 
  WORLD TRADE  
ORGANIZATION  G/TRIMS/W/36 
13 September 2004 
 
 (04-3809) 
Committee on Trade-Related Investment Measures Original:   English 
  
 
COMMUNICATION FROM THE EUROPEAN COMMUNITY  
AND ITS MEMBER STATES 
  
 The following communication, dated 6 September 2004, is being circulated at the request of the Delegation of the European Communities. 
 
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TRANSITIONAL REVIEW MECHANISM PURSUANT TO PARAGRAPH 18  
OF THE PROTOCOL ON THE ACCESSION OF THE PEOPLE'S  
REPUBLIC OF CHINA ("CHINA") 
 
 
I. GENERAL 
1. The EC is transmitting these comments and questions in advance of the meeting of the TRIMs 
Committee on 26 October 2004, in order for the Ch inese authorities to reply and to complete any 
information that may be incomplete. The questi ons build upon the previous meetings of the 
Committee on TRIMs on 14 October 2002 and 3 Octobe r 2003, as well as previous questions from the 
EC and its member States as contained in documents G/TRIMS/W/21 and G/TRIMS/W/31.  
2. Once the information to be provided by China in accordance with paragraph 8 and 
paragraph IV.3(a) of Annex 1A of its accession pr otocol has been received, the EC may submit 
additional questions. 
 The EC’s comments and questions rela te to the following priority items:  
 
•  Amendment of clauses contained in contr actual arrangements that are incompatible 
with the TRIMs Agreement; 
 
•  New Automobile policy (investment provisions). 
 
3. In connection with its accession to the WTO, China assumed a number of 
commitments with respect to existing WTO agr eements and the obligations contained therein.  
4. On TRIMs, has China committed itself to comp ly fully with the TRIMs Agreement through 
abolishing legislation and other measures constituting TRIMs upon joining the WTO  and through 
"providing relevant information, including information contained in Annex 1A, to each subsidiary 
body in advance of the review”. More specifically , paragraph 3 of the Accession Protocol for China 
reads:  
“3. China shall, upon accession, comply with the TRIMs Agreement, without 
recourse to the provisions of Article 5 of the TRIMs Agreement.  China shall G/TRIMS/W/36 
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 eliminate and cease to enforce trade and fo reign exchange balancing requirements, 
local content and export or performance requirements made effective through laws, regulations or other measures.  Moreover, China will not enforce provisions of contracts imposing such requirements.  Without prejudice to the relevant provisions of this Protocol, China shall ensure that  the distribution of import licences, quotas, 
tariff-rate quotas, or any other means of  approval for importation, the right of 
importation or investment  by national and sub-national authorities, is not 
conditioned on :  whether competing domestic supplie rs of such products exist;  or 
performance requirements of any kind, such as local content, offsets, the transfer 
of technology , export performance or the conduc t of research and development in 
China.”   
II. AMENDMENT OF TRIMS INCOMPATIBLE CLAUSES IN CONTRACTUAL 
ARRANGEMENTS 
5. Paragraph 3 of the Protocol of accession lays out a clear obligation for China to not only 
abolish or amend TRIMs-incompatible  legislation, but also to ensure that any contracts containing 
TRIMs-incompatible commitments and obligations would not be enforced. 
6. However, the EC notes that – according to the Chinese answers provided during previous 
TRMs – obligations contained in existing
 contractual arrangements may nevertheless remain valid 
and enforceable even where such arrangemen ts contain TRIMs-incompatible commitments. 
7. During the last TRM regarding TRIMs, China stat ed its respect for the freedom of parties to 
enter into contracts and added that commitments en tered into by (foreign) producers continue to be 
enforceable, as “such commitments cannot be deemed invalid … [and] the enterprise shall continue to 
honour its commitment made in the contract” and the fact that, in relation to foreign investment, the 
contracts and articles of association of a foreign i nvested enterprise become effective only after they 
have been approved by the competent authority.  
8. That answer would appear to be in cont radiction with the explicit undertaking under 
paragraph 3 of the Protocol to ensure that cont racts which contain TRIMs-incompatible commitments 
and obligations are no longer enforced.  
9. In this context, the EC would be grateful if China could : 
 Confirm that contractual arrangemen ts which contain TRIMs-incompatible 
commitments and obligations should be amended in such a way that they will contain obligations which are fully compatible with the TRIMs Agreement? 
 
 Indicate how such amendments might be instituted, including through a renegotiation of the relevant parts of a contract?   Confirm that for its part it will ensure that any contracts which may contain TRIMs 
incompatible commitments and obligations will not be enforced by China, including before 
domestic law courts or other administrati ve tribunals or bodies and that the TRIMs-
incompatible commitments and obligations  are to be considered null and void? 
 
III. NEW AUTOMOBILE POLICY (I NVESTMENT PROVISIONS) 
10. The EC understands that under the new Ch inese Automobile Policy maximum foreign 
participation in joint ventures is capped at 50% a nd that under the new Chinese Automobile Policy the  G/TRIMS/W/36 
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 maximum number of joint ventures per investor is ca pped at two. The EC further understands that for 
operations in the export processing zones none  of the above restrictions apply.  
11. Paragraph 3 of the Protocol of accession (set out above) stipulates that: “(…) China shall 
ensure that (…) the right of investment (…) is  not conditioned on: (…) export performance (…)”. 
12. In the light of the above understanding of the relevant features of the new Chinese 
Automobile Policy and the Chinese undertaking containe d in the Protocol of accession, the state of 
affairs may be summarised as follows: fully fore ign-owned production is on ly allowed in export 
processing zones and approval of such investments will only be granted for investment in such zones. 
In other words: in order to obtain approval of in vestment beyond 50% foreign ownership, foreign 
producers will have to locate their production in an  export processing zone.  Thereby, the approval or 
actual right could be conditional upon acceptan ce and fulfilment of an export performance 
requirement.  
13. In this context, the EC would be grateful if China could : 
 Confirm the relevant features of its new Automobile Policy and provide additional 
details about features relevant for the approval of  investments in the export processing zones 
and for the operation of businesses established in those zones, including the extent to which 
export (and the volume of such exports) is actu ally required and/or necessary for enterprises 
located in those zones, with the consequence th at such export performance becomes a condition 
for approval of foreign majority-owned invest ment and/or the unlimited number of joint 
ventures?  
 Clarify which government ministry or agency is responsible for export processing zones 
and which regulation foresees the abolition of oth erwise applicable joint venture restrictions 
provided the investment is located in an export processing zone?   Provide further details about the characteristics of the export processing zones, 
including the possibility of importing goods pro cessed in the zones into the mainland?  Are 
there circumstances under which this importat ion takes place on a duty-free basis? 
 
 
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