China: The New Foreign Trade Law of the People’s Republic of China

1. Introduction

Since the founding of the People’s Republic of China trade has been playing an increasingly important role in the Chinese economy. The characteristics of the foreign trade legal regime can be traced back to political and historical factors which occurred in China’s history leading, up to now, to a division of three main periods in the foreign trade legal regime. The first period covers the time between the founding of the PRC until 1979; this date also functions as the starting date of the second period of reform and opening up until 2001 when China entered the WTO. As such the WTO entrance date marks the start of the third period.

From 1979 onward the Chinese leadership, in sharp contrast with the Maoist isolationistic approach, opted for an increased integration of China’s economy in the global economy and therefore has continuously been revising its legal (trade) regime, in order to make it conform to the demands of international trade partners, and with the accession to the World Trade Organization to the WTO-rules.

This approach has contributed greatly to the rise of China’s foreign trade and investment. With a booming economy, China’s foreign trade has grown rapidly in the past decade, with a total foreign trade exceeding 850 billion US dollars in 2003 making it the world’s fourth largest trading partner. The current foreign trade law (FTL) was adopted in 1994, when China was still negotiating its way to get into the predecessor of the World Trade Organization. Therefore, the characteristics of 1994 FTL reflect China’s legal development phase at that time.

The 1994 FTL emphasized its administrational aim, giving the government the legal tools to supervise and manage the foreign trade sector. With its 44 articles, the 1994 FTL had an inadequate coverage, which had to be supplemented with a large number of administrative regulations and Ministry directives. The result was a fragmented body of rules which sometimes were overlapping, repetitive or inconsistent. Therefore, adjustments in legislative approach and layout were badly needed to comply with the changed challenges of globalization.

In order to fulfill its WTO commitments and duties, and fully exercise its rights and benefits as a WTO member, China amended the Foreign Trade Law within a timeframe of three years after its entrance into the WTO. As such the revised FTL is of a different spirit than its predecessor.

On April 6th 2004, the 8th Session of the Standing Committee of the 10th National People’s Congress of China enacted the new Foreign Trade Law, which will be effective as of July 1st 2004. The process of revising this law, including the drafting by the Ministry of Commerce, the review by the State Council and Congressional staff, took more than two years.

With its 70 articles and 11 chapters the new Foreign Trade Law is 26 articles and 3 chapters larger than its 1994 version.

The 11 chapters respectively refer to the general principles, the scope of the foreign trade operator, import and export of goods and technology, international trade in services, protection of trade-related intellectual property rights, foreign trade order, investigation, remedies, promotion and legal liabilities, and a final clause. Below follows a short analysis of the most important amendments.

Art 8 of the revised FTL states that individuals are allowed to conduct foreign trade and thus replaces the art 8 of the 1994 FTL where individuals were forbidden to do so. The new spirit that goes out from the new FTL finds its roots in the recognition of the legislators of the universal trend of individuals to conduct foreign trade in the technological field and international service and border activities. Undoubtedly the influence of the WTO rules which incorporate liberal ideas and China’s WTO commitments to provide all foreign individuals and companies with treatment that is at least equal to that of their Chinese counterparts have been the motor behind this important change. Also this further opening of foreign trade to individuals should create new business opportunities and expand China’s foreign trade, both in imports and exports.

If this change will automatically lead to a sharp rise of individuals engaging in business remains to be seen. The unlimited liability of an individual engaging in business against the limited liability of a company to its assets is one of the factors that will influence the increase. Also the fact that the MOC in December 2003 has lowered the capital requirements for domestic companies and has accommodated them with an easier approval process provides an extra incentive for choosing the limited liability option.¹ These companies only need to get the nod from the provincial-level foreign trade departments or some city-levels who got special authorization, rather than the Ministry.

Article 17 of GATT 1994 and article 8 of GATS allow contracting parties to establish or maintain state trading in international trade, i.e. the state authorizes special import and export companies, which may be state-owned or non-state owned, to trade goods in some areas. On this basis the revised FTL adds article 11 by which the state may exercise state trading administration over the import and export of some goods.

Instead articles 8 and 9 of the revised law provide that businesses interested in engaging in international trade must register with the Administration of Industry and Commerce and the Ministry of Commerce or their authorized agencies. The register only serves as a record and the listing on it does not require administrative approval. With the implementation of an automatic licensing system under the form of registration China kept its promise to conform to the WTO agreement on Import Licensing Procedures as from the date of accession.

These provisions should have the effect of opening up trading rights to all Chinese companies and joint ventures regardless of ownership, an important expansion of these rights. However, by requiring registration, these provisions appear to deny non-resident businesses the opportunity to import and export in China. Thus the new provisions do not appear fully consistent with China’s WTO accession agreement, in which it is promised to allow non-resident businesses to import into and export from China.

Article 16 lists the circumstances under which the State may impose restrictions or prohibit the import or export of goods and technology and such is allowed under the WTO rules. The 1994 FCL failed to address this issue which is necessary to safeguard China’s economic interests. Article 17 provides for the adoption of any necessary measures to protect the national security. The addition of mentioned articles indicates that China intends to protect national security and public interest while simultaneously developing foreign trade.

Intellectual property is an important component of foreign trade and protection of intellectual property rights is a key issue. As such Chapter 5 is one of the major additions to the new FTL which reflecting China’s ambition to protect economic security within the boundaries of the WTO rules. Consequently, the new section entails measures that are aimed at the protection of domestic industries and the market in general.

Article 29 states that manufacturers or sellers who import or export goods and that have infringed intellectual property rights of others subject themselves to suspension of business for a specified period of time. Article 30 justifies the action of the SAIC to remove the harms that are caused by such infringement in case intellectual property holders fail to do so or prevent licensees from taking action.

In general, the Chapter is drafted to protect the rights of both foreign and domestic intellectual property owners. Thus not only the foreign companies but also the Chinese companies that are developing their own brands and are pushing into overseas markets will come to rely heavily on these clauses of intellectual property protection.

With the aim of safeguarding the foreign trade order the MOC has the power to investigate activities of monopoly and unfair competition and other behavior that may disrupt the order thereof (Chapter 7). The elimination of material barriers to the development of domestic industries and market has to be ensured by anti-dumping and countervailing and safeguard measures as well as other remedies.(Chapter 8)

The FTL of 1994 is quite weak in its provisions of legal liabilities and penalties, as it provides for only a limited number of penalties of a single nature and mainly focuses on the cancellation of the right to foreign trade.

Chapter 10, of the revised FTL incorporates additions, modifications and improvements of the choices of legal liabilities. These include administrative and criminal liabilities, a ban on trade in addition to the cancellation of the right to trade with the aim of ensuring the effective implementation of the Law. As such the enhancement of surveillance over foreign trade and the enforcement thereof is emphasized.

The revised FTL also provides an adequate answer to the rapid development of foreign trade in China in the past decade by introducing fresh initiatives on the basis of the legislation experience of foreign countries. Initiatives that enable to respond promptly to sudden changes in foreign trade and provide better service to the operators include clauses for establishing an early warning system, a public information system, a statistics mechanism and publication of illegal operations.

The revision of the FTL lives up to its main aim of implementing China’s WTO commitments and promotes the healthy development of foreign trade according to WTO rules. If one compares the characteristics of the 1994 with the 2004 version one undoubtedly has to admit major improvements have been made in accordance with the present needs of China’s foreign trade.

As such the new Foreign Trade Law, which is general legislation, provides a good and rather complete framework. However, the implementation and enforcement of the FTL will be crucial to ensure that they are not just a ‘paper tiger’. To implement and enforce its provisions, the State Council and the administrative agencies must promulgate implementing rules and regulations and amend the existing ones. Understanding those implementing rules and regulations will be necessary to take advantage of the deregulated trade regime and the related business opportunities.

The extent to which these implementing rules and regulations correspond to the same liberal ideals that inspired the drafting of the revised FTL as well as the way in which they are carried out in practice will therefore determine the degree of successfulness of China’s attempts at bringing its foreign trade regime in line with international norms.

© Wenger Vieli Belser, Beijing, May, 2004

This publication is intended to provide accurate information in regard to the subject matter covered. Readers entering into transaction on the basis of such information should seek additional, in-depth services of a competent professional advisor. Wenger vieli belser, the author, consultant or general editor of this publication expressly disclaim all and any liability and responsibility to any person, whether a future client or mere reader of this publication or not, in respect of anything and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication.