Chapter 4 - Barriers to trade
4.1
China
has taken great strides to eliminate barriers to trade, particularly by
reducing or removing impediments at the point of entry such as tariffs and
quotas on imports. This chapter looks at the progress China
has made to assist foreign companies gain access to its markets and considers whether
it has been effective. It then examines the measures taken by China
to help foreign enterprises conduct business once they have gained entry to the
domestic market. It considers the business culture in China
and the difficulties encountered by people conducting business there. Finally,
the chapter looks at the restrictions that Australia
applies to importers and the Chinese view on the imposition of such barriers.
4.2
This chapter is intended to provide a broad overview of
the trading and business environment in China.
Subsequent chapters discuss specific economic sectors in China
of interest to Australia
and the trading restrictions applying to particular products.
From planned economy to market economy
4.3
Traditionally, as a centrally planned and controlled
economy, China had
a high and extensive protection regime. Before the period of reform ushered in
by Deng Xiaoping, China
was inward looking and generally limited its imports to goods that could not be
made or obtained in China.[152] One analyst described the import
system:
...in the early years of the reform era China maintained an
extraordinarily complex and highly restrictive system of controls including not
only the usual policy instruments, such as tariffs, quotas, and licensing
requirements, but also an array of other tools. These tools included limiting
the number of companies authorized to carry out trade transactions and
restricting the range of goods that each of these companies was allowed to
trade, import substitution lists, a system of registration for selected
imports, and commodity inspection requirements.[153]
4.4
Since the 1980s, China
has gradually relaxed some of its import and export controls. As noted earlier,
1978 marked a significant change in its approach to protection and economic
development which is reflected in tariff reforms and initiatives taken to
dismantle non–tariff barriers.
4.5
By the time China
entered the WTO in 2001, many of the obstacles to trade had been removed and
its approach to foreign imports had changed dramatically. At this time, Vice Minister
Long Yongtu described China's
progress over the previous fifteen years toward a market economy and of its
deepening participation in the process of economic globalisation. He stated:
China has substantially reduced its tariff levels for many
times, eliminated over–whelming majority of its non-tariff measures, gradually
opened its service sectors, abolished the mandatory plan for imports and
exports, eliminated export subsidies, established its market–based pricing
mechanism, unified the exchange system, realized the convertibility of RMB
under current account in international transactions, unified taxation system
and provided national treatment to imported product. [154]
4.6
Reflecting on the long negotiation period leading to China's
accession to the WTO, Mr Long
stated that it was an unprecedented challenge for China
and the complexity and difficulty of the process was 'beyond the imagination of
almost everybody'.[155] He likened it
to 'a "long March" full of arduous difficulties'.[156]
4.7
Its accession to the WTO on 11 December 2001 continued China's
transition from a planned economy to a market economy. Since then, it has
embarked on a program of sweeping reforms intended to allow the Chinese economy
to become integrated fully with the rest of the world. It has adopted an export–oriented
strategy to underpin its economic development and has made remarkable progress
in dismantling barriers to trade. Mr Yu
Yongding from the Chinese
Academy of Social Sciences argued
that China
wanted to integrate its economy gradually with the global economy on 'the basis
of comparative advantages'.[157] He
observed:
For many years in the past...China
used variety of policies such as multi–tier exchange rates, subsidies, tariffs
and various non tariff barriers (NTBs), to encourage exports, protect domestic
markets, and maintain foreign exchanges balance. However, following the
deepening of China's
reform and trade liberalization, all policies that are inconsistent with the
WTO rules have been abandoned or in the process of being abandoned. Some of the
policies were already abandoned long before China's
entry into the WTO.[158]
4.8
China's
market is certainly more open to the rest of the world and China
has freed up its economy considerably. A number of witnesses were of the view
that it is now easier for Australian companies to do business in China.[159] Even so, significant obstacles, even
at the point of entry, inhibit trade. DFAT explained:
Despite China's
ongoing efforts to meet its 2001 commitments, many tariff and non–tariff
barriers remain and the Chinese business environment can still be challenging
for Australian companies. Some significant issues relating to China's
economic reform remain a 'work in progress'. For example, the rule of law as it
relates to intellectual property rights and contracts is being strengthened but
still has some way to go. Once universally understood, applied and enforced,
this enhanced legal framework will underpin a more predictable business environment
in China.[160]
4.9
The following section looks at the major barriers remaining
in China that
impede trade.
Tariffs and import quotas
4.10
Tariffs on imported goods are one of the most common
and obvious forms of market restrictions. The Australian Industry Group noted
that China
still imposes significant tariffs on a number of items.[161] On average, China
applies considerably higher tariffs on the imports of agricultural products
than applied to non–agriculture products and levies relatively high tariffs on
textiles, clothing and footwear.[162]
4.11
Despite China's
dependence on overseas suppliers for minerals commodities, it imposes tariff
barriers on a number of these products. According to the Minerals Council, the
tariffs are not high enough to prevent trade but they are an unnecessary cost
borne by exporters. It gave the example of the tariffs on nickel, coal and
aluminium which place an additional cost of up to $50 million annually on
Australian minerals companies.[163] It
recorded the following tariffs:
-
manganese - 5.5%
-
zinc - 3%
-
coal - 3
to 6%
-
various copper products - 3 to 6%
-
aluminium alloys - 7%
-
lead - 3%
-
unwrought nickel - 3
to 4%[164]
4.12
As noted previously, under the WTO, China
agreed to increase market access by reducing tariff rates, removing quotas,
dismantling non-tariff barriers and opening up the telecommunications and
financial services sectors. It is committed to remove or reduce all tariffs on
imported goods mostly by 2004. Tariffs on industrial goods will be reduced to
an average of 8.9 per cent with a range from 0 to 47 per cent, with the highest
rates applying to photographic film and automobiles and related products.
Tariffs on agricultural goods will decrease to an average of 15 per cent with a
range from 0 to 65 per cent, with the higher tariffs applying to cereals. It
has agreed to limit its subsidies for agricultural production to 8.5 per cent
of the value of farm output.[165]
4.13
Its average Most Favoured Nation (MFN) rate in 2002 was
12.3 per cent which was half the level in 1996.[166] Even so, by the time its WTO
commitments are fully implemented, China's average bound rate will be 9.9 per
cent which, according to the report by the Director–General WTO, means that
applied rates 'will need to be brought down to at most this level'.[167]
4.14
On 1 January
2004, China
lowered its average tariff by 0.6 percentage points to 10.4 per cent.[168] The IMF Staff Report for the 2004
Article IV Consultation noted that the implementation of WTO commitments was
broadly on track, and, in some cases, ahead of schedule. It stated:
The unweighted average tariff was reduced to 10.4 percent in
2004 from 11.3 percent in 2003 and key commitments with respect to banking
services and trade and distribution rights have also moved forward. The
authorities are committed to implement agreed reforms and plan to further
liberalize trading rights with effect from July 1, six months ahead of
schedule...Staff encouraged the authorities to improve the administration of
tariff-rate quotas for agriculture, and to address other issues related to WTO
compliance. The authorities indicated their willingness to do so, and to
discuss any issues raised by partner countries through the WTO's dispute resolution
procedures, if necessary.[169]
4.15
The Chinese government has acknowledged that it still
has some way to go in opening up its markets. Premier Wen in the 2005 Report on
the Work of the Government stated:
Tariffs need to be reduced to the level we promised when China
joined the WTO, most non–tariff measures need to be eliminated, and the service
sector needs to be opened wider to foreign competition. We need to respond to
these new situations to ensure success in opening up.[170]
4.16
The table on the following pages provides detailed
figures on the structure of MFN tariffs in China
including the final bound rate.
4.17
China
also has many quota restrictions that constitute a significant trade barrier.[171] Hunt and Hunt Lawyers suggested
quotas need to be reduced and phased out over a reasonable period.[172] China
is committed to eliminate import quotas by 2005. [173]
4.18
There are also a range of technical barriers to trade
that impede or prevent the importation of certain goods into China.
RTIO informed the committee that iron ore is listed for compulsory examination
upon import. It noted that this quarantine imposition limits the potential for
pursuing 'Loading Analysis as Final' which it argued would be 'a mutually
beneficial agreement between Chinese steel mills and Australian exporters'.[174] Quarantine barriers of most concern
to Australia,
however, are the restrictions applying to agricultural products and will be dealt
with in detail in the following chapter.
Table: 4.1 Structure of MFN tariffs in selected
developing countries
(Per cent)
|
China |
Brazil |
India |
South Africa |
1996 |
2002 |
F.B.a |
2000 |
2004 |
F.B.b |
1997/98 |
2001/02 |
F.B.c |
1997 |
2002 |
F.B.d |
Bound
tariffe1.
Bound tariff lines (% of all tariff lines)e |
n.a. |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
67.0 |
73.3 |
73.3 |
96.3 |
96.2 |
96.3 |
2.
Simple average bound rate |
.. |
12.4 |
9.9 |
.. |
.. |
30.2 |
.. |
.. |
50.6 |
.. |
.. |
20.9 |
Agricultural
products (HS01-24) |
.. |
17.9 |
14.5 |
.. |
.. |
35.8 |
.. |
.. |
115.7 |
.. |
.. |
46.8 |
Industrial
products (HS25-97) |
.. |
11.4 |
9.1 |
.. |
.. |
29.5 |
.. |
.. |
37.7 |
.. |
.. |
18.1 |
WTO
agricultural products |
.. |
18.2 |
15.2 |
.. |
.. |
35.3 |
.. |
.. |
114.7 |
.. |
.. |
43.5 |
WTO
non-agricultural products |
.. |
11.5 |
9.0 |
.. |
.. |
29.6 |
.. |
.. |
36.2 |
.. |
.. |
18.1 |
Textiles
and clothing |
.. |
17.6 |
11.5 |
.. |
.. |
34.7 |
.. |
.. |
29.9 |
.. |
.. |
26.8 |
3.
Tariff quotas (% of all tariff lines) |
.. |
0.8 |
0.8 |
.. |
.. |
0.0 |
.. |
.. |
.. |
.. |
.. |
3.9 |
4.
Duty free tariff lines (% of all tariff lines) |
.. |
4.3 |
7.6 |
.. |
.. |
0.7 |
.. |
.. |
0.3 |
.. |
.. |
10.2 |
5.
Non-ad valorem tariffs (% of all tariff lines) |
.. |
0.0 |
0.0 |
.. |
.. |
0.0 |
.. |
.. |
6.4 |
.. |
.. |
0.0 |
6.
Non-ad valorem tariffs with no AVEs (% of all tariff lines) |
.. |
0.0 |
0.0 |
.. |
.. |
0.0 |
.. |
.. |
6.4 |
.. |
.. |
0.0 |
7.
Nuisance bound rates (% of all tariff lines)f |
.. |
1.9 |
2.4 |
.. |
.. |
0.0* |
.. |
.. |
0.0 |
.. |
.. |
0.0 |
Applied
tariff |
|
|
|
|
|
|
|
|
|
|
|
|
8.
Simple average applied rate |
23.6 |
12.3 |
n.a. |
13.7 |
10.4 |
n.a. |
35.3 |
32.3 |
n.a. |
15.0 |
11.4 |
n.a. |
Agricultural
products (HS01-24) |
35.4 |
18.0 |
n.a. |
12.9 |
10.4 |
n.a. |
33.8 |
41.7 |
n.a. |
11.3 |
11.5 |
n.a. |
Industrial
products (HS25-97) |
21.7 |
11.3 |
n.a. |
13.8 |
10.4 |
n.a. |
35.6 |
30.8 |
n.a. |
15.4 |
11.4 |
n.a. |
WTO
agricultural n.a. products |
33.8 |
18.2 |
n.a. |
12.6 |
10.2 |
n.a. |
35.2 |
40.7 |
n.a. |
9.4 |
9.6 |
n.a. |
WTO
non-agricultural products |
22.1 |
11.3 |
n.a. |
13.8 |
10.5 |
n.a. |
35.4 |
31.0 |
n.a. |
15.7 |
11.6 |
n.a. |
Textiles
and clothing |
32.8 |
17.5 |
n.a. |
20.3 |
17.2 |
n.a. |
43.7 |
31.3 |
n.a. |
35.1 |
24.4 |
n.a. |
9.
Domestic tariff "peaks" (% of all tariff lines)g |
1.1 |
1.8 |
n.a. |
0.0 |
0.6 |
n.a. |
0.2 |
1.3 |
n.a. |
4.0 |
3.9 |
n.a. |
10.
International tariff "peaks" (% of all tariff lines)h |
55.2 |
17.2 |
n.a. |
41.3 |
26.8 |
n.a. |
90.5 |
96.8 |
n.a. |
39.4 |
34.9 |
n.a. |
11.
Overall standard deviation of tariff rate |
17.4 |
9.1 |
n.a. |
6.7 |
7.0 |
n.a. |
14.5 |
13.0 |
n.a. |
17.8 |
12.6 |
n.a. |
12.
Coefficient of variation of tariff rates |
0.7 |
0.7 |
n.a. |
0.5 |
0.7 |
n.a. |
0.4 |
0.4 |
n.a. |
1.2 |
1.1 |
n.a. |
13.
Tariff quotas (% of all tariff lines) |
.. |
0.8 |
n.a. |
0.0 |
0.0 |
n.a. |
.. |
.. |
n.a. |
4.2 |
3.8 |
n.a. |
14.
Duty free tariff lines (% of all tariff lines) |
1.9 |
4.8 |
n.a. |
1.5 |
10.4 |
n.a. |
1.4 |
1.1 |
n.a. |
42.4 |
43.4 |
n.a. |
15.
Non-ad valorem tariffs (% of all tariff lines) |
0.0 |
0.7 |
n.a. |
0.0 |
0.0 |
n.a. |
0.2 |
5.3 |
n.a. |
25.6 |
25 |
n.a. |
16.
Non-ad valorem tariffs with no AVEs (% of all tariff lines) |
0.0 |
0.7 |
n.a. |
0.0 |
0.0 |
n.a. |
0.2 |
5.3 |
n.a. |
25.6 |
25.0 |
n.a. |
17.
Nuisance applied rates (% of all tariff lines)f |
1.0 |
1.9 |
n.a. |
0.8 |
15.1 |
n.a. |
0.0 |
0.0 |
n.a. |
0.2 |
0.0* |
n.a. |
.. Not available.
n.a. Not
applicable.
* Negligible.
F.B. Final
bound.
a Based on
2002 tariff schedule.
b Based on
2004 tariff schedule.
c Based on
2001/02 tariff schedule. Averages do not include lines where different parts of
the HS six-digit line were bound at different rates.
d Based on
2001 tariff schedule.
e Calculations
are only based on bound tariff lines. Including fully bound and partially bound
rates.
f Nuisance
rates are those greater than zero, but less than or equal to 2%.
g Domestic
tariff peaks are defined as those exceeding three times the overall simple
average applied rate (indicator 8).
h International
tariff peaks are defined as those exceeding 15%.
Note: Excluding
in-quota rates. Calculations exclude specific rates and include the ad
valorem part for compound and alternate rates.
Source: WTO Secretariat calculations, based on data provided by Members.
4.19
The Australian government strongly advocates the
lowering of trade barriers and the end to subsidies. During a recent address to
the United Nations, the Prime Minister urged countries to support moves to
eliminate all tariffs, subsidies and other barriers to trade.[175] Along similar lines, he told a
gathering of the Asia Society that the world's richest countries as well as
developing nations, such as China,
India and Brazil,
must show leadership in supporting the WTO objectives. In particular he stated
that 'nations share a particular responsibility to rise to the occasion on
cutting barriers to agricultural trade'.[176]
Committee
view
4.20
The committee recognises the advances that China
has made in removing or reducing tariffs and other barriers at the point of
entry. It accepts that these barriers could be lowered further.
Doing business in China
4.21
Gaining access to the Chinese market is but the first
step for many Australian companies toward successfully conducting business or
trading activities in China.
Once they have achieved access, they often confront an array of difficulties.
Ms Heather Ridout, Chief Executive, Australian Industry Group, pointed out that
often lurking behind the transparent barriers 'are the more murky impediments
that can cripple access to the China
market'.[177] Obstacles range over many
aspects of business activity and commercial law.
4.22
The following section separates the main areas of
concern for Australian business people doing business in China
into distinct topics for closer consideration. It looks firstly at the presence
of the Chinese government in the domestic marketplace and the influence it
exerts there. In particular, it considers the role of SOEs and corporate
governance. It then examines the legal and regulatory framework, the
enforcement of legislation, and the involvement of local government in the
business affairs of foreign enterprises. It also identifies some of the aspects
of the Australian market that the Chinese government regards as impediments to
trade.
The influence exerted by the
Chinese government in the marketplace
4.23
In China,
the private sector continues to expand and displace the public sector as a
proportion of industrial output. The emergence of this vibrant private sector
that is gradually overtaking the role of the government in the Chinese economy
is reshaping the business landscape in China.
Even so, government control remains firm and its influence still permeates the
economy. Undoubtedly, the government remains the leading force in planning China's
economy.
State-owned enterprises (SOEs)
4.24
In terms of private business establishment and
operation, the Chinese bureaucracy continues to wield tremendous power in the
commercial realm.[178] Its influence is
particularly evident through the activity of state-owned enterprises (SOEs) in
the economy. Indeed, much of China's
economy is controlled by large SOEs that still have a stranglehold on key
sectors in the market. Because SOEs occupy such a commanding position in China's
economy, their business and corporate governance practices are important to
foreign companies who must deal with these enterprises.[179]
4.25
Although the SOE sector has undergone significant
reform, many commentators maintain that substantial improvement in this sector
is yet to be achieved.[180] Most concur
that the lack of transparency coupled with a poor disclosure regime present
major problems for business people dealing with SOEs.[181] Mr
Graeme Thompson,
Principal Graeme Thomson
and Associates, noted that 'State trading enterprises are not fully
corporatized and separate from the State.'[182]
Taking account of the significance of SOEs in China
and the difficulties they pose for foreign enterprises, Ian
McCubbin, Partner, Deacons, has advised
Australian companies when contracting major projects with SOEs:
...to go beyond the commercial terms to satisfy themselves that
the relevant SOE will be permitted to meet its contractual commitments, either
at all, or more likely, within the time parameters set by the contracts. What
do you do if an SOE fails to meet a contractual deadline? In all probability
the SOE is not being capricious, just waiting for Central Government direction.
You will respond as most foreign companies do when they are dealing with a
major SOE. They do not issue proceedings, regardless of their legal rights.[183]
4.26
Numerous witnesses to this inquiry reinforced this view
that China
needs to improve its corporate governance and to reform its state–owned
enterprises. The Australia China Business Council contended that SOEs with
their hold over key areas of the economy and, at times, the lack of
transparency in their business dealings, have 'the potential to stifle trade
and lead to anti–competitive behaviour'.[184]
Ms Vivienne
Bath, a senior lecturer in law, noted the
problems for foreign investors operating in an environment where the government
has such a dominant presence in the market. She stated:
...as long as every foreign investor in China has to invest
through a foreign investment enterprise, the Ministry of Commerce has a role in
approving the investment, reviewing the documents and subsequently approving
any change which is made to the documents. I cannot see why that it is
necessary now that China
has moved away so much from an economy in which state owned enterprises are
dominant. Every year the sector of the economy that the state owned companies
control gets smaller and the private sector gets bigger.[185]
4.27
China
acknowledges that to facilitate its growing economy it needs to continue its
economic restructuring especially the reform of SOEs and corporate governance. Its
major priorities for reform are:
-
to restructure government bodies and to
transform the functions of government;
-
to promote State–owned enterprise reform, focusing
on corporate governance and share–holding systems; and
-
to promote financial reform, which is a critical
and often problematic aspect of China's economy.[186]
4.28
The Chinese government also announced that better
management of state owned assets would be a top priority and established a new
commission in April 2003 to manage state-owned assets.[187] It wants to improve its own
performance to ensure that its administration acts in accordance with the law.
Premier Wen announced:
We will conscientiously implement the basic policy of governing
the country by law and the Program on Performing Official Duties in Accordance
with the Law promulgated by the State Council, and speed up work to build a law–based
government...we will strengthen the administrative accountability system and
investigate and prosecute administrative improprieties in accordance with the
law. All departments must strengthen their internal management, actively cooperate
with and support auditing offices and supervision departments in the
performance of their duties in accordance with the law, and conscientiously
correct any problems discovered in the process.[188]
4.29
With the emphasis on improving information disclosure
and enhancing transparency for SOEs, the Government is looking for a major
shift in corporate culture. Mr Ma
Zhengwu, told an OECD conference on corporate
governance that:
A fundamental engineering for China
to develop market–oriented economy is to establish the good–faith system. SOEs
are influential not only to the industry to which they belong and regional
economy but also to national economy and are the dominant force for China's
economy, as a result, they shall assume the key responsibility in the
construction of social good–faith system which is based on transparency and
information disclosure and shall play the role of a model to promote the
forming of the social good–faith system.[189]
Corporate governance
4.30
China
has stated clearly its intention to reform state–owned enterprises which it
regards as a central plank in its economic restructuring. China
is also moving to address the general corporate governance problems in the
private sector. Ineffective shareholder protection, a poor disclosure regime and
conflicts of interest feature as the main weaknesses of current corporate
governance practices.[190] A recent
study found that the corporate governance model adopted in China
can be described as 'a control–based model, in which the controlling
shareholders (in most cases, the state) employ all kinds of governance
mechanism to tightly control the listed firms'. It stated that :
...concentrated ownership structure, management-friendly boards,
inadequate financial disclosure, and inactive take-over markets have been the
governance norm commonly practiced in China.[191]
4.31
Chinese leaders have made a commitment to improve
corporate governance and 'change the operational mechanisms of enterprises to
meet the requirements for a modern enterprise system'.[192] They recognise that good corporate
governance is central to China's
development. Despite this recognition, Chinese leaders have faced many
difficulties in trying to establish a sound corporate governance regime. In
December 2004, Mr Zhou
Xiaochuan, Governor of the People's Bank of
China, stated that at the very beginning, like primary school students, 'we
even disagreed and argued about some of the very fundamental issues'.[193] Now, the government wants the
reforms to proceed 'unwaveringly'.[194]
4.32
To this end, China
has undertaken far reaching reforms to improve corporate governance. For
example, it has issued a Code of Corporate Governance for Listed Companies in China
based on the OECD Principles of Corporate Governance. In summarising the
current situation, Hunt and Hunt Lawyers stated:
Whilst it would not be suggested that bad or improper business
practices have been eliminated in China there has been dramatic improvements in
terms of transparency, accountability and business ethics and before
criticising China it is important to have a balance remembering that even in
the most developed economies there are many examples of bad or improper
business practices.[195]
4.33
Its submission goes on to state:
The new generation of bureaucrats and business people are keen
to capitalise on the economic opportunities in China and to enhance the growth
of their own businesses and are keen to partner with foreign business people
and contrary to the myths propagated by the media outside China have found most
to be honourable and determined to ensure they meet obligations which they
undertake.[196]
4.34
Mr Eswar Prasad, Chief, China Division, Asia and Pacific
Department, IMF, has written that it was essential for China not just to have a
reform plan, but also 'a set of tools that are necessary to meet these reform
challenges and to deal with the additional shocks that the economy could face
as China's integration with the world economy continues and it becomes more exposed
to external influences'.[197] He
believed that a good legal framework, good property rights and sound financial
supervision were essential for China's
progress.[198] Mr
Albert Keidel, Senior
Associate, China
Program, Carnegie Endowment for International Peace, also noted that there remained
in China a
serious problem with the management and governance of enterprises not just
SOEs. In his view they are opaque. He stated:
...whether state–owned, state–controlled, or private, it's hard to
find out what their accounts are like. It's hard to find out what their
business plan is.[199]
4.35
Mr Keidel recognised the importance of building a
financial system on solid legal and accounting foundations, noting that China
is building those institutions but needs to progress a long way towards
creating the skill, talent and regulatory structures.[200] Other commentators agree that China
is still lacking 'world–class companies, a well developed banking system and
fully functioning capital markets'.[201]
4.36
Poor corporate governance is a sure breeding ground for
corruption. A recent OECD study formed the view that despite significant
efforts from the CPC and government leaders, corruption remained 'a serious
problem for both citizens and businesses, particularly for foreign direct
investment'. It acknowledged that this problem posed a significant challenge
for China.[202] Indeed, Professor
Yan Sun
recently asserted that since the beginning of economic reform in China
there has been 'a steady rise in the number of Chinese cadre disciplined for
abuses, especially at senior levels'. He wrote:
Among the highest officials disciplined for official corruption
– those at the deputy governor or minister level and higher – the average take
in the 1980s was about $5,000. Since the 1990s, the average has approached
250,000, or 50 times as much. This surge of corruption has stemmed from a
continuing expansion of incentives and opportunities created by economic
liberalization.[203]
4.37
The committee also cites, in particular, the
conclusions drawn in a recent OECD Policy Brief on China's
governance. It stated:
...corruption is one of the most important problems in China
today...More attention should be paid to reviewing areas prone to corruption,
eliminating opportunities for corruption and creating conditions conducive to
ethical behaviour.[204]
4.38
A recent conference of the Regional Asian Development
Bank and the OECD urged businesses operating in the region 'to act with
increasing integrity and put in place effective anti-corruption measures'. It
recommended that...
...governments set up and strictly enforce accounting standards to
improve transparency of company accounts; strengthen independent external
auditing controls to help prevent and detect acts of corruption; and require
auditors to report suspicions of bribery to competent authorities.[205]
It also stressed the need to establish ethical and
administrative codes of conduct for managing conflicts of interest.[206]
4.39
Witnesses before the committee also highlighted the
need for improved corporate governance in China.
For example, while identifying the SOE sector as a major problem, Dr
Morgan argued that reform needed to
encompass the wider corporate world in China:
China
has been making positive steps in the reform of corporate governance and the improvement
of state owned enterprises, but there is still a long way to go. Whether state owned
enterprises are part of the problem or part of the solution, in my view, really
does not matter in a sense. What is important is the extent to which China is
able to reform governance and bring into play effective market institutions
that will ensure some oversight of not only state owned enterprises that are
becoming increasingly corporatised but also the emergent private sector, which
is quite vibrant but, being entrepreneurial, also has its fair share of
cowboys.[207]
4.40
RTIO was of the view that there could be greater
transparency in the Chinese marketplace. It cited practices such the failure to
produce annual reports, the lack of third party audits, reporting that is not
up to international standards and stock market regulations not comparable with
international norms as significant shortcomings in corporate governance.[208] The Australia China Business Council
agreed that strong corporate governance and transparency needed to be
introduced and enforced in China.
This requirement would apply to publicly listed enterprises and also corporate
and government–owned entities throughout the country.[209] It stressed the need for clear
accountability, strong corporate governance and unambiguous transparency with
all stakeholders including shareholders, employees, customers and suppliers.[210]
Corporate governance—Australia
4.41
The reputations of countries such as Australia
and the United States
have in recent years been tarnished by a spate of corporate failures. These very
public instances of unacceptable or irresponsible corporate conduct by, in some
cases, highly respected companies and corporate executives exposed weakness in
corporate governance. Both countries responded by introducing laws that would
better promote transparency and accountability. They focused in particular on improving
disclosure and the avoidance of conflicts of interest. Australia
in particular has introduced a substantial body of reforms to ensure that its
corporate regulatory framework 'remains effective and helps define world's best
practice'.[211] These reforms range
across many aspects of corporate law and Australia's
experience in grappling with the complexity of such laws could be of benefit to
China. Australia's
corporate law economic reform program is continuing to introduce measures to
improve corporate governance in Australia.
Committee view
4.42
Corporate governance is now a matter of open public
debate in China.
The committee commends the initiatives taken by the Chinese government to
improve its corporate governance regime. It accepts, however, that implementation
will take time and China
needs to press ahead with reform to ensure that transparency and accountability
underpin corporate conduct in China.
The committee accepts that the challenge is not only in formulating legislation
but in changing the business culture. The committee believes that Australia,
in light of its serious and determined efforts to improve its corporation laws,
is well placed to provide a model for and practical assistance to China
in its endeavours to develop a better corporate governance regime.
Legal and regulatory framework for
foreign enterprises
4.43
As part of its drive for economic reform, the Chinese
government, since the 1980s, has turned its attention to the country's legal
framework. Indeed, the various agencies empowered to create rules have been busy
in formulating laws which have resulted in substantial legislative activity and
a proliferation of new laws and regulations. For example, Dr
Sarah Biddulph
recorded that to June 1999, the National People's Congress, the primary rule–maker,
had passed 250 laws and 106 decisions; the state council had passed 830
administrative regulations; local congress had passed 7,000 local regulations,
and finally local government and the ministries and commissions under the state
council had passed 30,000 administrative rules.[212]
4.44
Legal review and reform have continued. According to
the 2003 Report on the Work of the Government, between 1998 and 2003, the State
Council made 50 legislative proposals and promulgated 150 administrative
statutes. It stated further that:
...the State Council made a sweeping review of the 756
administrative statutes promulgated by the end of 2000, resulting in 71 of them
having been nullified and 80 others declared no longer in effect. The agencies
under the State Council went over 2,300 foreign–related regulations and related
policies, abolishing 830 of them and revising 325 others.[213]
4.45
A number of commentators accept that China's
reform program has greatly assisted and encouraged foreign companies to enter
the Chinese market. For example, Hunt and Hunt Lawyers informed the committee
that China is
'a much easier environment in which to work'. It used the example of the time
taken for foreign businesses to establish a wholly-owned foreign enterprise
(WOFE) as indicative of the improvement.
The WOFE concept was unknown in the 1980s, joint ventures were
mandatory but now depending on the industry sector in which you seek to operate
all requirements for the establishment of your own WOFE in China
can be completed in six to eight weeks at a modest cost, including the
incorporation of a company and obtaining all relevant government approvals.
In many large Chinese cities the government has recognised to
encourage foreign investment there must be a dramatic reduction in the time
required and the bureaucratic processes to obtain approvals. In part these
processes become easier because authority to make decisions has devolved from Beijing.[214]
4.46
It also noted that only the very largest investments in
sensitive areas now require approval in Beijing
and in most cases relevant approvals can be obtained in the city where the
foreigner is intending to commence business.[215]
The new laws include 'company law, insolvency laws and laws relating to dispute
resolution together with the development of credible arbitration bodies.'[216]
4.47
While acknowledging the improvements made to assist
foreign companies to conduct business in China, some witnesses considered that
the reform program has created a fairly complex system of national legislation,
administrative regulations and local laws in which governments at all levels
have a strong presence. Ms Vivienne
Bath, senior lecturer in law, commented on
what she saw as 'excessive regulation in the form of a proliferation of
government legislation at all levels in China
in relation to foreign investment, general corporate activity and sector
specific regulation'.[217] The Australia
China Business Council, was also critical of the current regulatory framework
in China, describing
the administrative system in many sectors as 'multi–layered, overlapping and
opaque.'[218] It noted that there are
significant regulatory barriers on the 'operation of wholly owned foreign
enterprises'. [219]
4.48
In keeping with these findings, Mr
Ian Satchwell,
ACIL Tasman, identified the bureaucracy as a major impediment for Australian
companies. He explained:
For a company to register in China
it must specify the area of business in which it intends to operate, and then
the company is only allowed to undertake business activities in the specified
sectors or fields. If new market opportunities open up it is difficult for the
company to move outside its specified scope of services, and that inhibits the
easy development of foreign firms, in particular, in China.[220]
4.49
Mr Duncan
Calder, KPMG, joined the numerous witnesses
who highlighted the problems created by the 'intricacy of different
interpretations of procedures and regulations'. He stated:
I hear a lot of evidence of people thinking they have opened the
door and understood the law who then find there is another layer of regulation that
sits behind that. Things may be approved but they may never happen, because of
frustration with delays. There are restrictive regulations in relation to
business scope and the registering of capital requirements for foreign
investment enterprises that can cause some difficulties there as well.[221]
4.50
The problem goes beyond the complexity and the multi–layering
of rules and regulations. Their tendency to discriminate against foreign
companies places such businesses at a distinct disadvantage. Evidence presented
to this committee documented a wide range of legal impediments confronting
Australian companies including the continuing legal and practical demarcation
between foreign and Chinese companies operating in China.
The Australia China Business Council cited restrictions such as the inability
to obtain full import/export licences, strict controls on foreign exchange
movements, limitations on inter–company loans and the retention of capital with
Chinese domiciled enterprises and concerns with regard to the convertibility of
renminbi.[222] Legal firms have found
their ability to service clients limited by laws that restrict their ability to
hire Chinese lawyers in China
and to form joint ventures or economic associations with Chinese law firms.[223] The mutual recognition of
professional qualifications gained outside China
also creates impediments.[224]
4.51
Ms Bath
believed that foreign investment enterprises should really just be regarded as
another form of private enterprise.[225]
She argued that China
should be working towards 'a simpler and less regulated investment regime and
the gradual elimination of the foreign domestic distinction'.[226] Mr
Calder would like to see Australian
companies have equal treatment in China
with Chinese companies.[227]
Committee view
4.52
Foreign businesses operate not only in a regulatory
environment where there is a strong government presence and a need for improved
corporate governance but also under of system of rules and regulations that are
confusing and complex. Even though government agencies at all levels have
introduced a raft of legislation since the 1980s, foreign companies find the
legal and regulatory environment complex, time–consuming, expensive, uncertain
and discriminatory. The experiences of some foreign companies in China
have left a lasting impression that conducting business in China
can be a risky undertaking.
4.53
Without doubt, many legal obstacles remain in China
that impede the attempts by Australian companies to become established and to
expand in that country. Although over the last quarter century China
has overhauled its legal system, some still regarded the system as inadequate
for a country moving into the global market of the 21st century.
4.54
Clearly, any measures taken to streamline the rules and
regulations governing foreign business operating in China
would greatly assist Australian companies in that country and be an incentive
for increased trading activities. The removal of practices that discriminate
against foreign companies in China
would also encourage Australian firms to conduct business there.
Specific problems in the current
legal system
4.55
Inadequacies or failings in the legal system in China
are not confined to narrow aspects of the law. Some commentators mentioned
bankruptcy laws where, in their view, it is very hard to bring an enterprise to
the table to make them pay their debts.[228]
Australian business people also cited returning money to Australia
as another significant difficulty. Hunt and Hunt Lawyers noted that one of the
main concerns in conducting business in China
is 'the ability to repatriate moneys earned' there.[229] Mr
Thomson also noted that 'difficulties still
exist in the remission of funds out of China
despite the steps taken to achieve the full convertibility of the RMB'.[230] The committee has chosen two areas
of the legal system in China
to highlight the problems confronting Australian firms—contract law and
intellectual property law.
Contract law
4.56
Mr Ian
McCubbin, partner, Deacons, has referred to China's
legal and regulatory system as 'relatively embryonic' and likely to restrict
free market access.[231] He noted that
contract law was one particular aspect of the legal framework that concerned
Australian businesses. He stated:
One of the most commonly asked questions of companies hoping to
do business in China
is 'Is my contract in China
worth the paper it is written on?' My answer to that question is 'it depends
what you want the contract to do'. If you are expecting to be able to enforce
the 'rules for the engagement of war' clauses in a Court of Law in China,
then the answer is probably 'No'. If, on the other hand, you view Chinese
contracts as a means of reinforcing your future negotiations, then the
documents have a significant role to play. Either way, this is the reality of
doing business in China.[232]
4.57
The Australia Business Council told the committee that China
is gradually adopting a legal system that 'enshrines written contracts with the
same sanctity as in Western systems'. It stressed, however, that improvements
were still required.[233] It noted in
particular the absence of a tradition of an independent judicial process in China
that would allow a party to enforce a written contract. It also observed that in
China contracts
are often seen as evidence of the parties' intentions at the time of signing
and therefore subject to renegotiation.[234]
Another witness, Dr Davis,
also identified the legal framework as a significant problem for foreign
countries conducting business in China
and again used contracts as an example. He stated:
At the moment, many businesses, when they write contracts with
the Chinese, are concerned that many of the Chinese regard them as little more
than nice pieces of paper and abrogable at the discretion, usually, of a
government official. We are aware of a growing tendency of Western
businesses—Australian and others—to put clauses in their contracts which, in
effect, say that if there is a dispute then the appropriate forum for this
resolution will be the International Chamber of Commerce’s International Court
of Arbitration. So, quite simply, it stays outside China.
In China,
there is also a growing recognition of reputation risk. That is, we cannot keep
opting in and out of contracts that we do and do not like just because
circumstances change. We cannot walk away from them; if we do, people will
cease to contract with us. [235]
4.58
DITR similarly cited the enforcement of contracts as another
area of concern for Australian business, stating that 'all of these things are
developing in the country'.[236]
Committee view
4.59
Clearly, Australian companies need to be confident that
any agreement or arrangement that they enter into with a Chinese party will be
honoured and that effective and fair mechanisms are in place to safeguard the
interests of all parties who enter into such arrangements.
Intellectual property (IP)
4.60
One of the most contentious areas of commercial law in China
is that governing the protection of intellectual property. It was cited by a
number of witnesses as a major area of weakness in the legal framework.
4.61
Upon its accession to the WTO, China
agreed to overhaul its legal system to ensure the protection of intellectual
property rights in line with the WTO's Agreement on Trade–Related Aspects of
Intellectual Property Rights (TRIPS Agreement).[237] The requirements imposed on China
since its accession to the WTO and its acceptance of the TRIPS Agreement have
been the main catalysts for reform. Change, however, has been slow and IP
remains an area that generates criticism from foreign firms. The 2004 Report to Congress on China's WTO Compliance found:
China
has been much less successful in
ensuring effective IPR protection, as IPR enforcement remains problematic.
Indeed, counterfeiting and piracy in China
are at epidemic levels and cause serious economic harm to U.S.
businesses in virtually every sector of the economy.[238]
4.62
The experience of some Australian businesses matches
that of a number of American companies.[239]
Mr Ian Heath, Director General of IP Australia, stated recently that
'counterfeiting is rife' across most industrial sectors in China citing, in
particular, the pharmaceuticals, chemicals, information technology, consumer
goods, electrical equipment and the auto sector. He explained that:
The extent of counterfeiting in China
is due to the ingrained culture, the support given to infringers by local
officials who genuinely want to support local industries, the lucrative gains
to be made, the limited resources and training available to enforcement
officials, and the lack of public education regarding the economic and social
impact of counterfeiting and piracy.[240]
4.63
DITR told the committee that while there is a law on IP
there is also the prevailing practice.[241]
The Australia China Business Council agreed with this view. It argued that the
enforcement of intellectual property rights in China
was 'a major issue of deep concern to all Australian business'.[242] It found that even where foreign
companies have been successful in prosecuting an intellectual property
infringement claim in China,
the remedies and orders of compensation are likely to be inadequate to cover
for the loss suffered by the companies.[243]
4.64
The Australian Industry Group (AiG) joined many
witnesses who complained that China
failed to protect intellectual property rights adequately. It told the
committee:
TRIPS obliges China to adhere to internationally accepted
standards of protection for copyrights and neighbouring rights, trademarks,
geographical indications, industrial designs, patents, integrated–circuit
layout designs and undisclosed information. The TRIPS Agreement also
establishes standards for the enforcement of IP rights in administrative and
civil actions, and in regard to copyright piracy and trademark counterfeiting,
in criminal actions and action at the border.[244]
4.65
It was also of the view that China
is currently failing to enforce IP standards effectively. Some of their members
asserted that 'it is common Chinese practice to simply copy products without
fear of reprisal'. It cited the example of Xerox which took a Chinese company
to court in China
for breach of copyright and although successful were awarded damages of only
US$2000.[245]
4.66
It maintained that enhanced intellectual property
protection is essential. It argued that China
needs 'to implement and enforce effective and commercially realistic penalties
that have a clear deterrent effect'.[246]
Dr Davis
was more emphatic in pointing out the failure of IP laws in China
to protect foreign businesses. He stated:
The classic has always been intellectual property rights. For
years, many companies have been concerned about de–engineering or reverse
engineering of the products that they allow to be licensed in China.
You do not have to be a small firm; I think it was the Ford Motor Company that
licensed the production of one of its new little cars and, lo and behold, in
about three months, there was an almost identical little car being made by a
Chinese company.[247]
4.67
Drawing the committee's attention to measures taken by some
foreign companies to help them manage this difficulty, he explained that one of
their members had used the following approach:
What I give them is three generations behind what I am making in
the West.’ He then said, ‘I am up to the sixth generation of this product and
they have been given only generation 3. By the time they have worked out how
generation 3 was made and then how to make generation 4, I am on to generation
7.’ So he is almost three generations ahead. That means that China
is at a disadvantage. The technology it is being given is older and not cutting
edge. As that goes deeper and deeper within China,
I think there will start to be a crackdown.
...If the Chinese want to move up the value–add chain, they will
have to do better on intellectual property or the flying ducks approach to
development, as it is called—which is that it moves from country to
country—will mean they are bypassed on the elaborately transformed manufactures.
From the bits and pieces we are picking up in the business community, for ETMs or
elaborately transformed manufactures, companies are going to India
before China.[248]
4.68
The Department of Communications, Information
Technology and the Arts (DCITA) was also of the view that there is considerable
scope for enhancing efforts to address intellectual property in China.[249] The department believed that Australia
may be well placed to take a collaborative approach in assisting China
with the process of improving their IP regime.[250] Indeed, in the recent round of FTA
negotiations, Australia
offered to 'provide detailed materials for consideration in the reform of China's
intellectual property regime'.[251]
Committee
view
4.69
It is clear that Australian companies exporting goods
and services to China
need to be aware of the pitfalls with regard to the protection of IP in China
and take the necessary precautionary measures to minimise risk. Australia
should join with other like-minded countries to work through the various
multilateral fora to encourage China
to remedy the failings in its IP regime including enforcement throughout the
country.
Enforcement
4.70
Foreign companies operating in China
want to be certain that the laws, rules, regulations or decisions arising from
legal proceedings will be enforced consistently, transparently, and without
favour. Hunt and Hunt Lawyers were of the view that a foreign business in China
finding itself in dispute is no longer faced with the option of having to walk
away and write–off the investment. It explained:
Whilst there are still inefficiencies in the Chinese court
system and the process can be slow and a little mysterious to foreigners (the
Chinese find our processes equally mysterious) the Chinese legal system is
rapidly improving and no more challenging than the systems, which currently
exist in India or Indonesia.
The Chinese government in the early 1990s encouraged the re–establishment
of a private legal profession, which had ceased to exist during the Cultural
Revolution. There are now a large number of very bright well-trained Chinese
lawyers, many of whom had experience working outside China
in Australia,
the United States,
Britain or Europe.
Chinese arbitration bodies have been opened up to include
foreigners. It is no longer necessary if you have a dispute in China
to choose a Chinese arbitrator. Bodies such as China International Economic
Trade Arbitration Commission ("CIETAC") include in the panel of
arbitrators many foreigners. There are six Australians on the CIETAC panel of
foreign arbitrators.
Foreign companies including Australian companies have won
arbitrations in China
and have successfully enforced arbitral awards. It is not suggested that the
system is today perfect or without challenges created by culture and language
but in the last 10 years there has been a dramatic change in the capacity of
foreign parties to exercise their legal rights and enforce same in China.[252]
4.71
Some lawyers were not as positive as Hunt and Hunt Lawyers
about the extent of improvement in the legal system. Ian
McCubbin referred not only to a lack of
understanding of the law by administrators, but the absence of strong and
efficient enforcement mechanisms. When looking at competition law in China,
he stated:
...what China
really lacked was an ACCC, led by an Alan
Fels or a Graeme
Samuel, to provide the vision (and the
stick) needed to inculcate the laws into daily commercial activity across the
country. Not only was there no single, focused administrative authority charged
with the responsibility, and equipped with the sanctions to make the law
effective in daily business, the underlying policy issues were simply not
understood by the relevant administrators. If the laws were not understood by
the senior regulators in Beijing,
how much less likely was it that an official in Wuhan
or Xian, far less in Xinjiang Province,
would be able to exercise consistent interpretations in the enforcement of
those laws?[253]
4.72
A number of witnesses supported this contention that
there were significant problems with the application and enforcement of laws in
China. Ms
Vivienne Bath
argued that although China
is reforming its legal system, a problem remains with the independence and
competence of the Chinese courts.[254]
Based on anecdotal evidence, she stated:
There are still quite a lot of judges who are not legally
trained. Also I think quite a few judges are placed in a very difficult
position because of their relationship with local government and the influence which
local government and party officials are able to place upon them...But certainly
outside the major cities—places like Beijing, Shanghai and Guangzhou, which
have a relatively high level of judiciary—it can be very difficult for foreign
investment enterprises or companies to be confident that they will get a fair
hearing if they have a dispute or that the judiciary will be truly independent
in their cases.[255]
4.73
According to Ms Bath,
a lot of people appointed to judicial positions were party or military
officials who may not have had legal training. She told the committee that the
Chinese are now trying to appoint judges who are trained and have legal
training and noted that there is a judicial college in Beijing
where judges are trained before taking up positions.[256] Dr
Biddulph also referred to the lack of
independence in Chinese courts. She attributed this difficulty with
independence in part to 'the exercise of party power which undermines or makes
incursions into that legal system'. She stressed, however, that the courts lack
of independence is not due entirely to the Communist Party but also stems from
the structure and status of the courts. She explained:
The budget for the courts is mostly appropriated at the local
level. That means that in certain areas the local government exercises quite
strong influence over decision making in certain courts—not all, but in some.
There is a problem, too, in that the judges do not have the same security of
tenure that they have here nor do they have the same status that they have
here. So there is a range of ways in which the independence of adjudication by
courts is undermined.[257]
4.74
Stephen Morgan
also believed that there are serious issues with the training of the judiciary
and the transparency of the courts.[258]
Professor Jacobs
shared this view. He also identified problems with the training, education and
independence of the judiciary and saw a role for Australia in assisting China
improve their legal system. He stated:
One of the problems that the Chinese have is establishing a
legal system. They talk about trying to establish a rule of law but they are
clearly having difficulties—and this is a very difficult issue...The same thing
is happening in Indonesia.
Judges do not change over night and legal education does not change over night.
It is probably fair to say in a democratising situation that the legal system
is always one of the areas which is behind other parts of government. China
certainly have not democratised, but they are also having problems
depoliticising the legal system. We could probably be helpful there, and we
should offer to help. Since we are a medium–sized power, help from Australia
would perhaps be less threatening than help from the United
States. I think that is a place where we
could have a good role to play.[259]
Committee
view
4.75
The committee sees enormous potential for the Australian
government to take an active and coordinating role in encouraging, sponsoring
and in some cases funding a range of Australian organisations and institutions
to assist China develop a judicial system that would be noted for the quality
of its members and its independence. Bodies such as the ACCC, ASIC, APRA,
various courts such as the High Court, relevant government departments, law
associations, universities and even private law firms would be ideal
participants in such a program.
Summary
4.76
In summary, the committee concluded that doing business
in China is
complicated by a cumbersome and inefficient bureaucracy and the influence
exerted by state-owned enterprises.[260]
It found a complex legal system exacerbated by added layers of rules and
regulations. In some instances, the system operates in favour of domestic
firms. It notes that enforcement is a significant problem with major
deficiencies in the judicial system such as poorly trained judges and lack of
independence.
4.77
The Chinese government accepts the importance of
reforming its legal system. For foreign firms conducting business in China,
reforms in the areas of government administration and corporate governance need
to go beyond the measures currently implemented by the Chinese government. It
is clear that Australian businesses look to strong and public support from the
Australian government to ensure that the Chinese business environment does not
put them at a disadvantage.[261]
Local government interference—'the
mightiest dragon cannot crush the local snake'
4.78
As discussed earlier, local or municipal authorities
have also been active in promulgating rules and regulations since the 1980s.
With this in mind, the committee notes a 16th century Chinese saying
that 'the mightiest dragon cannot crush the local snake'.[262] The following section looks at the
relationship between the central government and the provinces to determine
whether there are problems that create difficulties for foreign business.
4.79
While acknowledging the changes that have been
implemented since China's accession to the WTO, some commentators recognise
that one of the major challenges, as noted above, is not only implementing law
reform but ensuring that the laws, once introduced, are enforced. This raises
the question of the provincial governments and their place in assisting the
central government with its reform programs. For example, two commentators noted
that China had
at the central government level made fundamental changes to its legal and
regulatory frameworks to comply with WTO principles. Even so, they observed
that:
...China's commitments imply a need to ensure adequate enforcement
of new rules at all levels, especially the provincial and municipal levels,
where administrative and judicial capacity constraints, as well as the
potential role of vested interests, may hamper progress (e.g., in eliminating
restrictive practices such as the pervasive inter–provincial taxes, fees and
other non–tariff obstacles).[263]
4.80
In some instances, local governments may not only fail
to enforce laws but may impose additional burdens on foreign businesses. One
group of commentators with the IMF have suggested that 'in an effort to protect
industries from competition, local governments in China
are erecting barriers to entry of goods from other provinces'. They went on to
say:
For instance, managers of China
firms confirmed that they have indeed experienced some difficulties in
accessing markets in other provinces. A manager of a medical manufacturing
plant reported that the shipments to other provinces are occasionally stopped
by local rail officials for two to four weeks for no apparent reason. The
administrative units of the industry and commerce department were reportedly
obstructing access to markets through audits or local registration
requirements. [264]
4.81
They noted that it is not possible to measure such
barriers directly and added, as it is illegal to impose trade restrictions, 'the
measures adopted to protect local industries from competition are usually more
subtle than a direct border tax'.[265]
4.82
Some Australian businesses also regarded the
interference at the local level as an impediment to conducting business in China.
They were particularly concerned that local authorities did not always enforce
laws.[266] Ms
Valerie Kelly,
Department of Agriculture, observed that while at the federal level of
government there is 'a passion for the WTO', this does seem to have trickled
down to the provincial level.[267] The
Australia China Business Council also identified the application of laws at the
municipal level as a major problem. It stated:
Enforcement is needed particularly as you move from central
administration down the line to provincial and local levels of where the
decision makers are. As we say in our submission, the further away you move
from the central government, the less likely the decision might be in your
favour.[268]
4.83
Hunt and Hunt Lawyers also referred to problems associated
with the additional levels of regulation or interference from provincial or
local governments. Its submission stated:
There is significant anecdotal evidence of problems experienced
by Australian traders who believe that they have secured national Government
approvals for investment or trading but are then faced with significant (and
regularly changing) regulations and restrictions imposed by lower levels of Government.
The removal (or limitation) of these restrictions would afford significant
opportunities for Australian traders.[269]
4.84
To the same effect, Steven
Macmillan, Consultant,
China Business Focus,
told the committee:
It is a very common experience for businesses in China
to find, in our experience, that regulations and the way they are enforced differ
from the national to the provincial level. Some of the provincial governments
have a range of regulations in place that can sometimes mirror or contradict
those at the national level. A good example is the wool research and
development arm—AWI—in our group. There is a testing procedure for wool that is
imported into China
and it has a small fee attached to it. That fee is set at the provincial government
level and it differs from provincial government to provincial government. That
is an example of something that should ideally be under the purview of the
national government, being a foreign trade issue. But it is not, and it is
unpredictable as a result of that.[270]
4.85
Mr Woodard
noted that the difficulty of coordinating the provinces is an 'even greater challenge'
for China and
one they 'have not yet solved'. He stated:
...the aim is to know as much as is possible about what is going
on and to attempt to ensure that what happens is orderly and serves the total interests
of each country and of the relationship.[271]
4.86
The Australia China Business Council reinforced the
view that regional protectionism and barriers to inter–provincial trade
disadvantaged Australian companies. It argued that these local obstacles create
a sense that 'foreign companies are unable to compete on equal terms'. It argued
that:
China
needs a mechanism to apply consistency to enforcement, as the issue of
inconsistency in the application of laws and regulations encourages local
protectionism. It also extends to allegations of 'home–town' decisions in
arbitration and intellectual property enforcement, together with inconsistent
tax regimes.[272]
Committee
view
4.87
The committee finds that the involvement of local
authorities in trade and commercial affairs at the provincial level is a major
impediment for Australian companies operating in China.
4.88
Clearly, China
is a country that, despite reform, still has inadequate legal protections,
intellectual property rights violations and government interference particularly
at the local level. Australian business should understand the legal and
regulatory framework operating in China
to ensure that they are fully aware of the legal and business implications of
any decision or agreement entered into and are in a position to adequately
protect their interests. In particular, Australian business should not
underestimate the influence of local bodies in China.
4.89
More effective, fairer and consistent enforcement of
laws, rules and regulations at all levels of government would benefit and
encourage Australian companies to establish their business in China.
Suitable mechanisms
4.90
The need for uniform application of legislation and
consistency in law–making applies across China
and has relevance for all who come under the respective laws. In this regard, a
multilateral agreement rather than a bilateral arrangement, such as the
proposed Australia China FTA, appears to be a more suitable mechanism to pursue
the matter. Furthermore, reform is called for in areas such as corporations
law, particularly IP law and the laws governing contracts. An overhaul of this
type of legislation requires wide ranging legal reform and, again, a bilateral
agreement does not seem to be an effective vehicle to effect such broad
changes. Dr Ranald
noted that:
...a lot of the processes which business identify as being tariff
barriers are actually broad policies or laws in the Chinese context. It is
difficult to see them being changed; you cannot change those in a bilateral
context. It would take a general change of policy in the Chinese context, and I
think that is true of labour and environmental standards too.[273]
4.91
To address the difficulties discussed in this chapter
effectively—especially the need for uniform and consistent application and
enforcement of legislation at the provincial level—governments at all levels throughout
China need to
embrace legal change. Central and local authorities need to commit to reform
and actively co–operate to ensure that laws and government undertakings are
applied consistently throughout the country and in the spirit of China's
reform agenda. The nature and extent of reform required to bring China's
legal system into step with international standards requires wide ranging
change. It underlines the importance of Australia
joining other WTO members to encourage China
to undertake further reform and to impress on China
the need to ensure that its legislative reforms are adopted and effectively
enforced throughout the country.
4.92
Austrade
has emphasised that Australian companies must be prepared for sudden changes in
Chinese government policy, and that business conditions and policies in
different regions of China are 'very diverse'.[274] Indeed, the committee heard on
several occasions that the implementation of national policies is often
interpreted and implemented differently across the country. This makes it very
difficult for foreign investors with multiple investments in China to establish a national operating system.[275] There is also evidence that foreign
companies receive less favourable treatment than local operations.
Recommendation 1
4.93
The committee recommends that the Australian
government increase its efforts through the WTO, Asia–Pacific Economic
Cooperation (APEC) and bilaterally to encourage China
to promulgate laws that comply with the WTO and to ensure that they are
interpreted and applied consistently and without discrimination throughout the
country. In particular the committee cites the contract and intellectual
property laws and local government intervention as areas of most concern to
Australian businesses.
Recommendation 2
4.94
The committee recommends that the Australian
government place a higher priority on developing and implementing practical
measures to assist China
manage its transition from a planned economy to a market economy, especially to
improve its corporate governance regime. For example, by facilitating exchange
programs between Chinese and Australian departments or agencies or offering
special training and education programs for Chinese officials in the area of
corporate governance.
Recommendation 3 (see also recommendation 16)
4.95
The committee recommends that Austrade establish
a system for handling complaints on China's
provincial regulations. This system would:
-
encourage Australian companies to register such
complaints;
-
record the complaints in a central register and
monitor their management;
-
disseminate information about these complaints
among the Australian business community; and
-
report the complaints to the Australian
government.
4.96
The proposed Australia–China Free Trade Agreement and
whether it is an appropriate or effective vehicle for resolving some of the
difficulties cited in this chapter is discussed in chapter 12.
Chinese companies in Australia
4.97
The submissions to the committee that covered trade
barriers were concerned with impediments existing in the Chinese market that
made trading difficult for Australian businesses. Little mention was made about
the barriers Australia
has erected to protect its markets. It should be noted that Chinese companies
are not well represented in Australia—they
do not make the top twenty list.[276]
The following section takes a look at the Australian market from the Chinese
perspective.
Barriers to trade with Australia
4.98
Australia
employs a number of protective measures that other countries regard as barriers
to trade. The Chinese Ministry of Commerce has noted:
Though the overall tariff level in Australia
is fairly low, high tariff rates are kept for certain products, typically
exemplified by automotive vehicles, textiles, garments and footwear. The
Australian government has passed relevant laws to implement a 5% to 7.5%
reduction on import duties imposed on textiles as of January 1 2005. The existing level will
be maintained till 2009. Import duties on buses and auto components and parts
have been reduced to 10%, effective as of 1 January 2005. A further reduction to 5% will be made in
2010. Despite the reduction, tariff rates for automotive vehicles, textiles,
garments and footwear remain high compared with those for other products. The
tariff peak has adversely affected the Chinese exports, especially textiles.[277]
According to the relevant provisions of GATT 1994 on national
treatment, the importing country should not levy other taxes or fees on
imported duty-paid items in such a discriminatory manner as to protect the
domestic products. However, the Customs Tariff (Antidumping) Act provides that
the extra consumer tax ‘wine tax’ is levied on imported wine in addition to the
import duty. Such unjustified tax policy has increased the cost of wine
importers, and therefore weakened the competitiveness of imported wine.[278]
4.99
The Ministry also clearly identified what it held to be
problems with gaining access to Australia's
markets, particularly sanitary and phytosanitary (SPS) measures imposed on
products imported into Australia,
which remain an area of controversy. In its report on foreign market access,
the Chinese Ministry of Commerce noted:
Such conservative and stringent sanitary and phytosanitary
system adopted by Australia
has brought great impediment to the access of foreign agricultural products to
Australian market, and the mostly affected products of China
include fruit, vegetable and certain cash crops.
As the basis for sanitary and phytosanitary measures, Import
Risk Assessment (IRA) is a protracted process, and the technical standards
involved are ambiguous. The AQIS, the agency conducting IRA, usually deals with
one product from one country at one time with the result that many foreign
products are unable to get the IRA and the import license in time. Other
countries are calling for Australia
to comply with the WTO rules of transparency by increasing transparency of the
quarantine process. Philippine and EU has appealed successively to the WTO for
a ruling on the reasonableness of the results of the IRA, which had served as
the basis for rejecting their agricultural products.[279]
4.100
It also identified a number of other impediments it
believes creates difficulties for Chinese importers. They include:
-
the system for administrating foodstuff which in
China's view is 'very complicated and decentralized';
-
the differences in food standards imposed by
different states, which according to the report 'have brought about a lot of
trouble for Chinese enterprises, and at the same time, make Chinese exporters
more susceptible to Holding Orders';[280]
-
the approval and labelling system regarding bio–tech
food which the report considered as harsh;
-
the mandatory requirements on labels which have
created 'an extra burden on manufacturers, packaging enterprises, importers,
and retailers, in particular, the importers';
-
the security certification or registration
procedure on the import of medicine, which in China's view is not only
complicated but also costly and has brought heavy burdens to relevant Chinese
enterprises;
-
the requirement to pass Australia's GMP
accreditation which have increased the burden on Chinese manufacturers and
impeded their exports to Australia;
-
the comparatively lengthy period and costly
expenses involved in the safety certification process for machinery and
electronic products which, according to the report, 'have made it difficult for
Chinese enterprises to introduce new products to the Australian market';
-
various income subsidies granted by the Australian
government to producers—the report cites high domestic production subsidy to
dairy products, sugar and rice;
-
the rules governing the employment of foreign
labour as well as the qualifications of companies providing guarantee for
foreign labour;
-
difficulties in obtaining working visas; and
-
the high rejection rate for the short-term
business visa.[281]
4.101
The findings outlined in the Ministry of Commerce's
market access report are a reminder to Australians that trade is a two–way
street. While Australia's
interests are centred on the removal of impediments to gaining access to China's
markets, it should also be cognisant that the Chinese perceive real obstacles to
conducting business in Australia.
Conclusion
4.102
Clearly, the business environment in China
presents challenges for Australian enterprises doing business there. This
chapter has discussed in broad terms the various impediments to trade between Australia
and China.
Trade barriers, however, do not apply uniformly across sectors or indeed to
specific products. The following chapters examine a number of specific sectors
that are of major importance to Australia's
trade with China
and which highlight and expand on aspects of the trading partnership, including
barriers to trade.
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