On July 1, 1994, China's first Foreign Trade Law went into effect. The law, passed by the National People's Congress, the highest legislative body in China, provides a legal framework for the Chinese government, through the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), to regulate foreign trade activities and organizations in China. The new law is significant in that it is the first piece of comprehensive trade legislation ever published in the PRC. Until now, China's foreign trade has been controlled through internal (neibu) administrative measures or obscure policy pronouncements. Thus, while the very promulgation of the law constitutes an improvement in the transparency of China's legal regime, the broad scope and vague wording of the new Foreign Trade Law mean foreign firms must await implementing regulations currently being drafted by the MOFTEC legal department to ascertain if the law really will have any impact on China's foreign trade practices.
The timing of the new law's release should be of little surprise, given China's great determination to enter the General Agreement on Tariffs and Trade (GATT) as quickly as possible. In part, the Foreign Trade Law may help Beijing's efforts to enter the GATT or its successor regime, the World Trade Organization (WTO), as it indicates China's willingness to open its trade regime and abide by international treaties and agreements. Certainly, much of the language in the new law is consistent with international practice.
At the same time, however, the law contains provisions that reflect Beijing's unease with losing too much control over China's external trade. These provisions give the government great leeway to restrict trade or indefinite periods, and will do little to reassure skeptics of China's stated intention to open its markets. Nevertheless, the law does open the door for certain liberalizations--such as allowing foreigners to establish trading companies--that could be beneficial in the long run.
Then and now
In the past, when China's foreign trade was conducted solely through State-owned foreign trade corporations under MOFTEC (or its predecessors), the central government had total control over trade matters and Beijing felt no need to publish laws clarifying the rights and obligations of the various parties involved in any given transaction. As China began to move toward a market-based economy and MOFTEC became the regulator, rather than owner, of the country's foreign trade entities, the government realized a national law could help it exert some control and discipline over the private and semi-private companies newly engaging in foreign trade. Various drafts of the law circulated in the capital for years before Beijing's desire to join the WTO as a founding member finally gave MOFTEC the impetus to move forward.
The resulting Foreign Trade Law contains 44 articles, but many details will not become clear until the implementing regulations are promulgated and State administrators are forced to interpret and apply the law. Depending on the directions taken in the implementing regulations, the law could serve as a strong foundation for China's efforts to become integrated into the international economy, or it could be used as a legal basis for Beijing to erect non-tariff barriers to free trade.
Some articles of the new law, for example, state China is committed to trade, while others provide the justifications to restrict it. Article 15 declares China's general commitment to an open and free trading system and permits the free import and export of goods and technology, but adds a caveat: "except where otherwise provided for by laws or administrative regulations." Articles 16 and 17 outline these limits on free trade, giving Beijing the ability to restrict or prohibit the import or export of goods and technology when issues involving national security, balance of payments, health and safety considerations, and other specific areas are concerned.
While the laws of many countries, including the United States, also give their governments the flexibility to exert sovereignty over foreign trade practices, most operate within a system of considerable checks and balances. In China's case, however, there is no separation of power--MOFTEC writes and administers the rules governing its own actions. Thus, Article 18 allows MOFTEC unilaterally, or together with relevant State Council departments, to decide on an interim basis to restrict or prohibit the import or export of any good or technology at any time. Unlike protective US trade measures, which allow for regular reviews and revocation of restrictions if the original source of injury has ceased to exist, the new Chinese law does not specify any time limit for MOFTEC to review, renew, or terminate restrictions on trade.
Since the State Council's operations and decisionmaking processes remain shrouded in secrecy, the new law essentially permits the Chinese government to take whatever measures it deems appropriate to curtail or prohibit foreign trade indefinitely. Taken at face value, this would seem to be contradictory to the spirit of the GATT/WTO. But since China's admission to GATT/WTO will likely hinge on its accepting a very detailed protocol of accession, the current loopholes in the law--if they are addressed in the protocol--may not be as ominous as they now appear.
Reciprocal trade treatment
On a more positive note, the Foreign Trade Law contains provisions that underscore the Chinese government's commitment to enforce agreements it has reached with foreign countries. For example, to address ongoing discussions with the United States over intellectual property rights infringements, Article 27 provides that any entity engaged in the import and export of goods and technologies shall not, among other things, "infringe upon intellectual property rights protected by the laws of China." However, the Foreign Trade Law does not provide for specific sanctions against intellectual property infringers.
In other sections of the new law, the language seems aimed explicitly at putting on a good face for the GATT. The General Provisions of the law, for example, extend the concept of mutuality to China's trade relationships with foreign countries. The law commits China to grant preferential trade treatment to countries "in accordance with international treaties or agreements to which [China] has acceded...Most Favored Nation (MFN) treatment or national treatment [shall be granted] on the basis of the principles of mutual benefit and reciprocity." The concepts of MFN and national treatment, however, are not defined in the law.
Adopting the concept of "national treatment," a principle embodied by the GATT, may prove difficult in China--and less than popular with some foreign companies. Foreign-invested enterprises (FIEs) in China have grown accustomed to numerous tax breaks, while State-owned enterprises enjoy advantages in terms of access to raw materials, energy supplies, and domestic markets. Neither FIEs nor State enterprises are likely to want to give up their relative benefits. Acting on the principle of national treatment, therefore, will probably remain one of Beijing's long-term goals.
Protecting domestic industries
The Foreign Trade Law's efforts to duplicate international trade practices give Chinese government officials the opportunity to safeguard domestic producers from import surges, imports priced below normal values (dumping), and imports subsidized by an exporting countries. Articles 29-31 address these concepts in broad terms, but provide few details; MOFTEC reportedly is drafting rules that will clarify the system China wishes to put in place.
Since Chinese exports have recently confronted numerous anti-dumping and countervailing duty investigations in the United States and European Community, some trade analysts view these safeguard provisions as little more than an effort by Beijing to give its industries the legal means to impede imports of foreign goods. Until the implementing rules are released and put into practice we can only speculate as to Beijing's true motivation, but it is certainly not unreasonable for China to seek to protect its markets from goods dumped or subsidized by other countries.
In addition to introducing anti-dumping safeguards, the new law authorizes Beijing to impose sanctions to counter "measures of a discriminatory nature against China" with respect to foreign trade. The meaning of discriminatory, however, is not defined in the law and may give Beijing considerable latitude in applying sanctions. As the Foreign Trade Law was promulgated on May 12, 1994--two weeks before President Clinton's decision to delink China's MFN status from human rights considerations--the language in the new law was most likely included to strengthen China's legal position in future disputes. The US government, for example, cites the Jackson-Vanik amendment to the 1974 Trade Act as the legal basis for its annual review of China's MFN status. China can now point to its own legislative code to respond in kind to US "discriminatory" actions.
A new role for foreigners?
One of the most significant provisions of the Foreign Trade Law is the introduction of a new entity called the foreign trade operator (FTO), which is the only type of entity authorized to engage in the import and export of goods or technology. Articles 8-14 include no mention of nationality requirements for FTOs, perhaps signaling China's willingness to begin allowing foreign companies to compete with State-owned trading corporations and domestic trading companies.
The Foreign Trade Law defines an FTO as a MOFTEC-approved legal person or organization engaged in foreign trade activities. FTOs must:
* possess their own names and organizational structures;
* involve themselves in foreign trade;
* have the site, capital, and professionals necessary to operate their foreign trade business, and;
* comply with other conditions specified in laws or administrative regulations.
According to MOFTEC Minister Wu Yi, over 7,000 trading enterprises were engaged in foreign trade in China in 1993. It is not yet clear whether all of these firms will automatically qualify as FTOs or whether each must be examined by MOFTEC for approval. The procedures to be used or qualifying foreign firms to engage in foreign trade, which will not be known until the implementing regulations for FTO licenses are completed, will test China's commitment to the concept of "national treatment."
To qualify as an FTO, the new law says an entity must have a proven track record in the import-export business (either directly or through its agent) or possess the necessary goods to import or export. Since foreign trading firms have been restricted from foreign trade activities under the current system, the criterion of possessing a proven track record in China might drastically limit the number of foreign firms able to qualify as FTOs, and the scope of business they can engage in. While a limited number of high-profile foreign firms may eventually achieve FTO status, China's willingness to allow a broad spectrum of foreign-based FTOs may be years away. MOFTEC will reportedly publish implementing regulations covering the granting of FTO licenses later this year; the rules should make it clearer whether and which foreign firms will be able to act as FTOs.
No news on dispute settlement
Another issue of concern to foreigners, dispute resolution, receives no mention at all in the new law. It is doubtful that in the foreseeable future foreign trade disputes involving government entities can be litigated successfully in Chinese courts because of the lack of a "separation of power" doctrine. The Chinese judiciary is a State organ and will generally align itself with State interests.
Yet mediation and arbitration--the preferred means of dispute resolution in China--may not be satisfactory to the aggrieved foreign party when the Chinese government or its commercial entity is the defendant. Mediators generally seek compromise solutions to avoid displeasing a powerful Chinese ministry if it has direct stakes in the dispute. But if the aggrieved party seeks to settle the dispute in an international forum, the Chinese defendant may be able to use the vague wording of the new law to his advantage in challenging the validity of the award or judgment in China. A Chinese party with the right contacts, could, for instance, argue that the contract in dispute is unenforceable because its inability to fulfill the contract was due to State restrictions outlined in the Foreign Trade Law. Such tactics have been used in the past. In 1992, a corporate arm of the Chinese government resisted an American company's attempt to execute a default judgment for fraud and breach of contract, contending that it was prohibited by China's State Secrets Act to disclose the whereabouts of its assets.
An eye on services
In some ways, the new Foreign Trade Law helps clarify China's position on some of the issues raised during ongoing GATT tariff and protocol negotiations. The law's expanded definition of "foreign trade" to include technology and international trade in services as well as the import and export of goods appears to anticipate China's eventual membership in WTO.
However, there is little evidence that China is poised to throw open its service industries--including finance, insurance, transportation, tourism, telecommunications, consulting, and engineering services--to foreign competition. Article 22 states that China "shall promote the gradual development of international services trade," but Articles 24 and 25 describe several broad circumstances in which China's trade in services may be restricted or prohibited, including the catch-all phrase, "where prohibition is provided for in laws or administrative regulations."
In a press briefing in May 1994, MOFTEC Minister Wu stated that the new Foreign Trade Law can only lay down broad principles in the area of services because such trade is still a new undertaking for China. Beijing's ambivalence toward opening up China's markets to international trade in services probably reflects the PRC's desire to protect these relatively inefficient, undeveloped industries from foreign competition. Ironically, international service providers would likely prove instrumental in resolving many of China's existing bottlenecks in finance, transportation, and telecommunications.
A step forward?
Although the Foreign Trade Law has been in effect for six months, few Chinese trade authorities seem to be paying much attention to it. Most appear preoccupied instead with China's GATT negotiations. Although one may expect that the price of GATT/WTO admission will involve the adoption of legislation to clarify or supplement the Foreign Trade Law, ultimately, successful implementation of an open and free trade regime in China depends upon the willingness and ability of all levels of the Chinese government to uphold such a system. The new law lays a foundation for Chinese authorities to create a free trade regime. As of yet, however. it is too soon to tell whether it will become just another addition to China's growing repertoire of well-intentioned but relatively toothless laws.
Helen K. Ho, a lawyer with the international law firm of Dewey Ballantine, is based in Hong Kong. She specializes in international transactions, investment, and trade.…