December 12, 2002
The Honorable Robert Zoellick
Dear Ambassador Zoellick:
The Administration predicted growth in U.S. agricultural exports to China of $2 billion annually by 2005 as a result of the U.S.-China bilateral agreement on China’s accession to the WTO and the granting of normal trading status to the People’s Republic of China. This prediction was undoubtedly premised on the opening of China’s markets to U.S. agricultural exports in conformity with international trading rules. However, China is not living up to its commitments with respect to trade in cotton fiber. Despite repeated entreaties by the U.S. cotton industry, the Department of Agriculture and your agency, China has steadfastly refused to provide true market access for cotton fiber.
The National Cotton Council initially raised concerns with China’s implementation of its tariff rate quota (TRQ) commitments last November. Our fears were realized when China announced how it would regulate cotton imports under its TRQ in February of this year. Despite numerous discussions with Chinese officials by the U.S. cotton industry and by senior officials of the U.S. Department of Agriculture and your office, including Ambassador Johnson, China has announced that it will continue to impose these unfair restrictions on imported cotton fiber during 2003. In direct meetings with U.S. government officials, Chinese officials have stated they will not alter their implementation of cotton tariff rate quotas.
As the 2002 Report to Congress on China’s WTO Compliance (the "Compliance Report") issued by the Office of the U.S. Trade Representative stated, the regulations "did not provide for the required transparency, imposed burdensome licensing procedures, and appeared to contravene agreed rules in China’s accession agreement by allowing TRQ allocations to be reserved for the processing and re-export trade."
The most serious shortcoming in China’s approach is its clear intent to deny national treatment for imported cotton fiber. China’s regulations unfairly restrict cotton fiber imports by requiring that textile products made from the imported fiber be re-exported. If the importing textile mills do not re-export the resulting textile products, they will be penalized by the loss of subsequent quota and by being retroactively charged the over-quota duty rate on the imported products. By implementing the TRQ in this fashion, China has used the WTO Accession Agreement to further increase its cotton textile exports to the United States while shielding its own industry from competition. The numbers bear out this result. Through the end of July 2002, cotton textile imports from China were double the amount imported during all of 2001.
As the system now stands, China, as the largest potential market for cotton fiber exports, continues to protect its domestic fiber market from competition with imports, despite its obligation not to do so. By imposing requirements that importers of cotton fiber must export an equivalent quantity of textile products, China is not providing national treatment for imported cotton fiber and is implementing the cotton fiber tariff rate quota in a manner that is inconsistent with the U.S.-China bilateral agreement and with China’s obligations under the WTO.
The 2002 Compliance Report reflects these same concerns:
…, SDPC reserved a significant portion of the TRQ’s for the processing and re-export trade, despite China’s market access and national treatment commitments. This practice kept down the market share held by imports in China’s domestic market and, at the same time, created more competition for WTO members’ processed goods in other export markets. In the case of cotton, more than 60 percent of the TRQs apparently were reserved for Chinese companies that process cotton for re-export. In addition, SDPC allocated a portion of the TRQs for some commodities in smaller than commercially viable quantities, thereby undermining China’s market access commitments. (Compliance Report, page 32)
Article III.4 of the General Agreement on Tariffs and Trade sets out the standard for national treatment of products as follows:
"The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use…."
Chapter 2 of the Report of the Working Party on the Accession of China contains the following provisions:
"22. The representative of China confirmed that the full respect of all laws, regulations and administrative requirements with the principle of non-discrimination between domestically produced and imported products would be ensured and enforced by the date of China’s accession unless otherwise provided in the Draft Protocol or Report. The representative of China declared that, by accession, China would repeal and cease to apply all such existing laws, regulations and other measures whose effect was inconsistent with WTO rules on national treatment. This commitment was made in relation to final or interim laws, administrative measures, rules and notices, or any other form of stipulation or guideline."
Clearly, China’s implementation of its tariff rate quota for cotton fiber is not consistent with these requirements and commitments.
Your office and the Department of Agriculture have been supportive of the U.S. cotton industry’s efforts to encourage China to change its policies. We appreciate the fact that representatives of the U.S. government have held formal consultations with China on this issue.
However, the 2002 quota year is almost over. China’s announcements for the 2003 quota year indicate no change in its policy. The U.S. cotton industry is losing valuable market access opportunities in China – opportunities that were promised by China and the U.S. government. Meanwhile, textile imports from China increase at a rapid rate. While China benefits from increased market access to the United States, our farmers are being frustrated by unreasonable trade barriers.
It is imperative that the U.S. government take additional steps to ensure that China complies with its trade obligations. We request that the United States formally request consultations with China under Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) concerning its implementation of the tariff rate quota for cotton fiber. Should consultations fail to result in a change in China’s policy, we urge the U.S. government to seek a dispute settlement panel under Article 6 of the DSU.
In addition, we urge you to consider action under section 301 of the Trade Act of 1974 based upon China’s failure to comply with the U.S. – China bilateral agreement China’s WTO accession.
We would like to meet with you at your earliest convenience concerning this request. Thank you for your consideration of this issue.
Kenneth Hood, Chairman
cc: Secretary Ann Veneman
Secretary Don Evans
Under Secretary Alan P. Larson
Ambassador Allen Johnson
Mr. John Cloud