Introduction[1]

On November 10, 2001, the Doha Ministerial Conference of the World Trade Organization ("WTO") announced that it had approved the accession of the People's Republic of China to the WTO.[2] China finally became the 143rd member of the WTO on December 11, 2002,[3] after fifteen years of formal negotiations.[4] It was almost universally agreed that China's accession was hugely important for the world trading system.[5] China, which covers more territory than the United States and houses a population of over 1.3 billion people, joined the WTO as an enormous, largely-untapped market. Moreover, China's market is rapidly expanding, since China is a developing country with the world's fastest-growing economy.[6] China is a nation in the process of rapid post-communist socioeconomic transition, and its addition to the WTO opened up one of the world's traditionally closed societies while implicitly acknowledging the failure of Marxist-style totalitarianism.[7] For these and other reasons, many believe that China's accession to the WTO will help promote international stability and bring forth a myriad of benefits to the world economy.[8]

For all of the benefits that China and the world are supposed to reap from her WTO accession, the potential pitfalls are also extensive. Other WTO member countries and the WTO as a whole were concerned about China's political will, and even its fundamental ability, to abide by its WTO commitments.[9] Preoccupation with China's potential for success stemmed largely from the corrupt, one-party political system and its substantial control over and interference with China's peculiar "socialist market economy."[10] Paradoxically, over the last 25 years, this authoritarian system gradually dispensed power to provincial and local governments resulting in a "fragmented authoritarianism." This breakdown of China's traditional authoritarian system raises legitimate questions about whether the Chinese government has the ability to comply with WTO obligations.[11] As one commenter noted, "in the history of the GATT [(General Agreement on Tariffs and Trade)], and now [the] World Trade Organization, never has a country of such trading importance been admitted with a system that was still so far from conformance with GATT/WTO norms."[12]

Due to these concerns, one of the conditions of China's accession was the creation of a special review process, the Transitional Review Mechanism ("TRM"), to monitor China's post-accession compliance with its WTO obligations. Since China has become a Member, some of the concerns about the country's overall ability and willingness to implement its WTO obligations have proven to be well-founded. In 2003, two years after China's accession to the WTO, the United States and other Members, as well as academic scholars, viewed China as obviously lagging in terms of goal implementation in many areas.[13]

This article mainly focuses on the Transitional Review Mechanism, and attempts to gauge the TRM's effectiveness after the first two years of use. Part II examines the policy and structure of China's TRM, contrasting it with the structure of the other two WTO review regimes: the Trade Policy Review Mechanism and the various subsidiary body reviews. Part III discusses the impact of the TRM after the first two years of China's WTO membership and includes 1) the problems China has encountered, 2) the attempted resolution of those problems, and 3) the end results.[14] Part IV draws these lessons together and evaluates whether the TRM has served its stated purposes. Part V examines a particular trade dispute between China and the United States and explores whether a stronger TRM could have avoided formal WTO dispute resolution proceedings with regard to China's taxation of semiconductors. In light of the form in which the TRM has been realized, Part VI provides some final thoughts and concludes by briefly offering a possible solution to address China's compliance problems.

WTO Members' concerns led to the implementation of a unique Trade Review Mechanism

Many WTO Members expressed strong concerns about China's admission to the WTO due to sociopolitical uncertainty stemming from its unstable transition from Maoist communism to a mixture of political authoritarianism and market economics. In particular, China has continued to exercise great governmental control over its economy. Naturally, these fundamental issues regarding China's unique political and economic situation manifested themselves in its trade-related policies. Since the Communist Party's consolidation of power in 1949, China's political ideology created an extremely protectionist foreign economic policy and strong restrictions on foreign trade and investment.[15] In the Report of the Working Party on the Accession of China [hereinafter, "Working Party Report"], some of the Working Party members "expressed concern that some internal taxes applied to imports, including a value-added tax ("VAT") were not administered in conformity with the requirements of the GATT 1994," particularly the Article III national treatment requirements.[16] They also expressed concern that China "appeared to permit the application of discriminatory internal taxes and charges to imported goods and services, including taxes and charges applied by sub-national authorities."[17]

Given the concerns of the United States and other influential WTO Members, China's Protocol of Accession to the WTO (hereinafter, "the Protocol") included a special annual review process regarding the country's compliance with its WTO obligations.[18] In the context of multilateral institutions, a "review" is a process by which the organization judges the behavior of a state with regard to a rule of international law.[19] In the WTO, each Member is subject to a periodic Trade Policy Review ("TPR"), and the collective process of the TPRs is known as the Trade Policy Review Mechanism ("TPRM").[20] China's TRM, however, is distinguished from the TPRs of the other Members in several ways. The question is whether or not these differences are substantive ones.

The WTO uses various subsidiary body reviews and the Trade Policy Review Mechanism to evaluate Member compliance

The structure of the other WTO review regimes assists in understanding how the structure of China's TRM differs. Aside from the TRM, the review mechanisms under the WTO system are subsidiary body reviews[21] and the aforementioned Trade Policy Reviews.[22] WTO agreements established the subsidiary committees and councils and define the scope of their respective powers of review.[23] The committees and councils conduct reviews of countries with respect to their particular trade area. These reviews evaluate the information provided to the committee by a Member.[24] Essentially, these standard on-going and periodic reviews serve to establish an organization-wide understanding of a Member's progress on implementing its commitments.[25] When the review finds an inconsistency between a Member's commitments and its practice, the committee itself may "recommend" corrective action, and other Members may apply pressure to bring the errant Member into conformity.[26]

Aside from the general committee reviews, each Member also undergoes a periodic TPR, which is specific to that Member. The purpose of the TPR is to "contribute to improved adherence" to the various WTO agreements by facilitating the evaluation of "individual Members' trade policies and practices and their impact on the functioning of the multilateral trading system."[27] Thus, while the TPRM helps to fulfill the monitoring and supervisory functions of the WTO, it is not intended "to serve as a basis for the enforcement of specific obligations under the WTO Agreements, for dispute settlement procedures, or to improve new policy commitments on Members that should otherwise be done through the multilateral negotiation [process]."[28]

Although details regarding the structures of other review mechanisms are not discussed herein, it is enough to note here that the review mechanisms are designed to serve notification and monitoring functions, rather than the more intrusive supervisory or enforcement functions. [29] In other words, the review process seems to be at most a forum for discussion and promotion of dialogue between Members and the WTO. The review process facilitates greater transparency in trade policy, instead of acting as a coercive enforcement mechanism.

China's Transitional Review Mechanism compared to the other WTO review mechanisms

One would expect, given China's particular socioeconomic situation and the significant concerns expressed by major WTO members, that the scope of review of China's TRM and its anticipated functionality would be more extensive than that of the other WTO review mechanisms. Scholar Xin Zhang argues that China's TRM is more extensive, yet acknowledges that the process will be a challenge both to the WTO and to China, and speculates that how the WTO handles this new mechanism will be a test of its "credibility and reliability" as an international institution.[30]

Is it the case that the differences between China's TRM and other WTO review mechanisms amount to a review process of greater substance, in that it will more effectively address the significant gaps in China's ability and political will to abide by its WTO commitments? Or, do the differences in China's TRM merely constitute a cosmetically different version of the existing review mechanisms, doing little more than adding an extra administrative burden with no real gain? This section addresses these two questions by first analyzing the unique features and the overall structure of the TRM, and then comparing them with the other WTO review mechanisms.

Exploring the structure of the Trade Review Mechanism

China's Trade Review Mechanism is supposed to reflect the general WTO consensus. Even after the country's accession, drastic changes must be made to its trade policies and legal frameworks to comply fully with its WTO commitments. The basic legal structure of China's TRM is spelled out in Article 18 of China's Protocol of Accession.[31] However, Article 18 is extremely brief, consisting of ten subparagraphs covering less than two pages of text. This brevity makes Article 18 vague on the details of the process. Article 18 provides only a few general items, such as which WTO subsidiary bodies are involved in the TRM process, the scope of the General Council involvement, and the TRM's annual character.[32] However, Article 18 does refer to Annex 1, which provides additional rules for the content of the reviews.

Article 18.1's reference to Annex 1A describes some of the information that China is required to provide to the subsidiary bodies "in advance of" the review process. Article 18.2, on the other hand, indicates that the General Council will conduct TRM reviews "in accordance with the framework set out in Annex 1B."[33] While Article 18 is quite brief, Annex 1A is more detailed and covers six pages of text, listing a number of areas and types of information which China is "requested to" and "should" provide during the TRM process.[34] The high degree of intrusiveness into China's internal legal structure and processes is evidenced in the provisions of Part III of Annex 1A entitled "Framework for Making and Enforcing Policies," which requires the "revision or enactment of domestic law, regulations, and other measures" related to China's WTO commitments.[35] Annex 1A also discusses the creation of a "mechanism" through which cases of non-uniform application of the trade regime can be brought to the attention of Chinese national authorities. [36]

Even shorter than Article 18, Annex 1B briefly covers the issues that the General Council must address at its stage of the TRM process. The General Council is supposed to review the reports and issues of the subsidiary bodies from the first stage of the TRM review, the development of China's trade with WTO Members and other trading partners, and any recent developments and cross-sectoral issues regarding China's trade regime. Annex 1B also requires that China submit all documents and information relating to the review at least 30 days before the review begins. [37]

Key differences between China's Trade Review Mechanism and other Members' Trade Policy Review Mechanisms

One major difference between China's TRM and the TPRs of other Members is the frequency of the reviews. According to Article 18 of the Protocol, the TRM is to occur annually for eight consecutive years after China's accession with a final review in the tenth year.[38] China is the only Member of the WTO to have an annual process.[39] Other members receive a TPR every two to six years depending on their "rank" in the world trading system.[40] China's position highlights its peculiar socioeconomic circumstances and unique relationship with the rest of the Members. In addition, China's TRM process will not proceed in lieu of the normal committee and TPR reviews. China will also participate in those normal committee and TPR reviews according to the standard WTO schedules.[41]

Another unique feature of the TRM is its review framework, which appears to be more comprehensive than the other WTO mechanisms. First of all, the number of WTO bodies involved is greater. The sixteen subsidiary bodies of the WTO that have a mandate to cover China's commitments under the WTO Agreement and the Protocol of Accession directly review China's implementation progress.[42] This means that besides conducting their annual review encompassing all of the WTO Members together, these bodies each conduct an annual China-specific review. While the Protocol gives this authority to the subsidiary bodies, it provides few details on how the process should be conducted.[43]

In contrast, the TPRs of the other Members are conducted by a special Trade Policy Review Body ("TPRB").[44] The TPRB, instead of various subsidiary councils, is merely the General Council meeting in another guise.[45] Moreover, unlike other Members, the reports of the subsidiary bodies in China's TRM are forwarded to the WTO General Council, which conducts its own review and may "make recommendations" to China regarding its implementation progress.[46] However, this ostensibly higher level of involvement by the General Council is lacking in the TPRM.[47]

There is another significant difference regarding the scope of the activity on review. In the TPRM, the "trade policies and practices" of individual members are reviewed along with these practices' impact on the trading system as a whole.[48] Besides reviewing these general policies, China's TRM goes much further and reviews its progress in implementing its WTO obligations, including the examination of specific pieces of legislation and other domestic legal frameworks.[49]

A fair argument can be made that the driving purpose of the TRM is to have a review mechanism that is stronger than the others in the WTO system. In order to answer the question of whether the system has been successful in practice, we will look to the TRM's implementation and interpretation in the first two years of China's membership.

China's Trade Review Mechanism suffered from drafting ambiguities that led to differing interpretations and problematic implementation

According to the above description, China's TRM appears to be stronger than other WTO review mechanisms. This section, however, will show that despite the appearance of stricter review guidelines, the practical effects of China's TRM create little substantive difference between the review mechanisms. Even though the TRM seems to be slightly stronger, this section inquires whether the putative benefits accompanying a stronger review process have actually manifested themselves in practice during the first two years of China's membership.

While Annex 1A provides a fair amount of detail regarding the amount of information that China is supposed to provide, the Protocol is rather vague on the TRM process as a whole.[50] As a consequence, particularly in the first year, but also in the second, the process has been characterized by a substantial degree of dispute, legalistic wrangling, and low expectations. In the first two years of the TRM's existence, disputes focused on the procedural framework of the TRM. Many conflicts, for instance, concerned issues such as the proper timeframes for certain events and the form of China's answers to other Members' questions. Moreover, the format and substantive content of the final review reports was also a subject of dispute. As will be shown, China generally prevailed in these disputes, mainly due to omissions and ambiguities in the agreement that created the TRM framework.

Year One Developments

In the first year, several significant issues arose over the TRM. First, vagueness in the provisions of the legal documents led to disputes over procedural issues, which impeded the process of implementation. Second, there was contention over the data supplied by China since China delayed in providing reports until just before committee reviews began. Finally, the resulting reports lacked effective substance due to a serious flaw in the framework of the TRM, the requirement of consensus.

Procedural issues impeded the process of implementation

The disputes over the procedural framework of the TRM began a few months after China attained membership. One controversy arose with respect to the specifics of the timing of the TRM process. Key issues included: 1) at what point in the year would the reviews take place, 2) when could other Members begin submitting questions to China, and 3) how long before the review should China provide answers to those questions?[51] Since the Protocol of Accession is silent on these questions, the United States and other Members, at various committee meetings in early 2002, began raising issues regarding TRM procedures and compliance issues. China was generally uncooperative.[52] In one committee meeting, the United States proposed a timing framework by which China's general notification, the questions posed to China, and China's responses would occur 90, 60, and 30 days, respectively, before the date of the meeting on which the review was to take place.[53] China disagreed on one occasion, stating that its obligations were stated in Article 18, and that establishing specific procedures and timeframes would increase its obligations beyond the conditions to which it agreed for its WTO membership.[54]

Given China's determination on this front, the process for determining the timeframe and other issues for the first TRM fell to informal consultations. By mid-year, a general consensus was reached on timing, though not on the other issues; the review would occur at the last meeting of the year for each subsidiary body.[55] The first TRM review was held on September 17, 2002, and the reviews proceeded through November of that year, with the General Council review occurring in December.[56]

Disputes also arose in the first year's TRM with regard to the degree of China's willingness to answer other WTO Members' questions in writing. Annex 1A of the Protocol requires China to respond to specific questions from "the General Council or a subsidiary body."[57] Since this provision does not explicitly mention other WTO member countries, a debate arose as to whether China should provide written answers to questions submitted by them before review. On the one hand, the United States, the European Community ("EC"), Japan, and other Members were arguing that written and timely responses were crucial for this review and monitoring process to be successful.[58] In response, China essentially reiterated its argument as to timeframes by pointing to its legally binding mandate spelled out in Article 18, and stating that it was under no obligation to go further than the article's explicit provisions.[59] Variations of these arguments were played out on several occasions during the course of 2002, each time with China holding firm to the position that its oral responses and overall behavior were within the limits of Article 18, which was the absolute limit on their obligations.[60]

China delayed in providing its reports to the reviewing bodies

Another issue of moderate contention in the first TRM regarded the data supplied by China. There was little dispute over the amount of information China supplied, because with a few exceptions, China more or less provided all of the required information under Annex 1A.[61] As with the framework for meetings, however, the timing of China's submissions was once again in the spotlight. The Protocol states that China must submit its information and documentation relating to the review "in advance of" the review.[62] Unfortunately, the Protocol does not define this phrase any further, a seeming invitation for confrontation. With regard to the General Council review, Annex 1B provides that China must submit its information and documentation at least 30 days before the review,[63] but neither it nor the Protocol provides a similar timeframe for any of the sixteen committee or council reviews, which make up the vast majority of the review process.[64]

As it turned out, China failed to meet the 30-day deadline for its submission to the General Council review,[65] though it does not appear from the record that this caused any major controversy. Other Members asked relatively few questions as to the content of China's submissions during the subsidiary committee and council reviews, however, this was mainly due to the timing of China's submissions, which averaged a mere three days before the meetings.[66] At one council meeting, the United States representative stated that receiving the information on such short notice made it "difficult to respond" to the statements during the review meeting.[67] This is an understandable argument since the opportunity to respond to the information provided would presumably be one of the purposes of the review meeting in the first place, and indeed of the TRM process as a whole. Despite the timing of China's submissions, the 30-day limit only explicitly applies to the information submitted to the General Council. As such, it would be difficult to argue that China had technically violated its TRM obligations in this respect since the phrase, "in advance of," is not further specified with regard to the subsidiary reviews.

The requirement of consensus is a serious flaw in the TRM framework that caused the resulting reports to lack effective substance[68]

As discussed above, the Protocol directs that after each subsidiary body conducts its TRM review, each body is to report its findings to the General Council.[69] However, in what seems to be a recurring theme in the TRM's legal framework, there is no mention as to the content of the committee reports. The form that was eventually adopted required them to provide in their reports: 1) references to the documents that had been submitted, and 2) portions of the meetings' minutes.[70] In one instance, Japan voiced concerns that merely reporting factual exchanges would not address the substantive discussions that took place, which possibly indicated "some differences of interpretation" as to the purpose of the TRM.[71] In response, the Chairman of that committee stated that attempting to make the report "comprehensive" would make clearing the reports a never-ending process, because "consensus would not be possible" in trying to "interpret" the meaning of various Members' statements.[72]

While the concerns of the Chairman and the other committees that led to the adoption of this format may have merit, they also point out what is arguably the most glaring weakness in the TRM framework. The committee and council reports required a consensus for adoption, meaning the unanimous consent of all Members involved, including China.[73] Thus, if any subsidiary body's report contained language stating that China was not properly implementing its WTO obligations, China could block the report simply by refusing to join in a consensus. Unsurprisingly, the final subsidiary body reports did not contain any recommendations on improving China's compliance efforts, because China would not have allowed it.[74]

At the culmination of the first year's TRM process, Article 18.1 empowers the General Council to issue recommendations to China on its compliance efforts. One might expect that at least in this forum, China would not be sitting as the judge of its own behavior. However, the General Council report also required a consensus for adoption.[75] Therefore, it should not be surprising that, as one press report described, the final report of the General Council offered only "light and generally unspecific criticism."[76] For the same reasons, there was no push by other Members for the report to make concrete recommendations to China, or at the least have a cover statement.[77]

Year Two Developments

In 2003, there were low expectations for any substantial changes being made to the TRM procedure that had occurred the year before.[78] Like so many other features of the TRM, changing the existing procedures would require a consensus among Members.[79] In light of China's determined stance on the disputes concerning various procedural issues in the first TRM, it was unlikely that China would agree to anything different in the second, and thus no concrete proposals for a more disciplined system were put forward.[80] The reviews progressed in large part as they had in year one. Each review essentially consisted of a regular committee meeting. China explained its overall efforts and gave oral answers to the questions presented, and the reports presented what took place at the meeting, but gave no substantial criticism or recommendations for further improvement.[81]

While less debate persisted over TRM procedures during the second year, a new dispute briefly arose during the review of the Committee on Import Licensing. During the question-and-answer portion of the review, China's representative asked if China was obligated to answer the questions at all, suggesting that it had no such obligation since Section 18 of the Protocol did not actually specify it.[82] In response, the United States representative said that since Section 18 gave Members the right to pose questions to China, the "clear intent" was that Members had a right to answers to those questions, and thus China had to answer them.[83] While China did not appear to have raised the matter again in 2003, it will remain to be seen if China was merely testing its limits, or whether this will become a strategy that it aggressively pursues in the 2004 TRM. With regard to the information submitted by China, the format and timing was essentially the same as in year one, as were the responses of other Member countries.[84]

An evaluation of the TRM reveals flaws in the framework which impeded the stated goals of the process

In light of the cumulative experience of the TRM processes conducted after the first two years of China's membership, we can evaluate the TRM process as a whole, comparing the results to the purposes behind the framework and deciding whether the purposes were achieved. If they were not, the question to be asked is whether this was due to a failure to execute the system properly or due to fundamental flaws in the TRM framework itself.

The press and other various trade sources spoke of lowered expectations of Member countries and the WTO itself for the TRM process after the experience of year one.[85] However, the pertinent question is whether it was reasonable for those parties to have had higher expectations in the first place. If China's actions were "legal" in terms of its explicit Article 18 obligations, then the TRM framework as a whole should be compared with its ostensible intended purposes. By drawing this comparison, it is possible to evaluate whether the other Members' disappointment is a result of the success of the TRM framework or of its failure.

As discussed above, a "review" as understood in international law parlance means the power of an international organization to "judge" the behavior of a state. In the WTO context, reviews, including the TRM, are supposed to evaluate the implementation of WTO agreements by the Member countries.[86] The review has also been described as a "monitoring" mechanism, one that is non-intrusive and gathers information to be reviewed by others.[87] From the experience of the first two years of the TRM, it appears that the latter characterization is the more accurate one. While the TRM has been generally effective in gathering and presenting factual information in the "monitoring" function, both its structure and practice seemed to have precluded the possibility of any evaluative "judging" function from being realized.

China's required consent constitutes a major flaw in the TRM framework

The Protocol's description of the TRM process, as discussed earlier, is extremely brief and vague. Given the vagueness of this document with regard to important issues such as theTRM's procedure and the substance of its reports, it is not surprising that the TRM experience to date has been characterized by legalistic wrangling. While the contentiousness was more heated in the first year than in the second, this is largely because by year two, the other Members knew that Chinese opposition would have stymied any efforts to make any major changes. Thus, most Members resigned themselves to the form that the process had already taken.

Of course, given the WTO's unanimous consent requirement for any procedural change or for the adoption of any report, the results of the conduct and reports of the reviews were not surprising. The unanimous consent requirement essentially gave China a de facto veto over virtually every aspect of the TRM process, bringing to mind the proverbial fox guarding the henhouse. At least one press report at the time quoted a WTO official as saying, "as of now, it appear[s] unlikely that China would agree" to a report finding that China was not meeting its WTO obligations.[88]

Another consideration that would preclude the evaluative function is that any negative language in the review reports could be used against China in any kind of enforcement proceeding before the Dispute Settlement Body ("DSB").[89] It is theoretically presumed that reviews are supposed to expose weaknesses in the subject Member's implementation efforts, and that other Members could use the findings to later pressure or initiate the WTO enforcement mechanisms against that Member.[90] In the context of the TRM, however, China's consent to a negative report on its WTO compliance would seem to be a prima facie admission of noncompliance. A negative report may not only be used as evidence against China in a DSB panel proceeding in any later dispute, but could also be used as leverage against China in pre-panel hearing consultations or other informal negotiations.

Assuming that China's representatives are rational actors, it would make more sense for them to use their de facto veto power to block a negative report than to admit to any "wrongdoing," which could be perceived and treated as self-incrimination. In short, if a country acts according to their perceived best interest, this particular structure would seem to invite denial and obfuscation. One can hardly fault China for acting accordingly, since it can be fairly argued that this is what the legal structure allows.

The TRM, in practice, thus produced reports with substance limited to what the various parties in the meeting had said to each other. Therefore, China was effectively able to prevent even slight criticism from becoming the statement of the WTO as an institution. In other words, the TRM turned out to be more of a forum than a review. By the nature of the system's legal framework, the powers of the subsidiary bodies and the General Council to "evaluate" and "make recommendations" appear to be nonexistent. The trade sources in the press report quoted above noted that China had "a clear preference" for folding the TRM process into a "largely formalistic exercise" of the TPRM.[91]

This last point seems to indicate that at least some of the parties involved in the TRM, including the representatives of the nation being reviewed, believed that the TRM was substantively little different than the TPRM process. Given the connection between the problems discussed above and the lack of detail in documentation, as well as the inclusion of China in the final "evaluations," one may wonder whether all of this was the actual intent of the people who negotiated and drafted the Protocol. Whether or not this was the intent of the drafters could be interesting to explore in order to further understand the WTO politics surrounding China's accession.

Concluding the TRM's evaluation

As discussed above, "review" as understood in international law parlance means the power of an international organization to "judge" the behavior of a state. In the WTO context, the purpose of reviews, including the TRM, is to evaluate the implementation of WTO agreements by the Member countries.[92] This article has argued that the nature of the TRM process makes "judging" virtually impossible. However, since the documents creating the legal framework use language more akin to "monitoring" in describing the process' goals, it is difficult to determine at what point between "monitoring" and "judging" the TRM process lies. Whether one characterizes the TRM as a mild success, or a dismal failure, will depend on what one discerns to be the TRM's function.

The TRM failed to prevent the dispute over China's value-added tax policies from leading to the first formal WTO case filed against China

Both before and after accession, a large number of potential trouble areas were identified regarding China's compliance with its WTO obligations. From the perspective of the United States and other major developed countries, one of the perceived primary sore spots was China's value-added tax ("VAT") policies.[93] Recall that in the Working Party Report on China's Accession, there was "concern" that China's VAT policies were not in conformity with GATT 1994.[94] At the time, China responded that from its date of accession, the drafting and implementation of its laws, regulations and other measures would thereafter conform to the GATT.[95] The legal provision to enforce those policies is found in Article 11 of China's Protocol, which states that all "internal taxes and charges, including value-added taxes," must be applied in conformity with the GATT 1994.[96] While there are a myriad of detailed provisions in the GATT, the most important are the most-favored nation ("MFN") and national treatment requirements. [97] As a WTO Member, China must not only treat the goods of one Member as favorably as goods of any other Member, but also must treat the goods of other Members as favorably as it treats domestic goods.

The WTO des not prohibit all forms of value-added taxes. Indeed, many countries apply them in various ways, such as in the guise of a national sales tax.[98] If China were to apply VATs in a discriminatory manner to goods from some WTO Members and not to like goods from others, or to goods from other WTO countries but not to like domestic goods, it would in principle be violating its MFN and national treatment obligations. Many Members alleged exactly this kind of discrimination in China's VAT administration, citing such behavior as one of the major areas of concern during the first TRM.[99] In particular, Members identified discriminatory VAT treatment with regard to phosphate and urea fertilizers,[100] wheat,[101] and integrated circuits ("ICs").[102]

While Members submitted a significantly lower number of questions during the second TRM,[103] China's VAT administration was still a subject of concern; its VAT policies had been identified as an area in which China allegedly had taken "no positive action" the preceding year.[104] The United States, among other Members, expressed concern over the unresolved issue of China's discriminatory VAT practices on products such as semiconductors and certain fertilizers.[105]

In particular, the United States Trade Representative's ("USTR") 2003 report to Congress also mentions this VAT policy, and in particular, points to its application to fertilizer and semiconductors as raising "serious WTO concerns."[106] The report alleges that the semiconductor VATs are applied in a manner that "unfairly discriminates between imported and domestic goods, both through official measures and on an ad hoc basis," as well as providing preferential VAT treatment to certain products from certain countries, often Russia.[107] The report noted that in June 2003, China had begun to make progress when it ended preferential treatment for approximately 20 products, but that several other products were still getting the preferential treatment.[108]

Various sources have generally described the alleged discriminatory VAT policy on semiconductors as follows. China would impose a seventeen percent VAT on all domestically produced and imported semiconductors within its borders.[109] While this alone would not have violated its WTO commitments, China also would give domestic producers a rebate on the VAT amount they had paid over three or six percent, depending on the circumstances.[110] China would also allow a partial VAT refund for ICs that were designed in China, but manufactured abroad.[111] As for fertilizer, the USTR noted that China had exempted from its VAT one type of domestically produced fertilizer that directly competed with a principal United States export.[112]

Compared to the perspective of the USTR, the views of some groups representing the U.S. private sector regarding China's VAT policies were more blunt. The U.S. Council on International Business wrote to the USTR in 2003 [113] that China's VAT administration was a "discriminatory tax treatment" that was a "clear violation of the national treatment obligation," and that "[ran] counter to explicit Chinese commitments," as stated in the Protocol and the Working Party Report.[114]

Moreover, from late 2001 through 2003, the United States continued to address the range of MFN and national treatment issues with China bilaterally during WTO meetings.[115] It appeared, however, that the patience of the United States was wearing thin. In the 2003 report, the USTR told Congress that it would press China for "elimination" of its discriminatory tax treatment, and that if necessary, it would take the step of seeking WTO dispute resolution.[116] Signaling that time was running out for a solution, the USTR warned in early March 2004 that a formal case would be brought "if they [the Chinese] don't fix it [the discriminatory tax treatment] very soon."[117] Finally, citing China's "discriminatory tax rebate policy for integrated circuits," the United States filed a formal WTO dispute settlement case on March 18, 2004.[118] China - Value-added tax on integrated circuits was the first WTO case filed against China.[119]

In the WTO dispute settlement system, the first stage is a request by the claimant Member for consultations with the other Member.[120] Other Members may request to join the consultations if they believe that they "have a substantial trade interest" in the matter.[121] In China - Value-added tax on integrated circuits, the United States' request was quickly followed by requests to join the consultations by the European Community (March 26),[122] Japan (March 31),[123] Mexico (April 1),[124] and Taiwan (April 1),[125] all of whom were substantial exporters of ICs.[126]

In the next step of the dispute settlement system, if the parties have failed to settle the dispute within 60 days of the request for consultations, the complaining party may request that a panel be established to hear the case, though it is not required to do so.[127] This, however, was not the case with the semiconductor VAT dispute. On July 8, 2004, shortly before this initial period was to expire, the USTR announced that the dispute had been settled.[128] Effective immediately, according to the USTR press release, China agreed not to certify any new domestic semiconductor products or manufacturers for VAT refund eligibility, and to no longer offer VAT refunds that favor semiconductors designed in China and manufactured abroad.[129] China also agreed to stop providing the refunds to the current domestic beneficiaries by April 1, 2005.[130]

At this juncture, it is useful to examine the strength of the position taken by the United States and other Members involved in the China - Value-added tax case to see if a stronger TRM process could have prevented the invocation of formal WTO enforcement procedures. The filing of formal WTO dispute settlement proceedings ultimately proved successful in bringing about China's compliance regarding its discriminatory VAT policies. The United States appeared to have an extremely strong case against China's VAT administration, at least as far as semiconductor ICs were concerned. The allegations were straightforward; a substantial tax rebate, which was not available to foreign companies, was provided to domestic producers. If these allegations were proven, it would almost certainly be viewed as a violation of China's national treatment obligations. Similarly, the favorable treatment of chips manufactured in certain Member countries could be a violation of the MFN principle. Considering that these policies were based on a policy document circulated by China, the likelihood of a decision favoring the United States and other participants in a formal proceeding would have been high.[131] While Article 4.10 of the DSU urges Members to "give special problems to the particular problems and interests" of developing country Members,[132] this vague admonition would likely be of little help in defending a direct violation of the core GATT Article III principles.[133] It may be that China took a similar view of the situation, and then decided that it should choose a stronger case to fight in its first formal dispute proceedings.[134]

A stronger TRM could have prevented this issue from reaching the formal dispute settlement proceedings. For example, if the TRM process prevented China from unilaterally rejecting the subsidiary body's recommendation or the General Council's reports, that would have averted the formal dispute by identifying the problem and allowing recommendations early in the process. If the first and second year TRM reviews had contained official findings with regards to China's VAT policies, China's trading partners, who were injured by these policies, would have had more leverage with which to resolve their issues. If appealing to findings was not enough, a credible threat of formal enforcement action by the United States, the EC, Japan, and Mexico acting together would likely be as persuasive as when the United States was joined by the three nations in consultations after the formal China - Value-added tax case was filed.

Despite this contention, it should be noted that even a stronger TRM process may not have averted formal action in this particular case. The Chinese government viewed these discriminatory tax policies as an important step in developing its domestic semiconductor industry and thus, "central to China's development."[135] Therefore, China may have been taking as hard a line as possible before relenting to the seeming inevitability of losing in a formal DSU case. Each situation is different, however, and there may be future disputes where the case against China is just as strong, and the Chinese government would not maintain such a tenacious policy.

Conclusion

The various parties to the TRM process generally used diplomatic language to give mild praise to the endeavor as one of "great importance."[136] With this in mind, perhaps one should consider John Kenneth Galbraith's quip: "There are few ironclad rules of diplomacy but to one there is no exception. When an official reports that talks were useful, it can safely be concluded that nothing was accomplished."[137] With respect to the TRM, it is arguable that the mild praise of "useful" talks is an indication of insubstantial progress.

Given the need for consensus in most matters, it is likely that any meaningful modifications to fix the system would be next to impossible at this point. Others, of course, may argue that nothing needs to be fixed at all, and the system is working perfectly as intended. While it may be too late to fix the system for China, if one believes it needs fixing, the lessons learned could at least be applied in negotiating and drafting post-accession review processes for other post-totalitarian countries which have not yet joined the WTO, such as Russia and Vietnam.

As far as the United States is concerned, the sophisticated bilateral vehicles that handle Sino-U.S. trade issues appear to be working well. The Joint Commission on Commerce and Trade ("JCCT"), for example, resolved at least seven potential WTO cases with China in April 2004 alone.[138]

Additionally, the relative success of these meetings on the bilateral level also indicates a possible solution for ensuring China's compliance with trade obligations on a wider scale. A multilateral structure similar to the Sino-U.S. structure, involving other trading partners with close ties, such as Japan and the EC, could perhaps succeed in situations where U.S. pressure alone would fail. Ironically, the success of such a vehicle if it were applied would undermine the credibility of the WTO review mechanism by shifting focus away from its processes.[139] The counterargument is that the success of such a system would not be undermining the WTO process, but merely highlighting its impotence by achieving what it could not. Presumably, a mechanism that does not work will eventually be supplemented and perhaps supplanted by one that does. If there is a broad enough perception that the TRM process is ineffective, then it too will likely meet its fate. After all, to paraphrase the United States Trade Representative Robert Zoellick, the question is not whether we approve or disapprove of China's practices. The real question, rather, is how we can best change those practices.[140]