li et al (2014) argued that one reason that China sought to negotiate regional and bilateral trade agreements was to use international disciplines to underpin and support domestic reforms. Note that it has also been argued that large countries seek reciprocal market access commitments to neutralize the terms-of-trade effects of trade liberalization (Bown, 2010).
The information in this section is partly based on WTO Secretariat (2006, 2021).
China’s foreign trade was monopolized by state-owned foreign trade companies before 1979.
The current negative list refers to the “Negative List for the Access of Foreign Investment” and the “Negative List for Foreign Investment Access in Free Trade Zones” which are being revised by the National Development and Reform Commission jointly with the Ministry of Commerce and other relevant government bodies on an annual basis.
A “standstill” clause in a trade agreement means that the parties have to list all the barriers as they are at the time of making commitments, and no new barriers could be introduced afterwards. A “ratchet” clause means that if – after entry into force of an agreement – a party unilaterally removes a barrier in an area where it had made a commitment, it cannot reintroduce it anymore.
A study of 1663 patent infringement cases in 2014 found that, despite the damages awarded remained very low, with a median of USD4885.99, the system is stronger than commonly thought (Bian, 2018). Plaintiffs have an average win rate of 80 percent, comparing to 66 percent in Germany and 60 percent in the US. Permanent injunctions were automatically granted in 94 percent of the cases, partially offsetting the low damages awarded. He also found that foreign patent holders were more likely to win litigation and being granted permanent injunction than domestic patent owners. The damages awarded to foreign patent holders were higher at about three times of the domestic patent holders, despite the overall low monetary amount. A more detailed study by the IP center of Midsouth University of Financial and Political Science (2013) shows that average damage awarded from 2008 to 2013 averaged only RMB15,000 (USD 2277) for copyright violations, RMB326,000 (USD 49500) for trademark violations.
Anjie Law Firm (2019) studied 88 patent infringement cases with awarded damages over RMB 1 million between 2016 and 2018. The highest damage awarded reached RMB 80.5million (USD12.7 million), with the median rose from RMB 1.03 million (USD 154,000) in 2016 to RMB 2.0 million (USD 300,000) in 2018.
Following the enactment of the 11th “Amendment to the Criminal Law” on March 1, 2021, the criminal penalties for IP crime increased to a maximum of 10 years. The amendments also added a new article somewhat similar to the US’ Economic Espionage Act potentially in effect if not in wording, according to Aaron Wininger (2021) reported on the National Law Review.
The USTR “2021 Special 301 Report” (link) acknowledged that China amended its Patent Law, Copyright Law and Criminal Law in 2020, and published several draft regulatory measures on IP.
Regular statistics on IPR protection cases and annual reports are published by the China National Intellectual Property Administration (link) and the Amendment to Criminal Law in footnote 11.
Shanghai municipal government announced the “Negative list on cross-border trade in services for Shanghai Pilot Free Trade Zone” (link) on September 29, 2018.
The negative list for service trade refers to the “Negative list on cross-border trade in services for Hainan Free Trade Port (2021)” (link), published on July 26, 2021.
China’s Ministry of Finance invited public opinions on its proposed version of the Government Procurement Law (link). The first major revision since its enactment in 2003 and a minor revision in 2014.
Chapter 12 (Electronic Commerce) exempts dispute arising under this chapter from the dispute settlement.
Chapter 13 (Competition) prohibits recourse to dispute settlement under RCEP for any matter arising under this chapter.
According to TPP Article 17.1, “commercial considerations” means price, quality, availability, marketability, transportation, and other terms and conditions of purchase or sale, or other factors that would normally be taken into account in the commercial decisions of a privately owned enterprise in the relevant business or industry;
There are other areas which are not covered in this paper. For example, the CPFPP Transparency and Anti-corruption Chapter promotes transparency in the making and implementation of laws, regulations, and government decisions. The transparency requirements under the CPTPP are much more stringent than under RCEP. Given the public good nature of information, a higher bar of transparency in legislative and administrative decision-making supports a positive environment for international trade and investment. Another key area not covered in this paper is digital and data policy. The CPTPP encourages free cross-border data flow and prohibits disclosure of source code and data localization requirements. Note that on November 1, 2021, China applied for joining the Digital Economy Partnership Agreement (DEPA) between Chile, New Zealand, and Singapore.
See Mavroidis and Sapir (2021) for an exploration of the challenges to the current multilateral trade system. They suggested that CPTPP could serve as a “source of inspiration” for new WTO agreements, including on SOEs and technology transfer.
