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By Elizabeth M. Lynch, November 22, 2015

Movies in China

China’s movie market is big, real big. Five years ago, it was merely the eighth largest film market in the world. Today, it is the second and will likely surpass the United States as the world’s largest movie market within the next three years. Money-wise, China’s 2015 box office is on course to gross over 40 billion RMB ($6.25 billion). Needless to say, it is a high-stakes market and not just for the Chinese film industry.   With the U.S. and European markets saturated, Hollywood only has China to turn to for increased profits.

It is within this competitive environment that the National People’s Congress recently issued its draft Film Industry Promotion Law (“Draft Film Law”) for public comment (English translation courtesy of China Law Translate). Much in the law is designed to take advantage of China’s exploding film market and encourage the growth of the Chinese film industry: towns and villages are encouraged to build more theaters (proposed Art. 39); tax incentives and state funding are to be provided (proposed Arts. 37 & 38),and domestic film companies are encouraged to seek foreign investment and cooperation (proposed Art. 41).

But in China right now, money isn’t everything. Instead, the encroachment of “Western values” consumes the current leadership. And nothing says Western values quite like a Hollywood movie. Add that fear to the fact that in China, films have long been an important propaganda tool to promote socialist values and the hegemony of the Chinese Communist Party (“CCP”). This is the reason why Article 20 of the Draft Film Law forbids movies that “violat[e]…the basic principles of the Constitution” and “harm national honor or interest.”

So under President Xi Jinping, with his aggressive assault on Western values (see Document No. 9, Draft Foreign NGO Law, restrictions on foreign TV over the internet), what will this Draft Film Law mean for U.S. film companies?

The Foreign Film Quota – May Be Gone But So Not Forgotten

Recent U.S. film import – The Hunger Games: Mockingjay Part 2

There are two major restrictions that limit U.S. film companies from making a killing in China: (1) foreign film imports are limited to 34 a year and (2) the foreign studios are only allowed to keep 25% of the Chinese box office revenue. Is this 34-film quota a violation of China’s WTO obligations – you betcha as the WTO determined in 2009. But even in light of the WTO decision, China continued its quota system.  In 2012, the United States, with the movie industry desperate for China, entered into the U.S. – China Film Agreement which increased the number of imports and gave 80% of those imports to U.S. studios, putting to rest the WTO dispute. Currently, China permits 34 foreign films to be shown domestically, 14 of which must be 3D or Imax.

While some have stated that these quotas might be abolished when the U.S.-China Film Agreement expires in 2017, the Draft Film Law sneaks into the law a de facto quota. Article 32 of the draft states that domestic films must compass at least 2/3s of the movie theater’s total screening time. Essentially, foreign films will be limited to at most 1/3 of all screen time (although interestingly, the section of the draft law that deals with violations of the law does not address what happens if a theater dedicates more than a 1/3 of its film time to foreign films). So on some level, China’s “abolishment” of the quota system is irrelevant if Article 32 stays in the final version of the law. And there is no talk, even with the Draft Film Law, that the box office revenue limit of 25% is going out the window anytime soon.

The Cost of Censorship: The Film Industry as the Frontlines?

Coproduction with James Bond

But U.S studios have another way to obtain a greater share of the Chinese film market: participating in a “coproduction” with a Chinese partner. These coproduction are outside of the 34-film quota, with no limit and permits U.S. studios to attain 43% of the Chinese domestic box office. Coproudctions are subject to approval of the China Film Coproduction Corporation, a state-owned company that is ultimately controlled by the government State Administration of Press, Publication, Radio, Film and Television (SAPPRFT). Approvals can be obtained by filming at least one scene in China (think of the coproduction Skyfall with scenes filmed in Shanghai and Macau) or having at least one Chinese actor (co-production Transformers: Age of Extinction with Chinese actress Li Bingbing), a minimum of one-third of the movies’ total investment must be from the Chinese companies, and it must portray China in a positive light (coproduction of the 2010 version of The Karate Kid had to remove scenes where Chinese kids were the bullies) (for more info on coproductions, see this US-China Economic and Security Review Commission (USCESRC) report, p. 8).

To further take advantage of coproductions, Hollywood studios are anxiously watching the future of Dreamworks’ Oriental Dreamworks, created in 2012 as a Shanghai-based joint venture and set to release its first movie, Kugfu Panda 3, in 2016. The Draft Film Law encourages this type of relationship (draft Art. 41) because the Chinese film industry is still years behind Hollywood and needs its technical assistance. These coproductions provide that knowledge and technology. As the USCESRC report (see p. 9) notes, filming of the Avatar sequel, a coproduction, provided the Chinese side with sophisticated 3D technology as well as how to use that technology cost-effectively.

President Xi Jinping, not a fan of Hollywood values

But coproductions do not necessarily offer a win-win situation with U.S. studios avoiding the quota system and Chinese companies receiving Hollywood’s technology and know-how. In the end, these coproductions are still subject to the censorship whims of the Chinese government. True draft Article 20 delineates what content is forbidden but “harming national honor and interests” is anything but specific. While draft Article 12 implies that there will be a proper “film evaluation system” to provide some clarity to the censorship parameters, this is all being proposed while the Chinese government constantly discusses the need to contain foreign forces and influence. And there is likely little coincidence that the Draft Film Law was issued only a mere weeks after President Xi Jinping’s speech on the arts was finally released in the state-controlled media. In his speech, Xi makes clear that the Chinese film industry cannot merely be led by the market; economic benefit takes a second seat to the movie industry’s social purpose. Further, Xi highlighted that the Chinese movie sector, while it must take advantage of the foreign film industries’ technology and skill, should not be “chasing the foreign.”

This uncertain censorship environment will negatively impact U.S. film studio’s investment in costly coproductions. Unlike Chinese studios, U.S. studios take many years to produce a movie and at significantly higher cost than their Chinese counterparts would ever invest. As Rogier Creemers has pointed out, China’s post-production censorship, if it continues to be capricious, could result in U.S. investors eventually walking away from the field:

“[Because of censorship] [r]egulations and obligations can shift significantly in a very short space of time, and the possibility for media enterprises to influence this policy is relatively limited. Making a film, especially one involving significant technical effects or animation, takes a long time from start to finish, and it’s difficult to see how investors would be willing to part with their money if there’s no guarantee that their project will be permitted on the market two or three years from now.”

As a result, it may be U.S. film studios that are the first businesses to feel the  tightening yoke of the Chinese government’s censorship as well as its current obsession with containing foreign forces. No longer can U.S. businesses ignore what is happening in China’s civil society space – with the mass round up of China’s civil rights advocates and the squelching of any opinion that counter’s the Chinese government’s narrative. For this is what Hollywood does without even knowing it – undermining CCP rule. For example time travel which the Chinese censors have banned because it could be perceived as undermining CCP rule. Will it be the U.S. film studios to be the first industry to finally recognize that the Chinese government’s mindset cannot just be contained to just its crackdown on domestic dissidents but will also impact their bottom line?

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By Elizabeth M. Lynch, January 23, 2011

Welcome to the Jersey Shore!

State visits never produced tangible results, and last Wednesday’s visit of President Hu Jintao to Washington, D.C. was no exception.  True a series of business contracts  and joint ventures were announced, but not much else.  Really though, that’s not why we watch state visits – especially ones involving leaders of the two largest economies in the world.

We watch them more because they are a reality show of sorts – watching two world leaders from vastly different cultures walk the fine line between appearing strong for one’s own country’s interests but at the same time, not completely trampling the other country’s interests.  But unlike the Jersey Shore where one might just be sent home from the beach for misbehaving (think Angelina Season 1 AND Season 2), the consequences are much more serious when you are dealing with two countries whose future relationship can easily determine the fate of the world.

Fortunately, this State visit proved a lot more peaceful and face-saving than anything being shown on the Jersey Shore these days.  While there were some surprises, especially on the Chinese side, there were no fist-a-cuffs.  Overall, the visit seemed to show an improved relationship, at least rhetoric-wise, between the United States and China.

But this is a Jersey Shore analysis so enough of the feel goodness; the question still remains – who won?  Below is a point-by-point analysis of President Hu Jinato’s State visit.

Point for China – Hu Finally Gets a State Visit

The fact that there was a State visit at all was a huge point for China.  It’s been 13 years since a sitting Chinese president

Ceremony on the South Lawn, Jan. 19, 2011

was invited for a State visit and President Hu’s last visit to Washington in 2006 consisted of a lunch with President George W. Bush.  Could anything be more embarrassing for a world leader than to just be offered the lunch menu at the White House?

Unfortunately, yes.  Hu’s 2006 “official” (not state) visit was marred with embarrassing moments for the Chinese.  First, China was introduced as the Republic of China – the official name for Taiwan – sort of a huge gaffe in U.S.-China relations.  Second, a Falun Gong practitioner, a religious order that the Chinese government considers a threat to its rule, was able to obtain press credentials for Hu’s 2006 visit and protest at the event.

But for this visit, the Obama Administration pulled out all of the stops, making it a State visit to outdo all other State visits.  President Hu was greeted at the airport by Vice President Joe Biden and quickly ushered to the White House for an intimate dinner with President Obama.  At all times, China was introduced by its correct name and there were no protests on the South Lawn.

Michelle Obama at the State Dinner for President Hu Jintao

Culminating the event was Wednesday night’s State dinner, perhaps the most anticipated affair this winter.  In addition to a fun and interesting guest list, Michelle Obama chose an amazing dress in homage to one of fashion’s favorite designers – the late Alexander McQueen – making the event the talk of the town of both politicos and fashionistas.

Point for the U.S. – China Gets (a little bit) Tougher on North Korea

North Korea is proving to be a particularly troubling aspect of U.S.-China relations.  No one – including China – particularly cares for North Korea and its saber-rattling as Kim Jung-il’s son takes the rein of perhaps the world’s worst dictatorship.  North Korea’s bellicose activities interfere with China’s economic relations with its Asian neighbors.  But China has yet to take a strong stance against North Korea’s actions even though such actions upset the stability that China needs to continue its rise.  China’s hesitance comes from the fact that it fears a collapsed North Korea; not only would there be the demise of another communist ally, but a collapsed North Korea would mean an influx of starving Korean refugees into China as well as sharing a border with the democratic and U.S.-military-backed South Korea.

For its part, the United States has begun to see North Korea as an increasingly real threat against its allies and itself.  As a result, at Tuesday night’s intimate dinner between the two leaders, President Obama explained to President Hu that unless China takes a stronger stance against North Korea, the U.S. will be left with no choice but to rebuild a stronger military presence on the Korean peninsula.

That argument eventually carried the day.  In the Joint Statement issued on Wednesday, China, for the first time,

Kim Jong-il, Beijing's friend or foe?

“expressed concern” regarding North Korea’s nuclear build-up.  Additionally, while China has urged the resumption of “six party talks” with North Korea, the U.S. has hesitated, seeing it as a reward for North Korea’s bad behavior.  Evidently China and the U.S. were able to reach a compromise: before any six-party talks resume, the two Koreas must first resume their dialogue (see paragraph 18 of the Joint Statement).  On Thursday, South Korea agreed to low-level talks with the North.

Half a Point for the U.S. –Human Rights Makes the Agenda but an Odd Assortment of “Human Rights Advocates” Advise President Obama

Human rights loomed large during Hu’s State visit.  After meekly raising the issue during his State visit to China in November 2009, President Obama was having no criticism of his commitment to human rights.  Secretary of State Hillary Clinton made that apparent in her speech on January 14, 2011 when she not just raised the issue of human rights but also mentioned specific human rights advocates that the U.S. believed were been unlawfully detained.

President Obama continued to publicly press the issue of human rights.  President Obama publicly declared the universality of certain human rights as well as the need for the Chinese leadership to meet with the Dalai Lama.  Perhaps the most surprising of all was when President Hu admitted that China still had a ways to go in better protecting human rights (see the Q&A portion of the Joint Press Conference).

Normally, this should receive a full point.  But the U.S. loses a half a point because of form.  Prior to President’s Hu’s visit, President Obama met with five China human rights advocates.  These “advocates” included Prof. Andrew Nathan of Columbia University; Prof. Paul Gewirtz of the Yale China Law Center; author Zha Jianying; the wife of former Ambassador Winston Lord, Bette Bao Lord; and research scholar at the University of Maryland, Li Xiaorong.

While these five are likely well-informed on issues of human rights, there seems to be some missing names from the list of “human rights advocates.”  Sharon Hom of Human Rights in China has dedicated her life – and at times has risked her safety – to advocate for greater human rights protection; one can’t think of anyone else more qualified.  And if one wants to stick with academics (three of the five study human rights), it is questionable why Prof. Jerome Cohen of NYU School of Law was not in attendance.  Prof. Cohen continues to lambast China on its human rights record on an almost bi-weekly basis in his South China Morning Post articles and actively supports many human rights attorneys in China.

But most of all, why weren’t the Chinese human rights activists themselves invited?  Currently, the wife of missing human rights lawyer Gao Zhisheng is in the United States as is the wife of imprisoned human rights lawyer Guo Feixiong.  Why not invite either of them to speak with the President of the current human rights situation in China?  Or exiled dissident Yang Jianli currently residing in the U.S.?  Or better yet – why not have a Skype chat with any of the human rights lawyers presently in China (Teng Biao, Mo Shaoping, Tang Jitian, Liu Wei)?  The latter might be a bit too much to ask, but the list of human rights advocates invited to speak with President Obama should have been longer.

Point for China – U.S. Promises to Rein in Spending

As the largest holder of U.S. debt, China is very concerned about the U.S.’ spending habits.  The Federal Reserve’s announcement of injecting more cash into the U.S. economy through “quantitative easing” only worsened China’s fear that its U.S. dollar reserves would lessen in value.  So when President Obama, in response to a reporter’s question during the joint press conference, stated that the U.S. must take greater responsibility in saving and cutting the U.S. deficit, China was very happy.

Half a Point for the U.S. – Government Procurement

China’s closed government procurement market and its indigenous innovation policy has been a issue for U.S. businesses.  China is not a member of the WTO’s Government Procurement Agreement (“GPA”) and as a result is not required to have an “open” government procurement market.  China has submitted two bids in the past few years to be a member of the GPA, most recently this past summer.  However, both applications have fallen far short and as a result, China remains outside of the GPA.

But surprisingly, in the U.S.-China Joint Statement (paragraph 27), China agreed to resubmit an application to the GPA by the end of 2011 and include sub-central government entities as subject to its proposal.  Such an agreement was unexpected and likely a welcome development to the U.S. business community.

So why half the point?  Seeing is believing in this case.  It’s not completely in China’s self-interest to be a member of the GPA at this stage so anticipate that its renewed application will still fall short of GPA requirements.  And even if it becomes a member, it’s questionable if China will enforce laws to promote an equitable government procurement market.

Point for U.S., Point for China – 100,000 Strong Initiative Articulated

Study Abroad in China!

During President Hu’s visit, Michelle Obama, in a speech before a thousand DC-area students, reaffirmed the Administrations’ commitment to sending 100,000 U.S. students to China on various study abroad programs (the “100,000 Strong Initiative”).  In 2008, less than 15,000 U.S. students (on both the college and high school levels) studied abroad in China. The U.S. has a long way to go before we reach 100,000 students but its commitment to achieving that goal is a win-win for both China and the U.S.

Americans’ knowledge of China is abysmally low; as China rises, our lack of our understanding its history, culture or language becomes dangerous.  Study abroad programs can help bridge that gap.  While very few U.S. students will continue on their China path after their study abroad program, just being exposed to the culture and the difficulties that the nation faces is important.  But there will also be some students that will continue on that path, providing an invaluable resource to the American government as China continues its rise as a global power.

The “strong” in the 100,000 Strong Initiative is more about strengthening the cultural ties and understanding between our two nations.  While China sends 10 times the number of students to the Untied States, it is important that U.S. students go to China for those Chinese who will never come to America.  What’s even more important is that the 100,000 Strong Initiative reaches out to community colleges and historically black colleges and universities, both of which have been underrepresented in China study abroad programs.  It is important that the students the U.S. sends to China reflect our great diversity.

Sec. Gates, not a happy camper on US-China military ties

No Points for Anyone – Military-to-Military Ties Remain the Same

There doesn’t seem to be a change in military-to-military ties.  After the U.S. sold arms to Taiwan last January, China broke off military ties and the relationship has barely warmed.  When Secretary of Defense Robert Gates visited Beijing a few weeks ago, a stealth jet fighter was flown unbeknown to even President Hu Jintao.

The Joint Statement (paragraph 9) includes language on improving and deepening communication between the two militaries.  But it appears to be boilerplate language similar to the language found in the Joint Statement issued after President Obama’s visit to China in November 2009.  The fact that China’s military remains non-transparent, secretive and slightly threatening is a serious issue.  The fact that President Hu did not seem to have control of the military, even though he is the nominal Chairman of the Central Military Commission, is even more troubling, for both the U.S. and China.

The U.S. military is stationed through out China and patrols many international waters.  The Chinese military is becoming increasingly assertive at times.  Small incidents have occurred in the past.  But without good communications between the two militaries, it is easy for any small incident to become an international one that could upset the stability in the Pacific.  Hopefully the promised high-level military visits between the two countries will soon produce results.  Then both the Chinese and American people will find it easier to sleep at night.

Winner?

It’s a tie. As far as State visits go, this was a pretty good one.  Everyone got something they wanted and can bring back positive results to their respective people.  Aside from military relations, U.S.-China rhetoric seems to be improving.  Hopefully this trend can continue.

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By Elizabeth M. Lynch, December 23, 2010

Yesterday, the White House announced that President Hu Jintao will make a State visit to the U.S. on Wednesday, January 19, 2011.  President Hu’s visit is long overdue; at the end of President Barack Obama’s State visit to China in November 2009, it was expected that President Hu would visit the U.S. by the summer of 2010.

Needless to say, President Hu’s visit will come at an interesting time.  The State visit was not the only China-related news that the Administration announced on Wednesday; the Obama Administration also supported the United Steelworkers’ contention that China is illegally subsidizing its wind turbine industry by filing a suit in with the World Trade Organization.  And as trade issues continue to plague U.S.-China relations, North Korea’s recent bellicose actions against the South reflect the importance of China in maintaining peace in Asia while North Korea undergoes a leadership change.  Given the importance of the two nations to each other as well as to the rest of the world, a one-day State visit seems a bit short.  It will be interesting to see what deliverables emerge from the visit.

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By Elizabeth M. Lynch, June 11, 2010

Government Procurement - Shopping Spree for the Government

On Tuesday, China Law & Policy published an insightful interview with attorney Brett Gerson concerning China’s Government Procurement Law, China’s new policy to promote “indigenous innovation” in the Chinese technology sector, and China’s agreement to submit a proposal to the World Trade Organization’s (WTO) Government Procurement Agreement (GPA).

The very next day, what was the talk on Capitol Hill?  China’s government procurement policies!  Before a congressional hearing on China’s trade obligation under the WTO, China’s government procurement policies took center stage.  Which leads us to wonder – are members of Congress busy reading China Law & Policy?

Given the lack of depth in some of the Senators’ comments, we hope not.  In a rare show of bipartisanship, both Republican and Democratic senators united in their attacks on China, demanding that China sign on to the GPA.  Senators Debbie Stabenow (D-MI) and Sam Brownback (R-KS) were the leaders of the pack, calling for China to behave like every other WTO member and join the GPA and stating that China’s indigenous innovation policy is just a way for China to steal foreign patents.

But if the Senators had read Tuesday’s China Law & Policy interview, they would know that “signing up” is just not an option for the GPA.  China has to submit a proposal stating its new government procurement policy and the GPA member countries choose to accept or reject that proposal.  It’s like the Miss America pageant and China’s proposal is its version of the bathing suit competition; even if you wear your nicest two-piece, it’s still the judges who ultimately decide.  As Brett noted in his interview, China submitted such an application in 2007 and, because the GPA member countries did not like China’s proposal, it was rejected it.  China has promised to submit another proposal in July

Sen. Debbie Stabenow (D-MI)

2010.  Once China submits it, the decision to “sign up” for the GPA is out of its hands.  But Congress missed this important procedural distinction and the fact that China has actually promised to move forward.

And not all WTO countries are also members of the GPA.  Senator Stabenow just got that wrong.  A simple Google search would show that actually, plenty of WTO members, including countries like Australia, India and Turkey, are not parties to the GPA.

As for the accusation that China’s indigenous innovation policies are a way to steal foreign intellectual property, here’s a wake-up call – getting China to change this one policy is not going to solve the problem.  Chinese companies do illegally use foreign intellectual property and the Chinese government often turns a blind eye toward enforcing intellectual property rights and laws.  But China’s indigenous innovation policy is just one tool that China uses.  As Jim McGregor pointed out in his Washington Post op-ed, the Chinese government has created a complicated structure seeking to benefit its domestic technology industry:  “a foreign-focused anti-monopoly law, mandatory technology transfers, compulsory technology licensing, rigged Chinese standards and testing rules, local content requirements, mandates to reveal encryption codes, excessive disclosure for scientific permits and technology patents;” discriminatory government procurement policies is just one piece of the puzzle.

Congress needs to see this problem holistically – not something that can be solved merely by getting rid of a discriminatory government procurement policy.  And as McGregor notes in his piece, part of the problem is on the U.S.-side.  Although China has been building its economy for the past 10 years and the China “threat” to U.S. competitiveness has been obvious for the past five, the U.S. has done little offensively to battle this threat.  The U.S. government has not created any kind of economic planning for technology start-ups as  Tom Friedman noted in his New York Times op-ed, and the one piece of legislation that could provided something of a lifeline to the U.S.’ technology sector, the Climate Change bill, has been stalled in the Senate for a year now.  Furthermore, the U.S. still retains a behemoth bureaucracy that is ineffective to deal with the complexities of the China relationship and hires individuals with little to no China background to do this work.  Congress’ sole focus on attacking China on Wednesday ignores the other half of the equation – developing the U.S. tech sector to better compete with China and a government bureaucracy that actually protects U.S. industry.

China is an economic threat to the U.S, especially in the technology sector.  But Wednesday’s hearing showed a Congress not willing to actually solve the problem.  Instead, Wednesday showed a use of rhetoric designed to win upcoming midterm elections.  The only losers are the American public and the millions of Americans who are still out of work.

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By Elizabeth M. Lynch, June 8, 2010

Last month’s Strategic and Economic Dialogue (S&ED) featured many thorny issues that have been plaguing U.S.-China relations for the past few months: North Korea, currency manipulation, Iran….and government procurement?  Yes, government procurement. Not what one would think of as a controversial topic worthy of a major dialogue between two of the world’s leading powers.  So to help us understand the addition of government procurement to the S&ED agenda is Brett Gerson, an associate in the international trade and public procurement practices at Reed Smith and co-author of the recent article “Can China’s Government Procurement Market be Cracked?” in this month’s The China Business Review.

Click here to listen to the interview with Brett Gerson or read below for the entire transcript.
Length: 19 minutes (audio will open in another browser)

In the interview, Brett mentions three laws and regulations pertaining to government procurement in China. They can be found through these links:

• 2002 Government Procurement Law of the PRC (official PRC translation)
• January 2010 Draft Government Procurement Law Implementing Regulations (Unofficial translation courtesy of the U.S.-China Business Council) – link to be updated soon
• May 2010 Draft Administrative Measures for the Government Procurement of Domestic Products (Unofficial translation courtesy of the U.S.-China Business Council)

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Potentially a $90 billion Procurement Shopping Spree

EL:  Just to begin, what exactly is meant by government procurement and how does this involve U.S.-China relations?

BG:  Well, essentially government procurement is the process whereby governments or government ministries or agencies can purchase goods or services at a large-scale to provide for use in the carrying out of government processes.  So for example, this could, as an example of goods, a government agency could purchase in bulk a large number of, let’s say, printers or staplers or another good.  It could also be services.  The government could enter into an agreement with an IT company to provide some type of computer services or internet maintenance or something like that.

It’s becoming a very big issue between the U.S. and China because like many other areas of China’s market, there is immense potential for companies – both Chinese and foreign – to get into China’s procurement market.  Obviously the Chinese government is huge, they have a wide array of ministries and agencies both at a, sort of, federal level coming from Beijing, and at a provincial level.

EL: And how big is this market, this potential market, in U.S. dollars?

BG:  It’s hard to say exactly.  Most estimates hover around $90 billion which is really huge.  But it is tough because it is hard to say exactly which entities are state-owned enterprises, so which are entirely private and which are sort of public in nature.  But most estimates hover around $90 billion and I have seen a couple where in 2010 that’s expected to reach $100 billion.

EL: Currently, does China have any policy or laws in regards to government procurement of foreign companies’ goods or services?

BG: Yeah.  In 2002, China promulgated the Government Procurement Law.  It’s somewhat controversial in nature but it basically just states that Chinese government agencies and entities must purchase domestic goods, works or services except where those goods, works or services can’t be obtained within China under reasonable commercial terms.  Those reasonable commercial terms are defined as 20 percent more than imports.  Now, the problem with the Government Procurement Law is that it never defined what is “domestic.”  So companies, particularly foreign companies, had a hard time cracking that market because it was so easy for the Chinese government and Chinese government agencies and entities to just simply purchase products – goods or services – from Chinese companies.

Since 2002, there has been a lot of international pressure on China to better define what is domestic.  They finally did this in January 2010, just about six months ago, the Chinese government issued what’s called the Implementing Regulations.  These aren’t exactly law, but they define how the Chinese government is suppose to carry out the Government Procurement Law.  The Implementing Regulations set forth that….it better defined domestic.  It says that essentially domestic manufacturing costs that exceed a certain threshold, those products will be defined as domestic.  Now in the implementing regulations, they didn’t actually set the threshold.  We were able to look at some other guidance that the Chinese government issued recently and we were able to guess that they probably meant 50 percent.  Now, just a few weeks ago, right before the high-level meetings in China that you discussed, the Chinese government again issued another sort of policy guidance paper that did clarify that the threshold for a product to be considered domestic is 50 percent of domestic production costs.

EL:  So if they have clarified this recently and this law has been in place since 2002, why is this now becoming such

China's Government Procurement Laws - Trade Protectionism?

an issue? What has caused government procurement to become almost the centerpiece of the Strategic and Economic Dialogue last month?

BG:  There’s two main reasons and they sort of come together.  The first is that in the World Trade Organization, there is an agreement called the Government Procurement Agreement [GPA].  It’s a plurilateral agreement meaning that some but not all of the World Trade Organization members are a part of this agreement.  It basically just states that if you’re a party to this agreement, you cannot favor products or services from your country against those from a foreign country.  China, when they first came on to the World Trade Organization in 2001, they promised that they would join the Government Procurement Agreement as soon as possible.  Now, they have submitted a proposal before, back in 2007, but it didn’t quite come to the level of international best practices.  The member countries essentially rejected it.  Since that point, the United States as well as major European countries and other members to the GPA, have pressured China to resubmit a proposal that do come up to the standard that the member countries expect.  Finally, China agreed just recently at the high-level discussions in China that they were going to submit a new proposal in July of this year.  Right before the time the World Trade Organization Government Procurement Committee meets.  So I think that is one of the issues that is really bringing it to the forefront, is that there is a lot of pressure on China to join the GPA agreement.

The other issue, and this was also discussed and mentioned by Hillary Clinton and Timothy Geithner, is China has set forth a very controversial policy called indigenous innovation policies.  And basically these are policies that direct provincial governments and agencies and ministries to buy only from certain product catalogs.  These catalogs are primarily made up of high-tech and IT goods and traditionally it’s been extremely hard for foreign companies to get their products onto these catalogs.  For example, and I mention this in the article, out of the Shanghai-based catalog, there are over 500 products that are listed on this catalog, and foreign products make up only two of these products.  Of those two, they are not entirely foreign entities, they’re joint ventures between a foreign company and a local Chinese company.

So I think those two issues, one that China has been slow to join the World Trade Organization Government Procurement Agreement and two, these indigenous innovation polices that make it very difficult for foreign companies to get their high-tech products listed on these procurement catalogs.

EL:  But in terms of China favoring its domestic products over foreign products, is China really acting any differently than from any other countries in terms of government procurement?  Doesn’t in the U.S., isn’t the U.S. government required to purchase U.S. products?  How is China any different from that?

BG:  Well there’s a couple of differences.  The U.S. and other countries that are members of the GPA do have policies that direct or allow their own domestic government entities to purchase only domestic products.

There’s a couple of differences.  One, here in the U.S. we have what is called the Buy American Act.  The Buy American Act essentially says that federal agencies can only procure unmanufactured articles that have been mined or produced in the U.S. or manufactured articles that were made substantially of articles or materials mined or produced in the U.S.  But there are several exceptions.  One is you can waive that if it would be consistent with public interest or if observing that preference would be inconsistent with the public interest.  Second, where the cost of buying the U.S. good is, sort of, unreasonably higher than would you purchase them from a foreign entity.  The third exception is where the products in question are in too short of a supply in the U.S. to make that purchase feasible.

In addition to that, government agencies may purchase foreign-made information technology equipment.  So that’s sort of a big issue and that sort of touches upon the China indigenous innovation policies – there is sort of a cut-out for U.S. government agencies to waive the Buy American requirements for sort of high-tech, IT goods.

Also, the Buy American Act doesn’t include services which the Chinese government procurement policies will.  As you know, services is a huge sector for foreign companies in China: legal services, accounting services, IT services, things of this nature.

In addition to the Buy American Act, we also have the Trade Agreements Act and this is a pretty big issue because the Buy American Act will be waived where we have a trade agreement act, an agreement with another country.  These include all the countries that are signatories of the WTO Government Procurement Agreement that we mentioned before that China is not a signatory to; these also include all countries that we have free trade agreements with ; all these developed countries and also the Caribbean basin countries.

You are right in that the U.S. does have certain policies like the Buy American Act that on their face appear somewhat discriminatory.  But I think that the differences between China’s policies and the U.S. policies is that we have so many carve-outs for our Buy American Act: exceptions and instances where the Buy American Act requirements will be waived where we have agreements in place with other countries.  China is not one of them.

EL:  Just to go back to the indigenous innovation policy of China, because that was something that Secretary of State Clinton did mention specifically as a problem.  I guess just examining the equities of it.  Given that the U.S. and other countries were largely able to develop their technology sector before our current global trade system, and before there was competition from other countries, shouldn’t China also be permitted this luxury?  Don’t they have an opportunity to catch up?  Isn’t China’s indigenous innovation policy just a way to allow its small but growing technology sector to really flourish?

BG:  There is no question that China should be allowed to sort of foster the growth of their high-tech services but I

Investing in R&D in China might bring more benefit than an indigenous innovation policy

think, and Secretary Clinton and Secretary Geithner both mentioned this, that there’s ways to do this that are less discriminatory for foreign firms.  Rather than link the indigenous innovation policies to government procurement – which they are trying to do – we think that there are other ways such as using tax incentives or research and development support programs that can sort of achieve the same goals without the discriminatory effect.  We think that generally China grow this area by including foreign firms rather than excluding them.  Like I said, there are certainly sort of high-tech tax status programs that they can enter into and R&D programs.

One of the big ways that their policies discriminate against foreign firms is, initially when they released the indigenous innovation policies, they required that to get on these catalogues that I mentioned before, the company has to…the trademark of the product has to be owned by a Chinese company and they also had to have full ownership of the products IP [intellectual property] in China.  This was really stringent, this was tough.  Thankfully, just a couple of months ago in April actually, the Chinese government again released sort of guiding, implementing regulations memo.  Now, this doesn’t have the force of law but they’re proposing to relax these requirements by saying that instead of having full ownership of the trademark in China, the company need only have exclusive rights to the product’s trademark in China.  Instead of having complete ownership of the intellectual property in China, you only have to have a license to use the intellectual property in China.

So this is definitely a step in the right direction.  But ultimately, I think ideally foreign companies, U.S. companies, would want to de-link the indigenous innovation policies from government procurement.

EL:  Just getting back to the Strategic and Economic Dialogue, do you know what it was that the U.S. side was seeking to achieve in terms of government procurement and indigenous innovation policy.  I know that you had mentioned a little bit before but can you just summarize that the U.S. wanted out of it?

BG:  Sure.  I think the first thing they wanted is to urge China to submit an additional proposal, a new proposal, to the World Trade Organization Government Procurement Agreement, which they have agreed to do by mid-July so that’s definitely is a step in the right direction.  We don’t know exactly what that is going to say but we are think that it is going to be a step closer to international best practices and the other proposals that the member countries have agreed to.

Second, I think that, the U.S. delegates really wanted the Chinese government to relax the indigenous innovation policies and de-link them from the government procurement policies.  As it stands right now in the Implementing Regulations, Article 9 says that Chinese government entities and agencies should favor indigenous innovation products which are only listed on these catalogues like I mentioned.  So I think what the U.S. government would like to see is getting rid of the indigenous innovation article from the Government Procurement Law.  It is unclear that the Chinese government is going to do that.

EL:  Even though it seems like there was some progress at the Strategic and Economic Dialogue and that China has agreed to submit a new proposal, do you really see though China, I guess, even if it submits a new proposal, do you see that proposal to the WTO to join the Government Procurement portion of the WTO, do you see that as actually being something that other member countries would agree to?  Do you see China acquiescing to a lot of the foreign pressure and is it really in China’s self-interest to do that at this stage in its development?

BG:  It’s hard to say at this point.  I think we’ve seen that, in other areas, in strategic and economic areas, China has certainly refused to acquiesce to international pressure to do certain things or not to do certain things.  So it is hard to say without seeing their proposal.  I think that the GPA member countries would reject a proposal that is not up to standard.  They’ve done it before and I think they might do it again.  And I’m not sure that would be in China’s interest.  I think China at this point would have to understand what the member countries expect, what the parameters would be.  And it’s unclear to me that they would submit something that would be any less than that.  So it’s hard to say.  I don’t know.

Generally it seems that China doesn’t acquiesce.  However if the international community is successful in persuading them that it is in their best interest, to relax their indigenous innovation policies and to de-link them from government procurement, then I think they will go ahead and submit a proposal that’s up to par, that’s in line with international best practices.

Over the last several months, in January, since they issued their Implementing Regulations, there has been significant international backlash and they have sort of watered down some of the more strict discriminatory provisions in the Implementing Regulations.  So there’s been progress.  I suppose they only have another six, seven weeks before they’re going to submit their proposal to the Government Procurement Committee so it is unclear how much further they are going to go in watering those items down.

EL:  Well I guess only time will tell what happens in July.   Thank you.

BG:  It will be interesting; hopefully we can follow up and discuss what happened.

EL:  That would be great.  Thank you so much for your time.

BG:  Thank you.

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By Elizabeth M. Lynch, November 8, 2009

Last Wednesday, November 4, the European Union, the United States and Mexico filed a complaint with the World Trade Organization (WTO) against China for its quotas, export duties and minimum export prices for raw materials essential to the manufacture of steel and aluminum.  Noticeably absent from the complaint though, is any mention of China’s restriction on rare-earth elements.

Rare Earth - Much More than a Band from the 70s.

The raw materials at issue in the WTO complaint, while important to key manufacturing industries in the US and the EU, in many ways represent the economy of old.  Rare-earth elements, which China also heavily restricts export of, represent the economy of tomorrow; many of these rare-earth elements are indispensable for a greener, more environmentally-friendly world.  The magnetic properties of rare-earth elements like dysprosium and terbium are important for wind turbines and essential for the production of long-lasting, light-weight batteries for electric cars.

China, and its rare-earth enriched Inner Mongolia, account for 93% of the global production of rare-earth elements and 99% of the world’s dysprosium and terbium.  While countries have sought to expand green technologies, thus increasing the demand for rare-earth elements, China has continued to restrict the amount exports of rare-earth materials.  This past September, China, for the third year in a row, lowered the amount of rare-earth materials allowed for export by 6% overall, double-digits though for certain rare-earth materials .

China wants not just the monopoly on the production of rare-earth materials, but also on the more profitable business of producing down-stream products like electrical cars and wind turbines.  Japan, which is the largest importer of rare-earth materials because of Toyota and Honda’s drive to expand the market for hybrid and electric cars, feels the biggest pinch of all.  In fact, Japan purchases from a fifth to a quarter of its rare-earth materials on the black market, a black market where Chinese sellers thwart their own government’s restrictions.

In addition to its own domestic production, China, with its large foreign reserves to spend, has attempted to be a controlling share holder in other countries’ rare-earth industries.  Last spring, Chinese government-controlled mining companies purchased a 25% share of Australian rare-earth mining company Arafura.  China’s offer to purchase 51% of another Australian rare-earth mining company, Lynas, was likely going to be denied by the Australian government because of the Chinese government’s mishandling of the Rio Tinto case and the detainment of Australian citizen.  The Chinese mining company pulled out of the deal before it could be denied by the Australian government.

After China’s CNOOC’s failed bid to purchase California oil company Unocal in 2005, CNOOC  made overtures to purchase a single asset of Unocal’s: Mountain Pass, the U.S.’ only rare-earth mine.

Thus, the future of some green technology is beholden to China.  But Japan, instead of investing in China’s rare-earth elements industry, is looking to invest elsewhere – likely because of the danger in investing in a country with a fickle commitment to rule of law.  Japan has signed a deal with one of Kazakhstan’s largest mining companies for rare-earth excavation and is looking to Australia, Canada, Vietnam and the U.S. as alternate suppliers.  However, it will take at least 10 years before any of these new mines will produce rare-earth materials.  Until then, anticipate delayed development of green technologies and hopefully a WTO complaint.

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By Elizabeth M. Lynch, September 16, 2009

On Friday, in a move that some claim to be political posturing and others claim to be a long overdue enforcement of trade laws, President Obama decided to levy tariffs on tire imports from China.  In issuing these tariffs, President Obama relied on Section 421 of the Trade Act of 1974.  Section 421 is exclusively about imports from China and permits the President to issue tariffs on a product from China if the product is being imported “in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of a like or directly competitive product….”  That’s right, neither “unfair trade” nor “dumping” has to be alleged; just market disruption (see analysis here).  But China agreed to this specific provision in order to join the WTO.  In response to President Obama’s decision, China has threatened to levy tariffs against automotive imports and chicken meat.

So while President Obama’s decision was likely “legal,” was it the right move to make?  Trade law expert and China

Adam Bobrow

specialist Adam Bobrow offers his take on the President’s recent decision for tire tariffs below.

Trade Policy by Proxy—§421, Lost Opportunities, and a Prescription for Improvement

By Adam Bobrow

Last Friday, President Obama announced his decision in response to the first China-specific safeguard petition of his term.  The U.S. International Trade Commission (USITC) recommended imposing tariffs of 55%, 35%, and 25% ad valorem, for one year each to compensate for a market disruption to the domestic industry caused by a surge in imported car and light truck tires.  The President was predictably Solomanic:  he accepted the USITC’s framework, but substituted a tariff of 35%, 30%, and 25% ad valorem, in each of those years.  The President’s move upset many observers and interest groups—as it would have if he had imposed the relief recommended or no relief at all.  (In each case, a different distinct group would have applauded while the others jeered.)  To perhaps a greater extent than with most Presidential choices, this was a no-win situation.  In fact, the safeguard will not have a large impact on the U.S. economy.  So why spill so much ink over it?

This decision has taken on heightened importance because it is the Administration’s most important action related to trade policy to this point.  As such, it will be interpreted as a statement of trade policy, rather than as a single, and possibly singular, event.  In deciding to impose the safeguard, the Administration does not seek to make a general statement concerning its trade policy, but because the President has taken no other high-profile actions nor made a clear statement of his trade policy (routine reports to Congress don’t count), observers must treat this decision as trade policy by proxy.

But what could this Administration have done on trade in the first 8 months that would have made a difference today

Made in China - Tires

and avoided some of the avalanche of criticism that the safeguard has engendered?  Even more important, for a President who has claimed to be nominally in favor of trade liberalization but with supporters in Congress and organized labor who are not, how could the President enunciate a trade liberalizing agenda that might succeed?  First, a primer on the politics of trade policy is in order.

During the last half of the 20th century, there was a centrist consensus on trade in the United States.  Based on a general understanding of the economic implications of comparative advantage, the memory of the “beggar thy neighbor” policies of the 1930’s, and the benefits conferred by successive rounds of multilateral trade liberalization, the center held through the Clinton Administration.  That center crumbled in the last 8 years during an Administration that believed in trade liberalization but reflexively opposed any policy that could be construed as intervention in the economy.  Ultimately, the Bush Administration mismanaged the economy and undermined the consensus on trade liberalization in which its officials believed.

The situation now, with the Democrats in control of Congress and the White House, challenges the premises of the centrist consensus on trade liberalization more directly than did the divisive style but nominally free trade ideology of the Bush Administration.  According to Public Citizen, all the races in which trade played a part in 2006 favored the Democratic candidate, the one Public Citizen identified as favoring “fair trade,” a term that embraces a policy with less liberalization, more tools to protect existing workers in domestic industries, and less autonomy for Executive Branch trade negotiators.  (The results in 2008 were similarly one-sided from a trade perspective, if not quite as dramatic.)  As a result, a significant part of the majority caucus now believes in opposing continued trade liberalization and will fight for that position.  Assuming that the White House would like to rebuild a centrist consensus around the continued benefits of trade liberalization, the current make-up of the Congress poses a tremendous challenge.  The partisans on President Obama’s side of the aisle do not believe in trade liberalization and potential allies on the other side of the aisle have been unwilling to support any White House initiative in any meaningful numbers thus far.  How to thread this needle?

The way forward is a trade policy that embraces the entire economic impact of increased globalization throughout the U.S. economy and does not remain tied exclusively to the issue of lowering tariffs and eliminating non-tariff barriers alone.  Freer trade makes good economic sense:  in the common parlance, trade is a win-win economic deal.  But while economies experience trade as win-win, there is no guarantee that those benefits will reach all communities—and in almost all cases, some communities will lose because of freer trade meaning that the economic pain felt by some is both undeniable and due to trade.

The key is to find a way to lessen the economic pain and insecurity in those communities.  The answer lies not in instituting protectionist policies and raising barriers or in trying to impose standards on our trading partners that they cannot meet.  The answer lies in changing two things right here at home:  the framework in which we view trade and the way in which we manage our economy.

With regard to adjusting our lenses on trade, the issue must become one that recognizes the extent to which trade policy is not an arcane subject but one that touches everything about the U.S. economy.  As such, the trade policy debate should embrace fiscal policy:  fundamentally, the benefits of trade must be spread more widely.  A dramatic expansion of the Trade Adjustment Assistance programs that would allow for worker retraining and provide support to businesses transitioning due to losses in their communities arguably related to trade.  The health-care debate currently underway in Washington should be harnessed to support a liberalizing trade policy at the level of the individual worker:  given the dynamic and ever more productive job market in the United States, it is critical to down-sized workers to provide an affordable option to employer-based health care.  Longer term goals would include specific support for the industries of the future instead of simple protection for the industries that have trouble meeting globalized competition and a tax code designed to distribute the benefits of increased national wealth attributable to trade to more of the population.

These proposed measures are all political; all would be designed to create a grass-roots environment in which the benefits of trade permit the political space for elected representatives to continue trade liberalization.  While the idea of exporting jobs will always cause problems politically, removing the fear of job losses in which the entire community faces a different economic future is essential to create that political space.  By addressing trade through a fiscal policy lens, difficult reciprocal liberalization will also be easier, albeit still hard.  Completing the Doha Development Agenda at the WTO will offer many of the traditional benefits familiar from previous rounds of trade liberalization, but it will require that the United States address the inequities in its agricultural support system.  With the disproportionate weight in the Senate given to farm states, without a political consensus on the benefits of trade liberalization, such an initiative will never progress.

Perhaps President Obama sought to pursue such a paradigm shift in trade policy with the failed attempt to convince Representative Xavier Becerra to take the job as USTR.  This Latino Democratic Member from Los Angeles is the first to serve on the House Committee on Ways and Means and is one of the most senior Latinos in Congress as well as a member of the Democratic leadership.  As USTR, he would have had the opportunity to discuss the fiscal elements of rebuilding a centrist trade consensus based on improved fiscal and immigration policy.  Although generally in favor of trade liberalization, Representative Becerra has opposed recent trade measures, from bilateral free trade agreements (FTAs) to any extension of trade negotiating authority to President Bush.  As USTR, he would have shaken up the trade bar but would have actually represented a fresh face and a fresh approach to trade policy.

Representative Becerra reportedly refused the position.  Although speculation, the tenuous nature of the White House support and the difficulties inherent in trying to link so many important policy areas as USTR, traditionally one of the least powerful cabinet positions, certainly factored into his decision to decline the nomination.  Thus far, given that the Administration has not embraced a far reaching trade policy and has let its §421 decision speak louder than its policy prescriptions on trade, it appears that Representative Becerra made the right choice.  The question is, will the Administration learn from this criticism and make the right choice to broaden the trade policy debate beyond the China-specific safeguard.

Adam Bobrow is an international trade lawyer in Washington, DC.  He has experience working on trade policy, especially the U.S-China trade relationship, for the federal government in both the Executive Branch and on the Hill.  He has several years of experience advising companies and individuals doing business in China.  He can be reached at afb3@georgetown.edu.

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By Elizabeth M. Lynch, September 10, 2009

An Expert Weighs In

On Monday, we ran a piece on the international trade implications of the border adjustment measures of the House’s climate change bill.  The article ends with a section questioning the legality of the tariff provision under WTO rules.

China Law & Policy was fortunate to have Henry Gao, Associate Professor of Law at the Singapore Management

Prof. Henry Gao

University and expert on WTO law comment on our analysis.  In his comments below, he questions whether the provisions would in fact violate WTO rules.

If I understand it correctly, this means that the carbon tariff provision is in violation of the national treatment obligation under the WTO. However, this seems to be rather unlikely. The national treatment obligation only applies with regard to domestic taxes and other regulations. The carbon tariff, by definition, is not a domestic tax. Instead, it is a tariff that will be applied before the goods enter the border. Thus, for me, it appears that it’s more accurate to say that this is a violation of the MFN clause (given the assumptions in your article that some foreign firms will qualify while others don’t), or possibly the tariff binding obligation under GATT Article II, assuming that the US might exceed its bound tariff levels by imposing the extra tariff.

Also, legally speaking, while the US will surely have to fight hard to defend its case if the issue is really referred to the WTO, it’s less than certain that the US will win.  Indeed, in the very first case that went before the WTO Appellate Body (AB), the US-Gasoline case, the WTO has, contrary to popular belief, affirmed the right for WTO members to take actions to conserve exhaustible natural resources, which has been explicitly interpreted by the AB to include clean air. Of course, this doesn’t give countries an open license to do whatever they want. They will need to demonstrate first, that are no less trade-restrictive measures; second, that their measures do not constitute arbitrary or unjustifiable discrimination. To sum up, it’s OK to take actions to control climate change, but the legality of the measure would depend on how you structure your package. The devil, as always, is in the details.

Henry Gao
Professor of Law
Singapore Management University
Editor, WTO & China Blog

As Prof. Gao notes, the devil is most certainly in the details.  As of yet, the House bill does not clearly spell out how exactly these tariffs will be applied.  Because of this, experts fall on both sides of this issue.  Paul Krugman of the New York Times expressed the opinion that the tariff provisions would like be okay under WTO rules.  However, attorneys at Akin Gump’s Climate Change practice disagree and offer their assessment that the provisions are a violation of WTO rules.

While there is a call by some moderate Democrats and many Republicans in the Senate to make the provisions stronger, expect at the very least for the provisions to be made a bit clearer.