VZCZCXRO0634
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3631/01 1510058
ZNR UUUUU ZZH
P 310058Z MAY 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 8425
RUCPDOC/USDOC WASHDC
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 BEIJING 003631 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/CM 
USDOC FOR  ITA/IA/OP MICHAEL ROLLIN 
USDOC FOR 4420/ITA/MAC/CEA/MCQUEEN 
TREASURY FOR OASIA DOHNER 
USTR FOR STRATFORD/WINTER/ALTBACH 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV CH
SUBJECT: STRUCTURAL ISSUES WORKING GROUP AND TRADE REMEDIES WORKING 
GROUP DRAW COMPLAINTS ABOUT TRADE REMEDIES AND NON-MARKET ECONOMY 
STATUS 
 
 
INTRODUCTION/SUMMARY 
-------------------- 
 
¶1. (SBU) The Structural Issues Working Group (SIWG) convened on 
April 17, 2007, in Beijing and the Trade Remedies Working Group 
(TRWG) met on April 18, 2007. The SIWG was established in the April 
2004 meeting of the U.S.-China Joint Commission on Commerce and 
Trade (JCCT) to provide a forum for the U.S. and Chinese governments 
to explore and discuss China's economy and its ongoing economic 
reform program, as well as issues concerning China's status as a 
non-market economy under the U.S. antidumping law.  The TRWG, also 
established during the April 2004 JCCT meeting, provides a forum for 
both sides to raise issues of concern related to the others' trade 
remedy practices.  Both working groups are co-chaired on the U.S. 
side by the Assistant Secretary for Import Administration at USDOC 
and the Assistant U.S. Trade Representative for China Affairs at 
USTR.  The Director-General of the Bureau of Fair Trade for Import 
and Export at the Ministry of Commerce (MofCom) chairs the Chinese 
side for both working groups.  (The last formal meeting of the SIWG 
and TRWG took place in May 2005, despite repeated USG efforts to 
schedule meetings since then.) 
 
¶2. (SBU) In the April meetings, MofCom officials expressed 
dissatisfaction with recent U.S. trade enforcement actions, 
including the preliminary ruling in the countervailing duty (CVD) 
investigation of coated free sheet paper and the WTO challenges on 
IPR issues.  They pressed for China to be granted market economy 
status, asserting that USDOC's previous determinations do not take 
into account the most recent reforms.  Despite USDOC's extensive 
explanation of its analysis of China's non-market economy status, 
MofCom took the view that the U.S. has given China's state-owned 
enterprises insufficient recognition for independence from 
government directives and has not recognized the freer flow of labor 
in China, evidenced by the presence of 100 million migrant workers. 
Additionally discussed in the TRWG were other issues in antidumping 
cases between the two countries.  END INTRODUCTION/SUMMARY 
 
EXCHANGE WITH THE VICE MINISTER 
------------------------------- 
 
¶3. (SBU) MofCom Vice Minister Gao Hucheng made a brief appearance in 
which he underscored the importance of SIWG issues to advancing the 
Strategic Economic Dialogue (SED).  Gao's tone was clear and 
serious, but also relatively relaxed and businesslike.  He hoped 
that the SIWG would boost China's prospects for attaining market 
economy status and resolve bilateral differences over the recent 
U.S. trade enforcement actions, in particular citing USDOC's CVD 
investigation of coated free sheet and USTR's IPR-related WTO 
challenges.  Gao termed the March 30 CVD ruling a bad precedent; 
China is very unsatisfied, especially given that there also is an 
anti-dumping (AD) investigation in progress involving the same 
coated free sheet product.  Although the amount of money involved is 
small, the CVD ruling could have a big impact, said Gao.  Meanwhile, 
the U.S. Congress is sending negative signals on trade matters, 
creating uncertainty.  Gao asserted the need for a better 
environment, with smooth and effective channels to resolve issues. 
Let's not politicize these matters, he said. 
 
¶4. (SBU) Assistant Secretary David Spooner echoed Gao's hopes for a 
productive SIWG, explaining that the U.S. was in Beijing to "open 
its books" with regard to its August 30, 2006, decision not to grant 
China market economy status, including a detailed discussion of two 
important factors in the analysis: property rights and resource 
allocation.  In addition, A/S Spooner explained that the U.S. side 
wanted to listen to the Chinese side's assessment of the August 
decision, especially concerning any incorrect information that may 
have been used in the evaluation of China's market.  AUSTR Tim 
Stratford commented that China's transformation to a market economy 
is not fully complete and encouraged China to continue economic 
reform as such reform is good for not only U.S.-China trade 
relations but also overall Chinese economic and trade relations with 
the world. 
 
REVIEW OF CHINA'S ECONOMIC REFORMS 
---------------------------------- 
 
¶5. (SBU) Mofcom Bureau of Fair Trade for Import and Export Director 
General Li Ling reviewed China's economic liberalization since 1979, 
emphasizing the country's progress with regard to state-owned 
enterprise (SOE) reform.  Many SOEs have been reorganized as joint 
stock corporations and a significant number of those have listed on 
stock markets domestically or abroad.  Recent banking sector reform 
 
BEIJING 00003631  002 OF 004 
 
 
is particularly noteworthy, with the Bank of China and the 
Industrial and Commercial Bank of China having launched large and 
successful initial public offerings.  The Agricultural Bank of China 
will organize as a joint stock corporation this year.  Li also noted 
that China's banks increasingly have independently minded directors, 
not beholden to the government.  She cited as an example the Bank of 
China's recent refusal to handle the return of questionable funds to 
North Korea as part of the Six-Party Talks. 
 
¶6. (SBU) Li noted other areas of progress:  a budgetary division 
between the government and the SOEs; a reduction of the government's 
role in enterprise decisions, except, notably, for land use and 
environment-related guidance; and an optimized foreign investment 
structure in sectors like banking and telecommunications.  The 
Chinese Government has also backed the increased participation of 
labor in collective bargaining, particularly in industries with high 
concentrations of small- and medium-sized enterprises. 
 
¶7. (SBU) Li listed a number of accomplishments in economic reform 
over the past year: the property law; the enterprise income tax law; 
the bankruptcy law; the partnership enterprise law; foreign bank 
management regulations; and other banking and supervisory 
regulations.  Taken together, China is improving its market-based 
economic system and progress will continue, asserted DG Li. 
 
DISSATISFACTION ON NON-MARKET ECONOMY STATUS 
-------------------------------------------- 
 
¶8. (SBU) Following an introduction by A/S Spooner, Import 
Administration Office of Policy Director Ronald Lorentzen presented 
the findings of USDOC's review of China's non-market economy status 
in the recent lined-paper investigation.  Lorentzen explained the 
review procedures, USDOC's reliance on expert, third-party data and 
information sources, and the fact-based, comprehensive nature of 
USDOC's analysis.  Following a review of the six statutory factors, 
Lorentzen highlighted both the positive results of China's reform 
efforts to date -- including wage formation, foreign direct 
investment and the growth and development of the private sector -- 
and areas where additional reforms are needed, including property 
rights, resource allocation and the banking sector.  Lorentzen 
concluded by saying that while USDOC recognized in its analysis the 
many positive and impressive economic reforms that China has 
implemented to date, USDOC also found that the government retains 
considerable levers of control over the economy that precluded 
market economy status for China at the time. 
 
¶9. (SBU) In response to Lorentzen's presentation, DG Li complained 
that the U.S.: 
 
o has large room for maneuver in making NME determinations; 
o provides inconsistent treatment across countries, making the 
process ambiguous; 
o has excessive discretion; 
o has a process that is not predictable or transparent; and 
o has drawn on information inconsistent with China's recent economic 
situation, choosing instead to focus on conditions that existed in 
previous decades. 
 
¶10. (SBU) To illustrate her critiques, Li observed that China has in 
recent years gone to great lengths to free up the inter-regional 
movement of labor.  Government statistics show that over 100 million 
rural migrants have found work in urban areas.  Clearly, she said, 
these workers have choices and mobility.  A/S Spooner assured DG Li 
that the United States strives to use well-respected and current 
data sources in conducting all non-market economy status reviews. He 
stressed that USDOC is as rigorous in its analysis and as consistent 
across cases as possible and takes into consideration all data and 
information and comments on the record, including any from the 
non-market economy country government.  Spooner acknowledged the 
qualitative nature of the six factors and the flexible standard they 
provide, but emphasized the difficulty inherent in an analysis of 
change that is - building on a point Director General Li made 
earlier - continuous and unique to the country, time period and 
historical context in which it occurs.  Cross-country comparisons 
are therefore difficult and possibly misleading.  China's economy 
may compare well in some ways with countries that USDOC has 
graduated to market economy status, but China's economy is also very 
different in some ways from those countries.  Spooner welcomed the 
feedback from the Chinese Government and again emphasized our 
interest in ensuring that we have accurate data. 
 
PROPERTY RIGHTS AND RESOURCE ALLOCATION 
 
BEIJING 00003631  003 OF 004 
 
 
--------------------------------------- 
 
¶11. (SBU) USDOC Import Administration Senior Economist Albert Hsu 
discussed China's property law, commenting that entrepreneurs should 
be able to make independent, unrestricted business and investment 
decisions.  He acknowledged progress, but indicated that more is 
needed, including that land use rights be portable.  In response to 
comments from DG Li, Hsu said that designation, as a market economy 
does not require private land ownership; a system of well-defined, 
effectively enforced land-use rights will do.  However, the August 
2006 analysis concluded that China's system of land-use rights, 
particularly in rural areas, isn't quite there yet.  A separate 
presentation by the Chinese side, using the auto industry as an 
example of resource allocation, triggered a discussion on markets 
and their self-correcting nature when they operate on a market 
basis.  AUSTR Stratford pointed out that in a market economy, firms 
make investment decisions based on profitable returns, and when an 
industry is over-invested, investors move to under-invested 
industries, and in this way the market is self-correcting.  Hsu 
pointed out that China's investment environment is not yet 
self-correcting, forcing China to use administrative measures to 
guide investment. 
 
AUTOMOBILE SECTOR 
----------------- 
 
¶12. (SBU) In discussing the auto industry, AUSTR Stratford queried 
about consolidation.  MofCom Bureau of Fair Trade Director for 
Export Division I, Liu Danyang, noted recent passage of the 
bankruptcy law.  China's auto sector got off to a late start and has 
a short history, he said.  The sector has become profitable over the 
past 10 years, but now there are many players and much competition 
-- and local governments often see autos as a development pillar, 
leading to overcapacity and the driving down of profitability. 
 
MARKET ORIENTED INDUSTRIES 
-------------------------- 
 
¶13. (SBU) DG Li asserted that USDOC's market-oriented industry (MOI) 
test was too difficult and asked questions about how applying CVD to 
a non-market economy would affect the antidumping side of the 
investigation.  A/S Spooner listed several possible topics in that 
area for which USDOC would like to receive comments. 
 
¶14. (SBU) DG Li said MOI analysis should be based on comparisons 
with other developing countries.  She observed that no single 
industry in any NME has passed the MOI test, so this does not look 
feasible.  Li asserted that just because an entity is an SOE, this 
does not mean its activities are not market driven.  SOE business 
activities are not directed by the government, and USDOC has 
previously acknowledged this, she said. 
 
 
TRADE REMEDIES WORKING GROUP 
---------------------------- 
 
¶15. (SBU) Both the Chinese and the U.S. sides raised concerns 
arising from antidumping cases between the two countries.  DG Li 
again raised the CVD investigation on coated free sheet paper.  The 
U.S. side took note of MofCom's comments and Lorentzen again 
encouraged MofCom to submit its comments on the administrative 
record of the case. 
 
¶16. (SBU) DG Li also argued that separate rates and surrogate 
country selection were discriminatory.  Lorentzen emphasized that 
the separate rates practice was designed to work to benefit Chinese 
producers and was developed in such a way as to balance fairness 
with administrative ease.  He added that in this regard, USDOC had 
issued a Federal Register notice seeking comments on ways to improve 
separate rates practice and surrogate country selection, and 
encouraged MofCom to submit comments. 
 
U.S. CONCERNS 
------------- 
 
¶17. (SBU) Michael Rollin, Director of IA's Trade Remedy Compliance 
Staff, addressed concerns regarding transparency in China's 
antidumping practice and the issue of a U.S. company remaining 
subject to a Chinese antidumping measure after receiving a de 
minimis margin.  Rollin also sought further information on MofCom's 
expiry (sunset) review procedures and its interactions with Chinese 
Customs in antidumping matters, providing a list of questions on 
 
BEIJING 00003631  004 OF 004 
 
 
relevant Chinese Customs procedures.  DG Li assured Rollin that they 
would provide answers to the questions and additional information on 
expiry reviews through the IA office in Beijing. 
 
NEXT STEPS 
---------- 
 
¶18. (SBU)  DG Li proposed that the next formal A/S-DG level working 
group meetings take place next year, with a sub-A/S planning meeting 
to precede it in the second half of 2007.  While the USG is prepared 
to work closely with China on these issues, China's suggested timing 
of meetings and the continued lack of participation from Chinese 
expert agencies, such as the NDRC, limits our ability to work with 
China on a substantive level to build towards market economy status. 
 The U.S. side has regularly requested participation by such experts 
in SIWG meetings, both at the formal and technical level, but MofCom 
has not included them on the Chinese delegations, generally citing 
as a reason its lack of jurisdiction over those agencies. 
 
¶19.  (SBU) Designated liaisons at USDOC and USTR will work with 
counterparts in MofCom to follow-up on open items from the April 
meetings and to organize the next SIWG/TRWG meetings. 
 
PICCUTA