RL30225: Most-Favored-Nation Status of the
People's Republic of China

Vladimir N. Pregelj

Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

Updated October 13, 2000

CONTENTS

• Summary
• China's Most-Favored-Nation Status
• Withdrawing or Restricting China's MFN Status
• Reasons for and Effects of Withdrawing China's MFN Status
• International Contractual Implications
• Granting Permanent MFN Status to China
• Other Developments During the 106^th Congress
• Footnotes

List of Tables

Table 1. Illustrative MFN and Full Duty Rates Applicable in 2000 to Major Imports from China

Table 2. Incidence of Changes in Duty Rates Due to China's Loss of MFN Status

Appendix. MFN and Full-Duty Treatment of U.S. Imports from China, 1999: Imports for Consumption

Summary

Particularly since the Tiananmen Square incident of June 4, 1989, the U.S. Congress has considered two diametrically opposed types of action regarding China's nondiscriminatory, or most-favored-nation (MFN; normal-trade-relations) tariff status in trade with the United States. One has been its total withdrawal, the other--of more recent origin--its extension on a permanent basis.

After having been suspended in 1951, MFN tariff status was restored to China in 1980 conditionally under Title IV of the Trade Act of 1974, including compliance with the Jackson-Vanik freedom-of-emigration amendment, which must be renewed annually. This status would be either terminated or changed into a permanent one.

China's loss of MFN tariff status would result principally in the imposition of substantially higher U.S. customs duties on--and in higher, often prohibitive, costs of--over 95% of U.S. imports from China ($81,522 million total in 1999) and a likely cutback in such imports as well as possible retaliatory reduction by China of its imports from the United States. A significant economic disadvantage might result for Hong Kong and Macau, which, despite their political reunification with China, remain separate economic entities with permanent U.S. MFN status.

Sundry legislation introduced in earlier Congresses to withdraw or severely restrict China's MFN status failed to be enacted, in two instances for failure to override the President's veto. In the 105th Congress, legislation was introduced, but not passed, to grant permanent MFN status to China outright, or upon its accession to the World Trade Organization. Some of the latter-type bills would have placed additional conditions on the grant of the MFN status; denied MFN treatment to products or exports of the Chinese Army or a Chinese military enterprise; or raised the amount of U.S. tariffs on imports from China to the level of China's tariffs on U.S. exports to China.

On January 30, 1998, the President extended the trade agreement with China for 3 years, and on June 2, 2000, renewed for one year China's Jackson-Vanik waiver and, thereby, MFN status. A measure that would effectively terminate China's MFN status was defeated in the House on July 18, 2000.

Legislation to grant permanent nondiscriminatory status to China, as substantially amended in the House, was passed by the Senate on September 19, 2000, without additional amendments. It was signed by the President on October 10, 2000 (P.L. 106-286). In addition to the grant of permanent MFN status, the measure provides for product-specific safeguards against market-disrupting imports from China, for establishing a Congressional-Executive Commission to monitor and report on China's human rights and compliance with WTO commitments, and for establishing a task force to monitor and enforce China's compliance with the U.S. anti-slave-labor statute, establishing programs to develop China's commercial and labor law, and expresses the sense of Congress that China's and Taiwan's accession to the WTO be approved at the same time. The law cannot enter into force until China accedes to the World Trade Organization.

China's Most-Favored-Nation Status

In the context of the controversy surrounding the renewal of China's most-favored-nation (MFN) status ⁽¹⁾ or its permanent grant, it should be pointed out that historically the specific MFN issue involved is that of tariffs rather than of the general MFN treatment as envisaged by the General Agreement on Tariffs and Trade or the bilateral commercial compacts to which the United States is a party. Thus, the MFN status in controversy and, consequently, discussed in this report is limited to nondiscriminatory tariff treatment of China; that is, the application to imports from China of the same concessional customs duty rates, agreed to by the United States in reciprocal negotiations with other trading partners.

The United States has applied such MFN tariff treatment as a matter of statutory policy, enacted in 1934, generally to all of its trading partners. This policy was modified with the enactment of Section 5 of the Trade Agreements Extension Act of 1951 (P.L. 82-50), which required the President to suspend MFN tariff treatment of the Soviet Union and all countries of the then Sino-Soviet bloc. Under this statutory mandate, President Truman suspended China's most-favored-nation tariff status as of September 1, 1951. After China's occupation of Tibet, that country's MFN status also was suspended as of July 14, 1952. Whereas earlier the MFN status could, under certain conditions, be restored to a suspended country by presidential action, such restoration could take place, since October 1962, only by specific law, until the Trade Act of 1974, in Title IV, provided special authority and set out the conditions and the procedure for its temporary restoration to "nonmarket economy" (NME) countries and subsequent continuation in effect.

Under Title IV, the key elements of the procedure for temporary restoration of the MFN status to an NME country ⁽²⁾ are (1) conclusion of a bilateral trade agreement containing a reciprocal grant of the MFN status and additional provisions required by law, and approved by the enactment of a joint resolution; and (2) compliance with the freedom-of-emigration requirements ("Jackson-Vanik amendment;" Section 402; 19 U.S.C. 2432). These requirements can be fulfilled either by a presidential determination that the country in question places no obstacles to free emigration of its citizens, or, under specified conditions, by a presidential waiver of such full compliance.

In accordance with this procedure, the President, on October 23, 1979, transmitted to Congress the trade agreement with China, signed on July 7, 1979, its proclamation (Pres. Proc. 4697; 44 F.R. 61161), and the executive order (E.O. 12167; 44 F.R. 61167) granting to China the Jackson-Vanik waiver (H.Doc. 96-209). The agreement was approved by Congress on January 24, 1980 (H.Con.Res. 204, 96th Congress) and entered into force on February 1, 1980 (together with the reciprocal grant of the MFN status, which it contains in addition to all other provisions required by Section 405(b) of the Trade Act of 1974; 19 U.S.C. 2435(b)).

The continuation in force of an NME country's (e.g., China's) MFN status is contingent on (1) triennial extensions of the underlying trade agreement and (2) continued compliance with the Jackson-Vanik amendment, the latter in the case of some NME countries, including China, by means of annual renewals of the waiver authority and existing waivers.

The agreement, concluded for a 3-year initial term, itself provides for automatic 3-year extensions, but is subject to termination by either party upon notice at least 30 days before the expiration of any 3-year term. The continuation in force of the agreement is also subject to the requirement in Section 405(b)(1)(B) of the Trade Act of 1974 (19 U.S.C. 2435(b)(1)(B)), which applies to any trade agreement concluded under Title IV with an NME. Under that provision, the agreement is renewed triennially if a satisfactory balance of concessions has been maintained during the life of the agreement and the President determines "that actual and foreseeable reductions in United States tariff and nontariff barriers ... resulting from multilateral negotiations [which benefit China unilaterally because of its MFN status] are satisfactorily reciprocated by [China]." The agreement has thus far been renewed six times, most recently by Presidential Determination No. 98-14 of January 30, 1998 (63 F.R. 5857) through January 31, 2001.

To remain in force, the Jackson-Vanik overall waiver authority as well as the specific China waiver (and China's most-favored-nation tariff status, which is contingent on it) at present must be renewed annually. The renewal procedure entails (1) a President's recommendation, which must be made by June 3 of every year, that the existing waiver authority and individual waivers be extended for another 12-month period (through July 2 of the following year). Such extension is (2) automatic upon the President's recommendation unless it is disapproved by the enactment of a joint resolution (before 1990, approval of a simple resolution).

The language of the resolution is prescribed by law, and a specific fast-track procedure is provided for its consideration. In its basic legislative steps, the resolution must be reported within 30 calendar days (or else the committee considering it may be discharged), may be amended only with respect to the country (or countries) to which it applies, and the debate on it is limited in either chamber to 20 hours, divided equally between those favoring it and those opposing it. The resolution must be approved by August 31. A presidential veto of the resolution must be overridden by the August 31 deadline or within 15 days of session after Congress has received the veto message, whichever is later. ⁽³⁾ If the resolution is enacted, the waiver and the MFN status cease to be effective on the 61st day after its enactment.

Particularly in recent years, congressional opposition has increased to the continuation in force of China's MFN status on various grounds, mostly unrelated to the freedom-of-emigration considerations. Despite this opposition, legislative action to disapprove its annual extensions has consistently been unsuccessful and China's waiver and MFN status have remained in force. Moreover, the controversy in Congress has recently undergone a decided shift of its focus from the issue of whether to continue in force China's MFN status under the provisions of Title IV to the opposite one of granting such status to China unconditionally and permanently.

In a related side issue, the opposition to the application of MFN treatment to imports from China among the public at large has been in some part caused by an obvious misunderstanding of the term "most-favored-nation treatment" itself, taking it in its literal meaning. Congress, primarily in the context of this misunderstanding with respect to China, consequently, enacted legislation (Section 5003 of the Internal Revenue Restructuring and Reform Act of 1998 (P.L. 105-206)) replacing the misleading term in all seven instances of the then existing and in any future statutes with the term "normal trade relations" (NTR) or another appropriate term. ⁽⁴⁾

Withdrawing or Restricting China's MFN Status

Under the Tile IV regime, MFN status could be withdrawn from China, either permanently or temporarily, in several ways: (1) by direct legislation enacted through regular legislative process ⁽⁵⁾; (2) by using the specific means provided in the Trade Act of 1974 for denying MFN tariff status to a NME country that had it restored under that law, i.e., by the specific fast-track enactment of a joint resolution disapproving the mid-year annual renewal of the Jackson-Vanik waiver authority with respect to China, if such renewal is recommended by the President; (3) by the President's failure to recommend such renewal with respect to China in the first place, for noncompliance with the Jackson-Vanik requirements; or (4) by direct action by the President suspending or withdrawing China's MFN status. China also could lose its MFN status if the agreement is terminated, upon notice, at the end of a term, or, presumably, if the 3-year extension of the U.S.-China trade agreement does not take place because the President declines to make the required determination. (See p. 2.)

In past years, Congress has repeatedly and consistently attempted to terminate or restrict China's MFN status by means of resolutions disapproving the annual extension of China's waiver or by specific legislation, or subject its continuation in force to additional statutory conditions, primarily in the area of human rights. None of these measures has become law, although two of them (one in either session of the 102nd Congress), setting additional conditions for the annual extensions of MFN status, came close to being enacted: passed by both houses, they were vetoed by the President and the veto was upheld by the Senate.

A special situation arose in mid-1993, when the President extended China's waiver for another year, but at the same time in Executive Order 12850 also set specific additional conditions for the mid-1994 extension of China's waiver and MFN tariff status. These conditions closely reflected those set in the several versions of the United States-China Act of 1993 (103^rd Congress) and, in addition to compliance with the Jackson-Vanik amendment, required mandatory compliance with the 1992 U.S.-China prison labor agreement, and significant progress with respect to China's adherence to the Universal Declaration of Human Rights, releasing and accounting for Chinese citizens imprisoned or detained for the nonviolent expression of political and religious beliefs, ensuring humane treatment of prisoners by allowing access to prisons by international humanitarian and human rights organizations, protecting Tibet's religious and cultural heritage, and permitting international radio and TV broadcasts into China. The E.O. also charged U.S. officials to pursue resolutely actions to ensure that China keeps its commitments to follow fair, nondiscriminatory trade practices in dealing with U.S. businesses, and adheres to the Nuclear Non-Proliferation Treaty, the Missile Technology Control Regime guidelines, and other nonproliferation commitments.

Although China denounced the action taken by the President, the principal sponsors in both houses of the legislation to subject the 1994 extension of China's MFN status to additional conditions (Representative Pelosi and Senator Mitchell) expressed their satisfaction with the President's action as representing a sufficient step and stated that further congressional action on their respective bills would be unnecessary. The linking of China's MFN status to overall human rights, however, was abandoned in mid-1994 when President Clinton renewed the China waiver taking into account only its statutory condition, namely, compliance with the freedom-of-emigration requirement of the Jackson-Vanik amendment. Subsequent legislative measures to disapprove the renewal or subject it again to broader human rights conditions failed.

In both sessions of the 104th Congress, the joint resolutions disapproving the presidential extensions of China's MFN status through the renewals of the Jackson-Vanik waiver failed of passage. Likewise, no action was taken on several other bills, such as one nullifying China's waiver and subjecting its restoration to enactment by regular procedure; or another, conditioning the continuation of China's waiver on Taiwan's speedy admission to the World Trade Organization (WTO); or one assessing additional tariffs on imports from China until the President determines that China is fully implementing the agreement on the protection of American intellectual property rights in China.

In the 105^th Congress, joint resolutions disapproving the mid-year renewals of the waiver authority were introduced in both sessions but also failed to be enacted, allowing the extension of the waiver and China's MFN status to remain in force through July 2, 1999. No specific legislation was introduced to withdraw altogether China's MFN status; such action, however, was proposed with respect to goods produced or exported by the People's Liberation Army or a Chinese military company, but not further considered. China's MFN status also would have been impaired by a bill which required quarterly adjustments of U.S. tariffs on imports from China based on the amount by which China's tariffs on exports from the United States exceed U.S. tariffs on imports from China.

China's MFN status with the United States could have been adversely affected by legislation, introduced but not passed, requiring prior congressional approval of U.S. support of China's admission to the WTO and the withdrawal of the United States from the WTO if China were to be admitted without U.S. support.

Bills were also introduced in the 105th Congress to enhance China's MFN status. Some would have granted to China permanent MFN status either unconditionally or upon its accession to the WTO, some of the latter-type measures providing also, under specified circumstances, for snapback of duties on imports from China to pre-Uruguay Round MFN rates (i.e., those in effect on December 31, 1994), if China did not accord adequate trade benefits to the United States or take adequate steps to join the WTO.

In January 1998, the President also made the determination renewing the 1979 trade agreement with China for three years through January 31, 2001.

Reasons for and Effects of Withdrawing China's MFN Status ⁽⁶⁾

In the context of the Jackson-Vanik amendment and Title IV procedure, the sole statutory criterion for continuing in force or withdrawing China's MFN status was China's compliance with the freedom-of-emigration requirements--a criterion that in present circumstances no longer represents a practical obstacle to MFN treatment of China by the United States. The advocates of denying MFN status to China, however, have gone beyond the narrow scope of the freedom-of-emigration issue and have based their opposition to continued MFN status on China's violation of human rights in general, its unfair trade practices and obstacles to market access, lack of legal and regulatory transparency, the large and growing U.S. trade deficit with China, China's uncooperative attitude in weapons and nuclear nonproliferation, and, more recently, the alleged illegal Chinese donations to the Democratic National Committee, or nuclear espionage.

Supporters of MFN treatment of China, among them the Administration, took the position that the resolution of these issues ought to be pursued through consultations and negotiations in other fora, or other appropriate means. Particularly the structural trade and economic issues involved, they suggested, would best be resolved in the then still ongoing negotiations for China's accession to the World Trade Organization. In the view of the supporters of China's continued MFN status, its withdrawal would have been counterproductive since it would increase friction and be less conducive to resolution of any problems through dialogue. It would, they asserted, particularly in the human rights area, possibly exacerbate the situation, in addition to the adverse economic consequences it would engender.

Economic consequences would be considerable. Withdrawal of China's MFN status would result, in the first instance, in significant duty increases on about 95% of U.S. imports from China, totaling $81,522 million in 1999. The cost effect of the increases would vary among the various product groups, but would on the whole be substantial.

Table 1 illustrates how the withdrawal of the MFN tariff status would change the duty rates assessable in 2000 on 15 major products or product groups imported from China.

Table 1. Illustrative MFN and Full Duty Rates Applicable in 2000 to Major Imports from China

In view of the overall substantial differences between the concessional (MFN) and full rates of duty, it is clear that the termination of China's MFN status would have resulted in substantial increases in the cost of imports from China. The average MFN trade-weighted duty rate on all 1999 imports from China, dutiable as well as nondutiable, was 4.2% (on dutiable alone, 7.3%). Without MFN treatment, and assuming no change in the volume of imports, this rate would have been at about the 45% level. An even larger gap between the MFN and full-duty treatment would occur in the top categories of U.S. imports from China, primarily because a substantial share of them are duty free under MFN treatment but would be subject to high duty rates without it.

On the basis of our recent survey of imports under the individual tariff items whose imports in 1999 exceeded $100 million each (167 in all) (see Appendix) and which together accounted for $51.2 billion (62.7%) of all U.S. imports from China in that year, the termination of China's MFN status would increase the average duty rate on the same imports in 2000 more than twelvefold: from 3.5% to 42.9%. The importers' overall cost of those products would increase by over one-third, mostly in the range between 25% and 65%.

Compared to similar data for earlier years, these figures indicate a larger concentration of China's exports to the United States in duty-free products or those dutiable at low rates (up to 10% ad valorem). Imports free of duty under the NTR tariff treatment account for 70 out of 167 listed tariff items, at a total value of $28.0 billion (34.4% of total U.S. imports from China), and imports dutied at rates of up to 10% ad valorem account for 80 tariff items, totaling $19.5 billion (23.9% of total imports) (see Table 2). The data also suggest an increasing--quite probably by design--intensification of China's exports to the United States in the product lines subject to zero or low-rate duty rates.

As a consequence of the changes brought about by the termination of China's NTR status, the trade pattern of articles now imported from China would be likely to change substantially. Much of their sourcing would be likely to shift to suppliers in other countries or to domestic suppliers. This restructuring also would result in higher costs to the importers of the articles involved, in part because those imports from China that would still take place would generally be subject to higher, non-NTR duties, and in part because the costs of articles from alternative sources, assessed NTR duties, would most likely be higher, although lower than they would be for non-NTR imports from China.

Although some of the increases would likely be in part absorbed in the subsequent chain of distribution, relative cost increases at the retail level would be high, particularly on low-margin, moderately priced consumer goods (certain clothing, footwear, household electrical and electronic products, toys, etc.). China is now a substantial supplier of such goods, and some of them may, at least temporarily, even become priced out of the U.S. market. Because of the type of the articles involved, the resulting increased costs and reduced availability would affect disproportionately lower-income U.S. consumers.

On the Chinese side, such changes would obviously have an adverse effect by reducing significantly the U.S. demand for such imports from China. The size of this reduction and the impact of its adverse effect on China's economy would depend on a number of factors, but, in the opinion of several China trade experts, would be substantial. It would be, it is claimed, particularly damaging to the economy of China's southern provinces (Fujian and Guangdong), which are most dependent on exports and where much of China's exports originate. Indirectly, it would also adversely affect Hong Kong and the economic benefits it derives from being the port of transit for close to 60% of China's exports to the United States, and whose businesses also have substantial manufacturing interests in the neighboring southern China: hence, Hong Kong's general opposition to the withdrawal of China's MFN status. Hong Kong's recent reversion to China's sovereignty as a Special Administrative Region has not changed Hong Kong's status as a separate trade and customs entity nor the role it has played in the past in China's foreign trade and other economic relations. A withdrawal of China's MFN status would also have adverse consequences for other major investors in South China: Taiwan, Japan, and the United States.

Table 2. Incidence of Changes in Duty Rates Due to China's Loss of MFN Status
(167 tariff items valued $100 million and over;
by 10% duty-rate brackets; values in millions of dollars,
and number of tariff items in each category )

Depending on whether and, if so, in what way and to what extent China would retaliate against imports from the United States (by increasing its tariffs to non-MFN levels, or taking other import-restrictive measures), the annual loss of U.S. exports to China could be significant, most likely affecting U.S. exports of grain, power generating machinery, aircraft, and fertilizer products. Also likely to be adversely affected would be overall U.S. economic relations with China, particularly U.S. investment and establishment of American businesses.

International Contractual Implications

Denial of China's MFN status would have to be implemented also with having regard of two relevant provisions of the 1979 U.S.-China trade agreement, still in force, addressing specifically the discontinuance of the agreement or of any of its provisions. In its automatic 3-year extension provision (Article X.2), the agreement allows for its termination if either party to it "notifies the other of its intent to terminate this Agreement at least thirty (30) days before the end of a term." The agreement also provides (in Article X.3) that "if either Contracting Party does not have domestic legal authority to carry out its obligations under this Agreement, either Contracting Party may suspend application of this Agreement, or, with the agreement of the other Contracting Party, any part of this Agreement." This provision appears to be applicable with respect to MFN treatment in the event that the waiver authority is withdrawn under the Jackson-Vanik amendment or the treatment itself is terminated by a specific newly enacted statute.

A more generally applicable provision (Article IX), which asserts "the right of either Contracting Party to take any action for the protection of its security interests," might conceivably, if circumstances warranted, be used to suspend the MFN treatment.

An additional element to be considered in the context of U.S. MFN policy toward China is China's almost completed procedure for membership in the World Trade Organization ⁽⁷⁾ and the obligation of WTO members (which include the United States) to accord to each other unconditional MFN treatment in its all-encompassing meaning (i.e., not only with regard to tariffs). This obligation is contained in Article I of the General Agreement on Tariffs and Trade 1994 (GATT 1994), one of the many compacts resulting from the Uruguay Round of multilateral trade negotiations that constitute the Agreement Establishing the World Trade Organization.

China's accession to the WTO, the procedure for which was initiated in 1986, is a goal that China as well as many other WTO members, including the United States, are earnestly pursuing. China's 6-year-old negotiations of a bilateral trade agreement with the United States, a key player in the procedure for China's admission to the WTO, intensified in the several months prior to the early April 1999 visit to the United States by China's premier, Zhu Rongji, and resulted in a partial agreement on market access for agricultural and industrial products and various services. The negotiations to resolve several other differences between the two countries, which the United States considered of essence for China's participation in the WTO, however, were temporarily suspended by China in the wake of the accidental bombing by NATO aircraft of China's embassy in Belgrade. The negotiations were resumed and were successfully concluded with the signing of a voluminous and comprehensive bilateral agreement on November 15, 1999.

China's accession has also become an issue of direct interest to Congress through the introduction of several measures requiring statutory approval of the U.S. support of such accession.

When China accedes to the WTO, the continuation of the past U.S. policy (which conditioned China's MFN treatment by the United States on compliance with the requirements of Title IV) or, more drastically, an imposition of additional restrictions on, or withdrawal of, MFN status from China would constitute a violation of the U.S. obligations under the GATT 1994 Article I, calling for "general most-favored-nation treatment" of all GATT signatories/WTO members. In such a case, China would--after its accession--have cause to submit the issue for resolution to the WTO Dispute Settlement Body.

One way for the United States to avoid such violation would be by taking recourse to WTO Article XIII. This article provides for nonapplication of all WTO multilateral agreements between any current and the newly acceding member if, before the accession agreement of the new member is approved by the WTO Ministerial Council, either country does not consent to such application. ⁽⁸⁾ If the United States and China then wished to apply reciprocally any other provisions of the WTO package of agreements (except the permanent MFN treatment), they could technically do so by amending the existing bilateral agreement or renegotiating it by including provisions for such application.

Such course of action, however, does not appear likely in practice under present circumstances, particularly in view of the fact that a comprehensive agreement, the benefits of which weigh heavily to the benefit of the United States, has already been reached between the United States and China as part of China's accession to the WTO. Recourse to WTO Article XIII would also put this agreement on hold until the United States were able to apply to China the WTO agreement in its entirety, essentially by extending to it unconditional and permanent MFN status, a quid pro quo on which China would undoubtedly insist. ⁽⁹⁾

Granting Permanent MFN Status to China ⁽¹⁰⁾

China's rapid progress, in recent months, in its quest for accession to the WTO has shifted the focus of the China MFN debate from the issue of annual renewals of China's status under a Jackson-Vanik waiver to one of granting China permanent unconditional MFN/NTR status. In the likely event that China becomes a WTO member, such membership will require both countries to apply to each other permanent most-favored-nation treatment. Denial of such treatment on the part of the United States by continuing the practice of its annual renewals would make impossible the reciprocal application of the WTO Agreement as well as of the comprehensive U.S.-China bilateral agreement, which was signed on November 15, 1999, as part of the process of China's accession to the WTO.

Draft legislation authorizing the President to terminate the application of Title IV of the Trade Act of 1974 (including, principally, the Jackson-Vanik amendment) and by proclamation extend permanent nondiscriminatory treatment to China was transmitted by the White House to Congress in a Presidential message ⁽¹¹⁾ on March 8, 2000. It was introduced on March 23 jointly by Senators Roth and Moynihan as S. 2277 and referred to the Committee on Finance, and on May 15 by Representative Archer (by request; H.R. 4444) and referred to the Committee on Ways and Means. In addition to the language of comparable legislation enacted earlier to grant permanent nondiscriminatory status to several other countries in similar situations, the two bills required the President to transmit to Congress, before making the determination terminating the application of Title IV to China, a report certifying "that the terms and conditions for China's accession to the WTO are at least equivalent to those agreed" in the U.S.-China bilateral agreement. The bills also set as the effective date of the legislation a date "no earlier than the effective date of China's accession to the WTO," thereby equating the extension of permanent MFN status to China under domestic law with the United States' identical international obligation under the WTO.

H.R. 4444 was amended and reported favorably by the House Ways and Means Committee with the addition of provisions detailing criteria and procedures for product-specific remedial action--to remain in force for 12 years--against disruption of the U.S. market by surges in imports from China. Anti-surge provisions would apply regardless of whether such surges are autonomous or caused by diversion of Chinese exports from third countries to the United States because of import-safeguard action by those countries against disruptive surges in their imports from China. ⁽¹²⁾ These provisions, a bipartisan proposal by Representatives Levin and Bereuter and supported by the Administration, address the concern regarding possible injurious consequences of China's permanent NTR status. They are the U.S. domestic enactment of the special anti-surge mechanism negotiated as part of the U.S.-China bilateral agreement, but made part of China's WTO accession protocol and applicable on an MFN basis to any WTO member country's imports from China.

H.R. 4444 was further amended by the Rules Committee ⁽¹³⁾ with the addition of provisions establishing a Congressional-Executive Commission to monitor and report on China's human rights and compliance with WTO commitments, and a task force to monitor and enforce China's compliance with the U.S. anti-slave-labor statute, establishing programs to develop China's commercial and labor law, and expressing the sense of Congress that China's and Taiwan's accession to the WTO be approved at the same time. The Rules Committee version was passed by the House on May 24, 2000, in a roll-call vote of 237 to 197.

S. 2277 was reported favorably without amendment on May 25, 2000, ⁽¹⁴⁾ but not further considered. Instead, the Senate, on September 7, 2000, began considering H.R. 4444. Due to a large number of amendments--none of which was agreed to-- the debate on the measure was protracted and the vote on it was delayed to September 19. The measure was passed by a vote of 83 to 15. The measure was signed by the President on October 10, 2000 (P.L. 106-286).

Even though legislation approving China's permanent normal trade relations (PNTR) status has been enacted, PNTR treatment will--in accordance with the legislation-- not be extended to China until China's WTO accession protocol, now in the final stages of negotiations, is completed and China's accession approved by the WTO, foreseeably before the end of 2000 or in early 2001.

The issue of U.S.-China trade relations, focusing on the extension of permanent NTR treatment in the context of China's accession to the WTO as well as of some other aspects, has been explored in hearings by various congressional committees: Senate Banking, Housing, and Urban Affairs Committee on May 9, 2000; Senate Commerce Committee on April 11, 2000; Senate Finance Committee on April 13, 1999, February 23, March 23, April 6, and July 18 and 19, 2000; Senate Foreign Relations Subcommittee on International Economic Policy on April 6, 2000; full Senate Foreign Relations Committee on April 11, 2000; House Agriculture Committee on May 16, 2000; House Banking and Financial Services Committee on May 11, 2000; House International Relations Committee on May 10, 2000; House Small Business Subcommittee on Tax, Finance, and Exports on May 17, 2000; and House Ways and Mean Committee on March 30 and May 3, 2000.

Other Developments During the 106^th Congress

In addition to the customary annual extension of China's Jackson-Vanik waiver (see p. 15-16), several legislative measures have been introduced in the 106^th Congress addressing China's MFN status in the context of its accession to the World Trade Organization.

China's MFN status would be directly affected by the "snap-back" provision of H.R. 577 (China Market Access and Export Opportunities Act of 1999). Introduced by Representative Bereuter on February 4, 1999, and referred to the Committee on Ways and Means, the measure requires the President to determine, after consulting with appropriate committees, and report to Congress by January 1, 2001, whether China is (1) according adequate trade benefits to the United States and (2) taking adequate steps or making significant progress toward becoming a WTO member. If either determination is negative, he is to increase by proclamation, within 180 days, duty rates on one or more imports from China to not more than the pre-Uruguay Round HTSUS column 1 (i.e., concessional MFN) levels in effect on December 31, 1994. Upon notification to Congress, he also may subsequently modify a rate within this ceiling, but not terminate it. The "snap-back," however, can be terminated when China becomes a WTO member, or when the President proclaims that China is according adequate trade benefits to the United States and taking adequate steps or making significant progress toward becoming a WTO member, whichever is earlier. Upon admission to the WTO, China would no longer be subject to provisions of Title IV of the Trade Act of 1974 and would regain permanent MFN status.

In addition, four measures, only indirectly affecting China's MFN status, would require congressional approval by joint resolution of U.S. support of China's admission to the WTO. As mentioned earlier, lack of such support could not block China's admission to the WTO.

H.R. 884 and S. 743 prohibit U.S. support of China's admission to the WTO without such approval, enacted under a modified fast-track procedure; they require the President to notify Congress if China becomes a WTO member without U.S. support, and to submit to the WTO a written notice of the United States' withdrawal from the WTO, effective 6 months after the notification.

H.R. 884 was introduced by Representative Gephardt on March 1, 1999, and referred to Committee on Ways and Means and, for a period to be determined by the Speaker, to Committee on Rules, for consideration of provisions falling within the jurisdiction of either committee. S. 743 was introduced by Senator Hollings on March 25, 1999, and referred to Committee on Finance.

A narrower provision, Amendment No. 89 to S. 544, which omits the requirement of presidential notification to Congress and withdrawal of the United States from the WTO, was introduced from the floor by Senator Hutchinson on March 18, 1999, but on the same date laid on the table by a yea-nay vote of 69 to 30, with one abstention.

A somewhat similar measure, S. 742, introduced by Senator Grassed on March 24, 1999, and referred to Committee on Finance, requires the U.S. Trade Representative to consult with the House Committee on Ways and Means and the Senate Committee on Finance at least 60 days before any vote is taken by the WTO Ministerial Conference or General Council on the admission of a new member; and prohibits the United States to support China's admission to the WTO unless Congress by enacting a law allows such support.

Another variant of legislation tying permanent restoration of China's NTR treatment to its WTO performance is S. 2548 (Securing Heightened Opportunities for Workers, Manufacturers, and Agriculture Exporters Act - SHOW-ME Act), which would make the extension of nondiscriminatory trade treatment to China contingent on the prior conclusion of a bilateral agreement regarding the enforcement of China's WTO commitments. It was introduced on May 11, 2000, by Senator Ashcroft and referred to the Committee on Finance.

Following the President's recommendation of June 3, 1999, to renew China's Jackson-Vanik waiver (and MFN status) for a year (Presidential Determination 99-28 ⁽¹⁵⁾), joint resolutions to disapprove the renewal were introduced in both houses on June 7, 1999: H.J.Res. 57 by Representative Rohrabacher (referred to Ways and Means Committee), and S.J.Res. 27 by Senator Bob Smith (referred to Finance Committee).

Motion to discharge the Senate Finance Committee from further consideration of S.J.Res. 27 was rejected (12 - 87) on July 20, 1999. H.J.Res. 57 was reported adversely on July 26, 1999 (H.Rept. 106-262) and defeated on July 27, 1999 (170 - 260).

Related to this action was a hearing on U.S. trade relations with China and China's admission to the WTO, held on June 8, 1999, by the Trade Subcommittee of the House Ways and Means Committee.

On June 2, 2000, the President recommended a one-year extension of the Jackson-Vanik waiver (and MFN status) for China (Pres. Determination 2000-23). This action was necessary to continue in force China's MFN status (albeit on a temporary and conditional basis) in the event that legislation extending permanent status to China (H.R. 4444; see p. 12) was delayed beyond the expiration date of the current temporary extension or not enacted. Legislation to disapprove the President's waiver extension (H.J.Res. 103; Representative Rohrabacher) was introduced on June 23, 2000. On July 18, 2000, the House Ways and Means Committee reported H..J. Res. 103 adversely, ⁽¹⁶⁾ and the measure was defeated on the same day by a vote of 147 to 281, allowing the Jackson-Vanik waiver and China's conditional NTR tariff status to continue in force through July 2, 2001.

Appendix. MFN and Full-Duty Treatment of U.S. Imports from China, 1999: Imports for Consumption
(value in thousands of U.S. $; duties at CY2000 rates)

Sources: U.S. Department of Commerce. Tradenet.; 1990 data

U.S. International Trade Commission. Harmonized Tariff Schedule of the United States (2000).

^a In most cases, a shortened version of the description given in the Harmonized Tariff Schedule.

^b Duty rates applicable in the year 2000 in percent ad valorem.

^c Percentage difference between the landed cost (c.i.f. value plus duty) of items under MFN and full duty rates.

^d Duty rate shown is ad valorem equivalent of specific rate of $1.32 per metric ton, including weight of container.

^e Ad valorem rate of 33 percent.

^f Duty rates shown are calculated average trade-weighted rates of the listed items.

Footnotes

1. ^(back)Because the term "most favored nation" status or treatment, if taken literally, is misleading, it has been replaced in 1998, by law, in existing and future U.S. statutes with that of "normal trade relations (NTR)" or another appropriate term (which also are to be used in any future enactments). The term is still used in this report for reasons of historical continuity and because of its continued universal use in international trade relations and agreements (e.g., the WTO Agreement) as well as in existing U.S. bilateral trade compacts, including the July 1979 and the November 1999 trade agreements with China.

2. ^(back)Although legislation to grant permanent NTR treatment to China has been approved by both houses of Congress and is expected to be signed by the President, it cannot enter into force in accordance with its own terms before China's accession to the World Trade Organization, possibly by the end of 2000. Until then, the provisions of Title IV technically continue to apply to China and its MFN status.

3. ^(back)For a detailed description of the legislative procedure for enacting a joint resolution of disapproval, see CRS Report 96-490, Legislative Procedure for Disapproving the Renewal of China's Most-Favored-Nation Status.

4. ^(back)Additional information on this subject is contained in CRS Issue Brief IB93107, Most-Favored-Nation (Normal-Trade-Relations) Policy of the United States.

5. ^(back)Once China's NTR status is made permanent under the just enacted legislation, this would be the only way to restrict, suspend, or revoke it.

6. ^(back)In view of the enactment of permanent NTR treatment for China and consequent nonapplicability of Title IV to China, this and some subsequent section of the report are presented for their historical interest.

7. ^(back)For detailed specific aspects of this issue, see CRS Report 97-348, China's Application to the World Trade Organization: Implications for U.S.-Chinese Relations; CRS Report RL30175, China's Accession to the World Trade Organization: Legal Issues; and CRS memorandum Questions Regarding Accession of the People's Republic of China to the World Trade Organization, by Jeanne J. Grimmett, dated March 23, 2000 (released with client consent, and available from the American Law Division, CRS).

8. ^(back)Such action was taken by the United States at the time when, in similar circumstances, Hungary, Romania, Mongolia, and Kyrgyzstan were joining the GATT or WTO and, recently, in anticipation of Georgia's becoming WTO members. The invocation of Article XIII with respect to the first four countries was rescinded upon their being extended permanent MFN status by the United States. The invocation of Article XIII by the United States would result in reciprocal nonapplication of the WTO agreements (including the substantial benefits of the U.S.-China 1999 bilateral agreement--a point stressed in the recent congressional debate on approving China's permanent MFN status). The lack of China's permanent U.S. MFN status, however, would not prevent, in the context of WTO rules, the United States from voting in favor of China's admission to the WTO, nor, on the other hand, would lack of U.S. support by itself prevent China's admission to the WTO.

9. ^(back)As long as the 1979 trade agreement with China remained in force, however, the United States could benefit from a limited number of those types of concessions that have been granted by China to other countries in bilateral agreements or included in the accession protocol as part of China's accession to the WTO for which the 1979 agreement specifically requires reciprocal MFN application. While China's tariff concessions to other WTO members would apply to China's imports from the United States on the MFN basis, the United States would, however, be precluded from access to two key elements of the WTO agreement: the WTO dispute settlement mechanism, and the agreement on services.

10. ^(back)This action does not apply to China's Special Administrative Regions of Hong Kong and Macau, to which MFN treatment by the United States is due individually since they already were members of the WTO as separate customs territories before their respective reversions to China.

11. ^(back)U.S. President (Clinton, 1993-). Permanent normal trade relations for China; message from the President of the United States... Washington, U.S. Govt. Print. Off., 2000 3 p. (106^th Congress, 2d session. House Document 106-207). Message dated March 8, 2000.

12. ^(back)U.S. Congress. House. Committee on Ways and Means. Permanent normal trade relations with the People's Republic of China. Report together with additional views (to accompany H.R. 4444). Washington, U.S. Govt. Print. Off., May 22, 2000. 37 p. (103rd Congress. 2d Session. H.Rept. 106-632).

13. ^(back)U.S. Congress. House. Committee on Rules. Providing for the further consideration of H.R. 4444, a bill to authorize the extension of nondiscriminatory treatment (normal trade relations treatment) to the People's Republic of China. Report (to accompany H.Res. 510). Washington, U.S. Govt. Print. Off., May 23, 2000. 29 p. (106^th Congress, 2d Session. H.Rept. 106-636).

14. ^(back)U.S. Congress. Senate. Committee on Finance. Termination of the application of Title IV of the Trade Act of 1974 with respect to the People's Republic of China. Report (to accompany S. 2277). Washington, U.S. Govt. Print. Off., May 25, 2000. 10 p. (106^th Congress, 2d Session. S.Rept. 106-305).

15. ^(back)U.S. President (Clinton, 1993-). A report to the Congress concerning the extension of waiver authority or the People's Republic of China. Communication from the President of the United States... Washington, U.S. Govt. Print. Off., 1999. 3 p. (106^th Congress, 1^st session. House Document 106-77). Communication dated June 3, 1999.

16. ^(back)U.S. Congress. House. Committee on Ways and Means. Disapproval of normal trade relations for the People's Republic of China. Adverse report (to accompany H.J.Res. 103). Washington, U.S. Govt. Print. Off., July 18, 2000. 11 p. (106^th Congress, 2d Session. H.Rept. 106-755).