China's Foreign Investment Policies that Contravene WTO Agreements

The General Agreement on Tariffs and Trade (GATT), the precursor of the WTO, reached three agreements relating to the establishment of a global investment mechanism during the Uruguay Round, which ended in 1994. These are the Agreement on Trade-Related Investment Measures (TRIMs), Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), and General Agreement on Trade in Services (GATS). The inclusion of investment measures in multilateral trade talks was a major breakthrough of the Uruguay Round as well as an achievement by GATT in establishing a global investment protection mechanism. This is the basis of the effects of WTO accession on China's policies on foreign investment.

GATT included investment measures in trade talks because countries and regions across the world had set their own conditions on foreign investment as prerequisites for their market access (or purchase of domestic enterprises of the host country) or as subsidies or incentives. These measures are of two types. The first type covers incentives for investment, including tax concessions, tariff concessions, investment subsidies, and acquisitions and mergers. The second type covers operational requirements, including restrictions on profit repatriation, foreign exchange control, and requirements on local equity, local content, domestic sales, trade balance, licencing, technology transfer, product specifications, exports proportion, and import substitutes. TRIMs requires that the principles of national treatment, quantitative restriction and transparency established by GATT should apply to these measures. In other words, the host government should do away with unreasonable measures that contravene the principles of national treatment and quantitative restriction, and should promptly announce trade-related investment laws and policies.

Preferential Treatment for FIEs

The three agreements mentioned above have the principle of national treatment at the core. In international direct investment, national treatment means that foreign enterprises should receive the same treatment as domestic enterprises in incorporation, ownership, control, judicial matters, legal protection, and matters relating to the investment property or investment activities.

China' existing policies on foreign investment are inconsistent with the principle of national treatment and the three WTO agreements in two main respects, namely FIEs are given both preferential and discriminatory treatments. In order to attract foreign direct investment, China implements a dual-track tax system whereby domestic and foreign enterprises are levied different income taxes. The income tax concessions extended to foreign firms are not granted to domestic enterprises, especially private operations. As for circulation-related taxes, foreign firms can enjoy rebates on their tax burden resulting from the replacement of the consolidated industrial and commercial tax and special consumption tax by VAT, consumption tax and business tax; but domestic enterprises do not have this privilege. With regard to tariffs, foreign enterprises are exempt from tariffs on the import of production equipment, parts and components as well as raw materials, auxiliary materials, components, parts and packaging materials imported for the production of goods for export in accordance with law (this measure was abolished in 1996 but reinstated in 1998). Foreign investors and technical personnel are allowed to import, tax free, a given quantity of articles for daily use. Foreign direct investment projects may apply to the government for the use of land, and the government will assign land use rights to them for a given period in the form of leasing. Special economic zones and open coastal cities often offer considerable concessions to foreign firms on land use fees. Foreign direct investment projects on education, culture, science and technology, medical and health care, and public facilities as well as export-oriented and hi-tech projects enjoy even more favourable terms. Foreign enterprises also have priority in investment approval and have the privilege of recruiting talent from other cities. They are granted import and export rights, management autonomy, a freer hand in foreign exchange management and greater flexibility in setting their wage scales.

Discriminatory Treatment for FIEs

Despite the many privileges, foreign enterprises receive discriminatory treatment in certain areas, which mainly finds expression in the fact that they face much stricter requirements than domestic enterprises in bank loan seeking, business scope, equity ratio, and application for export licences and quotas. Foreign enterprises are also subject to local content requirements, foreign exchange balancing requirements and export to domestic sales ratio. It is therefore not surprising that foreign investors often complain about unfair treatment in acquiring raw materials, applying for bank loans and obtaining guarantee for a fixed price level compared with domestic enterprises. Complaints about discriminatory treatment are particularly strong against requirements on localisation, import-export balance and credit control in the automobile, petrochemical, chemical and computer industries.

As for trade in services, foreign firms are subject to strict requirements or even denied access. On IPR, China's existing Trademark Law, Patent Law and Copyright Law also fall far short of the requirements of TRIPs.

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