A New Era for Distribution in China
Bosco, Sara Yang, The China Business Review
New laws finally allow foreign investors to trade and distribute
Restrictions on trade in goods and services across geographic boundaries and within China have long been some of the biggest obstacles to foreign investors' success in the country. China's commitments as part of its 2001 World Trade Organization (WTO) entry package included pledges to open these activities to foreign firms. But only this year has that promise become reality, as a result of two significant developments. On April 6, the Standing Committee of the National People's Congress enacted amendments to the PRC Foreign Trade Law. Just 10 days later, the Ministry of Commerce (MOFCOM) followed by issuing the Measures for the Administration of Foreign Investment in the Commercial Sector (Commercial Sector Investment Measures). The Commercial Sector Investment Measures and the amendments to the Foreign Trade Law took effect June 1 and July 1, respectively, and herald the start of a new era for foreign companies doing business in and with China.
Amendments to the Foreign Trade Law
China's Foreign Trade Law, originally passed in 1994, applies to foreign trade, or the import and export of goods and technology, and international services trade. The most recent changes to the law eliminate the foreign trade authority system, under which the state designated which companies had rights to trade with foreign parties. The law also protects intellectual property, a major concern for foreign companies. Finally, the law announces that a catalogue for international services trade is forthcoming and outlines MOFCOM's powers.
* Breaking the state monopoly
Before the amended Foreign Trade Law took effect, only certain companies licensed by the PRC government had the authority to import and export all goods, technologies, and services. Since most companies did not have foreign trade authority, foreign suppliers were forced to enter into contracts with these specially licensed companies, thus driving up costs and forcing contractual relationships between parties without common commercial interests.
As part of its WTO entry agreement, China pledged to eliminate this system and allow all enterprises in China the right to engage in foreign trade by December 11, 2004. Indeed, China met this deadline about five months early. Chinese entities or individuals that wish to import or export goods and technologies for their own use may now do so by registering as a "foreign trade operator," a process that should be more administrative than substantive. This also means that foreign companies can deal directly with their Chinese counterparts.
Though the law defines a foreign trade operator as "a legal person, other organization, or individual engaged in foreign trade business activities...after completing industry and commerce formalities...in accordance with the law," it is not clear whether a foreign-invested enterprise (FIE) must register as a foreign trade operator to import and export goods and services. Since FIEs have always had the authority to import goods and technology for their own use and to export goods and technologies they have manufactured or developed themselves, this authority will likely continue. More important for foreign companies is the fact that the Commercial sector Investment Measures permit FIEs to import goods for resale or export goods they have not made or developed (see below).
* Intellectual property protection
The protection of intellectual property in international trade is enshrined in a new chapter of the Foreign Trade Law. The law states the basic principle that "the state shall protect intellectual property rights in foreign trade in accordance with relevant laws and administrative regulations" and authorizes MOFCOM to prohibit, for a defined period of time, production and sales in China by those who import goods that infringe intellectual property rights. The new chapter also protects the licensees of imported technology in China against the imposition of mandatory license of unrelated technology, exclusive grant-back licenses (where the licensee makes an improvement on the original technology, and the original licensor obtains grant-back rights of the improvements), and other practices that jeopardize the notion of fair competition in trade activities. …