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Report to Congressional Committees:



September 2002:



WORLD TRADE ORGANIZATION:



Selected U.S. Company Views about China’s Membership:



GAO-02-1056:



Highlights:



WORLD TRADE ORGANIZATION Selected U.S. Company Views about China’s 

Membership:



Highlights of GAO-02-1056, a report to the Chairman and the Ranking 

Minority Member, Committee on Finance, U.S. Senate, and to the Chairman 

and the Ranking Minority Member, Committee on Ways and Means, House of 

Representatives:



Why GAO Did This Study:



China’s entry into the World Trade Organization (WTO) on December 11, 

2001, brought the world’s seventh largest economy under global trade 

liberalizing rules. If implemented, China’s commitments will open 

China’s economy and reform its trading activities, thereby expanding 

U.S. companies’ opportunities for investing in China and for exporting 

goods, agricultural products, and services to China. Understanding U.S. 

companies’ expectations is fundamental for policymakers to judge the 

degree to which the benefits of China’s WTO membership are being 

realized.



GAO analyzed U.S. companies’ views about (1) the importance of, (2) the 

anticipated effects of, and (3) prospects for China implementing its 

WTO commitments. GAO surveyed a random sample of 551 U.S. companies and 

interviewed 48 judgmentally selected companies in four cities in China. 

Survey results reflect responses from 191 companies-a response rate of 

38 percent-and may not reflect the views of all U.S. companies with 

activities in China.



What GAO Found:



U.S. companies that responded to the GAO survey reported that most of 

China’s WTO commitments are important to them. These companies, which 

already have a presence in China, identified rule of law-related 

reforms as more important than other reforms to increase market access, 

to liberalize foreign investment measures, and to make fundamental 

changes to continue China’s transition to a market economy. 

Specifically, WTO commitments in the areas of intellectual property 

rights; consistent application of laws, regulations, and practices; and 

transparency of laws, regulations, and practices emerged as the most 

important areas in which China made commitments.



Most companies responding to GAO’s survey expected that China’s WTO 

commitments would have a positive impact on their business operations, 

that the impact has already begun or would begin within 2 years and 

that it would lead to an increase in their volume of exports to China, 

market share in China, and distribution of products there. However, 

some company representatives whom GAO interviewed in China believed 

that China’s implementation would be incremental.



Survey respondents expected that most of the WTO-related commitment 

areas listed in GAO’s survey would be difficult for Chinese officials 

to implement. Companies expected the important rule of law-related 

commitment areas to be the most difficult commitments to carry out and 

had mixed expectations about implementation for different government 

levels and geographic areas across China. Besides rule of law-related 

reforms, company representatives described how they expect that China’s 

need to protect its domestic interests and China’s culture with regards 

to business relationships might create impediments to implementation.



Figure: Almost 80 Percent of U.S. Companies Responding to GAO’s Survey 

Expected China’s WTO Commitments to Have a Very Positive or Positive 
Impact 

on their Business:



[See PDF for image]



[End of figure]



The full report, including GAO’s objectives, scope, methodology, and 

analysis, is available at www.gao.gov/cgi-bin/getrpt?GAO-02-1056. For 

additional information about the report, contact Susan Westin at (202) 

512-4128.



Contents:



Letter:



Results in Brief:



Background:



WTO-related Reforms Are Important to U.S. Companies:



Companies Expect Positive Results from China’s WTO 

Accession:



Companies Expect Impediments to Implementation of China’s WTO Reforms:



Concluding Observations:



Appendixes:



Appendix I: Objectives, Scope and Methodology:



Survey Development:



Sample Development:



Survey Administration:



U.S. Companies Responding and Not Responding to the Questionnaire:



Structured Interviews:



Additional Limitations:



Appendix II: GAO Survey of U.S. Companies on China-WTO Issues:



Appendix III: GAO Strutured Interviews of U.S. Companies about China-
WTO

Issues:



Appendix IV: Profile of Survey and Structured Interview Respondents:



Respondents Came from a Wide Range of Industries, Locations, and Types 

of Operations:



Respondents Conduct Business through Variety of Business Relationships:



Size and Experience of Respondents Vary:



Appendix V: Profile of U.S. Investment and Trade with China:



U.S. Investment in China:



U.S. Trade with China:



Appendix VI: Summary of other Business Surveys of U.S. Companies in 
China:



Effects of China’s WTO Membership:



Challenges of Doing Business in China:



Potential Compliance Problems:



Profitability:



Familiarity with China’s WTO Commitments:



Appendix VII: GAO Contacts and Staff Acknowledgements:



GAO Contacts:



Acknowledgments:



Tables:



Table 1: Importance of 30 WTO-related Commitment Areas to Company 
Survey 

Respondents:



Table 2: U.S. Company Expectations for When Impact of China’s WTO 

Commitments Will Begin:



Table 3: U.S. Company Goals in China That Survey Respondents 
Identified:



Table 4: U.S. Company Expectations for Difficulty in Implementing 

China’s WTO Commitment Areas:



Table 5: Survey Respondents’ Views on Importance of Commitment Areas by 

Difficulty of Implementation:



Table 6: U.S. Company Expectations for China’s Reforms, by Level of 

Chinese Government:



Table 7: Disposition of Random Sample of 1,000 U.S. Company Names:



Table 8: Final Disposition of GAO’s Company Survey Respondents:



Table 9: Survey Respondents’ Business Activities with China:



Table 10: Survey and Structured Interview Respondents’ Types of 
Business 

Relationships in China:



Table 11: Survey Respondents’ Years in China, by Company Size:



Table 12: Recent Surveys of Companies with a Presence in China on WTO-

Related Issues:



Figures:



Figure 1: U.S. Direct Investment in China, 1989-2000:



Figure 2: U.S. Trade with China, 1989-2001:



Figure 3: Expected Impact of China’s WTO Commitments on Survey and 

Structured Interview Respondents’ Business in China:



Figure 4: U.S. Company Expectations for Activities Affected by 

Implementation of China’s WTO Commitments:



Figure 5: Location of Facilities or Other Presence of Survey 
Respondents:



Figure 6: Number and Types of Survey and Structured Interview 

Respondents’ Business Relationships in China:



Figure 7: Length of Time That Survey Respondents Had Been in Business 

Relationship with China:



Figure 8: U.S. Foreign Direct Investment Worldwide, 2000:



Figure 9: U.S. Foreign Direct Investment in China, 2000:



Figure 10: U.S. Exports to China, 2001:



CEO: chief executive officer:



FCS: U.S. and Foreign Commercial Service:



IPR: intellectual property rights:



SOE: state-owned enterprise:



WTO: World Trade Organization:



Letter September 23, 2002:



The Honorable Max Baucus 

Chairman

The Honorable Charles E. Grassley

Ranking Minority Member

Committee on Finance

United States Senate:



The Honorable William M. Thomas

Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means

House of Representatives:



China’s December 2001 entry into (accession to) the World Trade 

Organization (WTO) represents a major step in China’s recent reform 

efforts, formalizing China’s commitment to abide by global trade rules. 

China’s accession agreement included commitments to remove trade 

barriers and open its markets to foreign companies and their exports in 

numerous product sectors and for a wide range of services. The United 

States is China’s second largest source of foreign direct investment, 

while China is the ninth largest destination for U.S. exports.[Footnote 

1] Successful implementation of China’s WTO commitments may eventually 

provide U.S. companies with greater access to China’s market of about 

1.3 billion consumers and result in fundamental changes that can foster 

China’s continued transition to a market economy. Therefore, U.S. 

companies are interested in how China’s implementation of its WTO 

commitments will affect their ability to do business in China.



Related to your request that we undertake a long-term body of work 

regarding China’s membership in the WTO we analyzed U.S. companies’ 

views about (1) the importance of WTO-related commitments to their 

business operations in China, (2) the anticipated effects of China’s 

WTO-related reforms on their businesses, and (3) China’s prospects for 

implementing these reforms.



To perform our work, we surveyed 551 randomly selected U.S. companies 

with a presence in China, and interviewed 48 judgmentally selected 

companies in 4 cities in China, as well as 2 U.S. trade associations 

with a presence in China. Our survey results reflect responses from 191 

companies. Because of the low response rate to our mail survey (38 

percent), our results may not be generalizable to the larger population 

of all U.S. companies doing business with China.[Footnote 2] Hence, our 

analysis is restricted to companies that responded to our survey. 

However, respondents included companies with business activities in all 

of the agriculture, manufacturing, and services categories listed in 

our survey as well as facilities or other types of presence in all of 

the locations in China listed in our survey. For some questions, we 

grouped China’s numerous WTO commitments into 30 areas, which 

encompassed fundamental market, market access, investment measure, and 

rule of law-related reforms. A detailed description of our scope and 

methodology is included in appendix I of this report; responses to the 

survey and structured interviews are included in appendixes II and III, 

respectively, and a profile of respondents is included in appendix IV.



Results in Brief:



U.S. companies with business operations in China that responded to our 

survey believe most World Trade Organization commitment areas are 

important to their companies. Respondents identified many rule of law-

related reforms as more important than other reforms.[Footnote 3] 

Specifically, three quarters of the respondents selected intellectual 

property rights; consistent application of laws, regulations, and 

practices; and transparency of laws, regulations, and practices as the 

most important commitment areas for their companies. Company 

representatives that we interviewed also explained the importance of 

other reforms, including reductions to market access barriers (such as 

tariffs and product quotas) and investment-related measures for their 

future operations in China.



Many companies anticipated that China’s WTO commitments would soon have 

a positive impact on their business operations in China. More than 

three quarters of the companies responding to our survey and structured 

interviews expected this kind of impact. Taking WTO membership into 

account, companies’ top goals for doing business in China included 

establishing a presence for the future, increasing exports to China, 

and benefiting from lower labor costs in China. More than three 

quarters of respondents reported that they expected implementation of 

China’s WTO commitments would, overall, lead to an increase in their 

companies’ activities in China, including their volume of exports to 

China, market share in China, and distribution of products there.



Respondents expected many of China’s WTO-related commitment areas to be 

relatively difficult for Chinese officials to implement, however. 

Overall, Chinese officials were expected to have a high or moderate 

level of difficulty implementing two thirds of the commitment areas 

listed in the survey. U.S. companies expected rule of law-related 

commitment areas regarding consistent application of laws, regulations, 

and practices, and intellectual property rights to be the most 

difficult areas to carry out. Respondents expected implementation to 

vary for government levels and geographic areas across China. For 

example, respondents expected officials in China’s major 

cities[Footnote 4] to have the fewest difficulties and China’s 

autonomous regions[Footnote 5] and local and provincial governments to 

have the most difficulties (with a few exceptions) implementing WTO-

related reforms.In interviews, company representatives also described 

the implementation challenges that they believe China faces in 

furthering rule of law, protecting its domestic interests, and stemming 

from China’s culture and its emphasis on relationships.



Background:



China became the 143RD member of the WTO on December 11, 2001, after 

almost 15 years of negotiations. These negotiations resulted in 

commitments to open and liberalize its economy and offer a more 

predictable environment for trade and foreign investment in accordance 

with WTO rules. The United States and other WTO members have stated 

that China’s membership in the WTO provides increased opportunities for 

foreign companies seeking access to China’s vast market. China is 

already a major destination of U.S. investment overseas, and China and 

the United States are already major trading partners.



China’s WTO Commitments:



The results of China’s negotiations to join the WTO are described and 

documented in China’s final accession agreement, the Protocol on the 

Accession of the People’s Republic of China, which includes the 

accompanying Report of the Working Party on the Accession of China, the 

consolidated market access schedules for goods and services, and other 

annexes. China’s WTO commitments are complex and broad in 

scope.[Footnote 6] They range from the rules for how China’s trade 

regime will be reformed in accordance with WTO principles to specific 

market access commitments for goods and services. A number of 

commitments are to be phased in over 10 years.



Commitments related to reforming China’s trade regime require a 

specific action from China, such as reporting particular information to 

the WTO, while others are more general in nature, such as those that 

affirm China’s adherence to WTO principles. Many commitments seek to 

improve the rule of law. Generally, China agreed to ensure that its 

legal measures would be consistent with its WTO obligations. These rule 

of law-related commitments include broad reforms to publish and 

translate trade-related laws and regulations and apply them uniformly 

at all levels of government and throughout China. China will have to 

adhere to internationally accepted norms to protect intellectual 

property rights and enforce relevant laws and regulations relating to 

patents, trademarks, copyrights, trade secrets, and integrated 

circuits.[Footnote 7] China also made a substantial number of other 

rule of law-related commitments regarding transparency, judicial 

review, and nondiscriminatory treatment of businesses.



The accession agreement also includes market access commitments for 

goods, including commitments that will reduce tariffs on agricultural 

and industrial products from about 14 percent in 2001 to less than 10 

percent in 2010, as well as commitments to reduce or eliminate many 

other trade barriers such as quotas or licensing requirements on some 

of these products. Further, China made commitments to allow greater 

market access in 9 of 12 general service sectors, including sectors 

that are important to U.S. companies such as banking, insurance, and 

telecommunications. However, some limitations, including those that 

require joint ventures with Chinese partners in some sectors or 

restrict the amount of foreign investment, will continue.



It is important to note that, in addition to the commitments set forth 

in the accession agreement, WTO membership confers obligations and 

rights on China. For example, membership obligates China to adhere to 

more than 20 existing multilateral WTO agreements that cover various 

areas of international trade. China, like all other WTO members, must 

adhere to the WTO’s three main agreements governing key areas of 

international trade: (1) the General Agreement on Tariffs and Trade, 

(2) the General Agreement on Trade in Services, and (3) the Agreement 

on Trade-Related Aspects of Intellectual Property Rights. Other 

specialized multilateral WTO agreements that apply to China include the 

Agreement on Trade-Related Investment Measures, the Agreement on 

Agriculture, the Agreement on Technical Barriers to Trade, and the 

Agreement on Subsidies and Countervailing Measures. Numerous sections 

of China’s protocol and working party report refer to or reiterate 

specific provisions of a number of these underlying WTO agreements. 

Membership also gives China various rights under WTO rules. For 

example, the Understanding on the Rules and Procedures Governing the 

Settlement of Disputes gives access to a formal mechanism for resolving 

disputes over WTO trade-related issues.[Footnote 8]



U.S.-China Investment

and Trade:



Eventual implementation of China’s WTO commitments should result in 

greater freedom for American firms to invest and trade in China, 

according to the U.S. Department of Commerce. The United States was the 

second largest foreign investor in China in 2000.[Footnote 9] China was 
the 

ninth largest destination for U.S. exports in 2001. In 2001, U.S. 

companies exported about $18 billion of merchandise to China. The major 

exports included transport equipment, electrical machinery, office 

machines, general industrial machinery, oilseeds, and fruits. Figure 1 

shows the increasing level of U.S. foreign direct investment in China. 

Figure 2 shows the increasing levels of U.S. trade with China. See 

appendix V for additional information regarding U.S.-China investment 

and trade.



Figure 1: U.S. Direct Investment in China, 1989-2000:



[See PDF for image]



Note: Numbers are reported in constant dollars.



Source: U.S. Department of Commerce.



[End of Figure]



Figure 2: U.S. Trade with China, 1989-2001:



[See PDF for image]



Note: Numbers are reported in constant dollars.



Source: U.S. Department of Commerce.



[End of Figure]



WTO-related Reforms Are Important to U.S. Companies:



U.S. companies reported that many WTO-related commitment areas were 

important to them, according to our survey of U.S. companies with 

business activities in China. The 30 commitment areas included market 

access, investment measures, fundamental market, and rule of law-

related reforms. Thirteen of the 30 commitment areas were important to 

a majority of the responding companies. Commitment areas related to 

enhancing the rule of law emerged as most important both for those who 

responded to our survey and for those who took part in our structured 

interviews. The relative importance of some other commitments varied 

among manufacturing and services firms but was consistent with the 

nature of their operations. In interviews, company representatives 

emphasized and explained the importance of key commitments.



Rule of Law-related Commitment Areas Are Most Important:



We found that survey respondents were particularly focused on reforms 

related to enhancing the rule of law. At least three quarters of 

respondents selected intellectual property rights; consistent 

application of laws, regulations, and practices; and transparency most 

frequently when asked to rate the importance of individual commitment 

areas to their companies (based on a list of 30 WTO-related commitment 

areas that we specified in the survey). These results did not 

materially change when we compared the survey results for small-and 

medium-sized companies and large companies.[Footnote 10] Other than 

those related to rule of law, respondents most frequently selected 

trading rights (the right to import or export); tariffs, fees, and 

charges; and scope of business restrictions as the commitment areas 

important to their companies. All 30 commitment areas were important to 

at least one quarter of our respondents. Table 1 shows the number of 

survey respondents that said each WTO-related commitment area was 

important to their company.



Table 1: Importance of 30 WTO-related Commitment Areas to Company 

Survey Respondents:



Commitment areas: Intellectual property rights; Reform: Rule of law; 

Number of cases: 168; Number responding “Important”: 129; Percent: 

76.8.



Commitment areas: Consistent application of laws, regulations, and 

practices; Reform: Rule of law; Number of cases: 174; Number responding 

“Important”: 132; Percent: 75.9.



Commitment areas: Transparency of laws, regulations, and practices; 

Reform: Rule of law; Number of cases: 172; Number responding 

“Important”: 129; Percent: 75.0.



Commitment areas: Enforcement of contracts and judgments/settlement of 

disputes; Reform: Rule of law; Number of cases: 171; Number responding 

“Important”: 125; Percent: 73.1.



Commitment areas: Equal treatment between Chinese and foreign entities; 

Reform: Rule of law; Number of cases: 168; Number responding 

“Important”: 118; Percent: 70.2.



Commitment areas: Trading rights (ability to import and export); 

Reform: Fundamental market; Number of cases: 152; Number responding 

“Important”: 99; Percent: 65.1.



Commitment areas: Independence of judicial bodies; Reform: Rule of law; 

Number of cases: 161; Number responding “Important”: 103; Percent: 

64.0.



Commitment areas: Tariffs, fees, and charges; Reform: Market access; 

Number of cases: 158; Number responding “Important”: 101; Percent: 

63.9.



Commitment areas: Scope of business restrictions; Reform: Investment 

measures; Number of cases: 157; Number responding “Important”: 89; 

Percent: 56.7.



Commitment areas: Equal treatment in taxation; Reform: Fundamental 

market; Number of cases: 151; Number responding “Important”: 83; 

Percent: 55.0.



Commitment areas: Foreign exchange restrictions; Reform: Investment 

measures; Number of cases: 158; Number responding “Important”: 85; 

Percent: 53.8.



Commitment areas: Distribution rights; Reform: Fundamental market; 

Number of cases: 136; Number responding “Important”: 73; Percent: 53.7.



Commitment areas: Customs procedures and inspection practices; Reform: 

Market access; Number of cases: 150; Number responding “Important”: 78; 

Percent: 52.0.



Commitment areas: Price controls including dual and discriminatory 

pricing; Reform: Fundamental market; Number of cases: 131; Number 

responding “Important”: 60; Percent: 45.8.



Commitment areas: Restrictions on partnerships and joint ventures; 

Reform: Investment measures; Number of cases: 153; Number responding 

“Important”: 70; Percent: 45.8.



Commitment areas: Equal treatment for access to funding, supplies, and 

human resources; Reform: Fundamental market; Number of cases: 147; 

Number responding “Important”: 67; Percent: 45.6.



Commitment areas: Technology transfer requirements; Reform: Investment 

measures; Number of cases: 135; Number responding “Important”: 60; 

Percent: 44.4.



Commitment areas: Market access for services; Reform: Market access; 

Number of cases: 138; Number responding “Important”: 61; Percent: 44.2.



Commitment areas: Quantitative import restrictions (licensing and 

tendering requirements); Reform: Market access; Number of cases: 133; 

Number responding “Important”: 58; Percent: 43.6.



Commitment areas: Standards, certification, registration, and testing 

requirements; Reform: Market access; Number of cases: 138; Number 

responding “Important”: 59; Percent: 42.8.



Commitment areas: Establishment and employment requirements; Reform: 

Investment measures; Number of cases: 158; Number responding 

“Important”: 67; Percent: 42.4.



Commitment areas: Export restrictions; Reform: Market access; Number of 

cases: 125; Number responding “Important”: 47; Percent: 37.6.



Commitment areas: Operation of state-owned enterprises; Reform: 

Fundamental market; Number of cases: 133; Number responding 

“Important”: 48; Percent: 36.1.



Commitment areas: China’s application of safeguards against U.S. 

exports; Reform: Rule of law; Number of cases: 133; Number responding 

“Important”: 48; Percent: 36.1.



Commitment areas: Local content requirements; Reform: Investment 

measures; Number of cases: 124; Number responding “Important”: 42; 

Percent: 33.9.



Commitment areas: Subsidies for Chinese firms; Reform: Fundamental 

market; Number of cases: 126; Number responding “Important”: 41; 

Percent: 32.5.



Commitment areas: Number of products subject to state/designated 

trading; Reform: Fundamental market; Number of cases: 114; Number 

responding “Important”: 36; Percent: 31.6.



Commitment areas: Quotas; Reform: Market access; Number of cases: 118; 

Number responding “Important”: 35; Percent: 29.7.



Commitment areas: Requirements for minimum amount of production that 

must be exported; Reform: Investment measures; Number of cases: 119; 

Number responding “Important”: 33; Percent: 27.7.



Commitment areas: Export subsidies; Reform: Fundamental market; Number 

of cases: 118; Number responding “Important”: 31; Percent: 26.3.



Note: Percentages for the individual commitment areas are based on the 

number of respondents who made a judgment about the importance of each 

commitment area. Therefore, the percentages do not include respondents 

who checked “Don’t know,” “Not applicable,” or did not provide an 

answer. See the survey results in appendix II for a breakdown of these 

responses. :



Source: GAO survey of U.S. companies on China-WTO issues, question 16.



[End of table]



The relative importance that companies assigned to rule of law-related 

commitment areas (compared to those related to other reforms) generally 

remained consistent for agricultural, manufacturing, and services 

firms. These three types of firms most frequently identified rule of 

law-related commitments as important. However, given the nature of 

their businesses, these firms differed in the areas that they 

identified next most frequently. Manufacturers assigned greater 

importance to tariffs, fees, and charges. Manufacturers as well as 

agricultural firms also assigned greater importance to trading rights 

(the ability to import and export) and customs procedures and 

inspection practices. This is consistent with the needs of 

manufacturers to move goods into and out of China. Services firms 

assigned greater importance to commitment areas related to the scope of 

business restrictions and market access for services, consistent with 

the historical limitations on their ability to operate in China and 

their need for approval from the Chinese government in order to do 

business there. Structured interviews with representatives of U.S. 

companies in China generally corroborated the survey results regarding 

important WTO-related commitment areas.



Company Views on Important Commitments:



Many survey respondents and company representatives we interviewed 

emphasized the importance of China’s rule of law-related reforms to the 

functioning of their operations in China and pointed to specific 

problems with current laws, regulations, and practices. For example, in 

order to explain the importance assigned to certain commitment areas, 

one company representative noted that because licensing procedures in 

China are notoriously opaque, transparency is a priority for his 

company. One survey respondent’s written comments emphasized the 

importance of equal treatment under the law, saying that “getting a 

level playing field for U.S. business versus Chinese competitors is 

critical.” Another representative of a large multinational company told 

us that rule of law-related reforms are important, because China’s 

application of product standards and other measures varies greatly 

between localities. Furthermore, this company representative said that 

Chinese officials often promulgate regulations and procedures without 

sufficient comment periods, the regulations themselves are often 

deliberately vague, and intellectual property rights (IPR) violations 

are still rampant. Another individual told us about the biggest problem 

his company had encountered in China, which involved the rule of law. 

Several years ago, his company won a court judgment against a client 

who had failed to pay on a contract. Despite winning the judgment, this 

U.S. company had been unable to collect the debt, and the court had 

failed to take steps to enforce the judgment.



In addition to rule of law-related reforms, several company 

representatives also explained the importance to their companies of a 

number of other reforms, including (1) reductions in tariffs and 

nontariff barriers (market access) and (2) the liberalization of 

investment-related measures. First, several manufacturers discussed 

the importance of obtaining increased market access through tariff 

reductions. One representative of a food manufacturer explained that 

China’s implementation of its WTO commitments would make it easier and 

cheaper to import the ingredients used in his company’s products. 

Another representative of a manufacturing firm reported that high 

tariffs were one of the most important issues for his company. He noted 

that although tariffs have already come down on several imported 

products, his company still pays high tariffs on certain other 

products. Concerning nontariff barriers and reforms to China’s quota 

system, one company representative explained that his company sometimes 

encounters problems in selling products in China because quotas reserve 

a portion of the market for domestic manufacturers. This has caused 

problems because it lead to inventory overruns for his company. Second, 

several representatives of various U.S. companies in China also 

highlighted the importance of other reforms, such as commitments 

liberalizing investment-related measures. For example, one company 

explained that repatriating profits made in China still involves a 

lengthy process. Representatives of another U.S. multinational company 

that we interviewed complained about the difficulties that China’s 

restrictive foreign exchange regime creates. This company maintains a 

separate holding company in order to move renminbi (China’s currency) 

from one joint venture to another within China. Finally, several 

companies that provide services in China pointed out that numerous 

commitment areas are important to them (indirectly) because they are 

important to their clients’ ability to do business in China (directly).



Companies Expect Positive Results from China’s WTO Accession:



Respondents to our survey expected China’s WTO accession and 

implementation of its commitments to improve their ability to do 

business in China and to increase their business with China. More than 

three quarters of the companies generally expected a positive impact on 

their business from China’s WTO commitments, and most expected to begin 

to see this impact relatively soon--though some company representatives 

indicated that the full impact would take time. Companies identified 

their current business goals for China, and most companies we 

interviewed said that their company’s goals had already changed to 

reflect China’s WTO membership. Furthermore, companies generally 

expected that their business activities in China would increase as a 

result of China’s implementation of its WTO commitments, including 

their volume of exports to China, market share in China, and 

distribution of products there.



Positive Impact Generally Expected Soon:



A majority of the companies participating in our survey and interviews 

expected a positive impact to eventually result from implementation of 

China’s WTO commitments. Some companies had already experienced an 

impact, and most companies expected to begin to experience an impact 

within the next few years. Companies provided a variety of explanations 

for their expectations regarding the eventual impact.



When asked what impact they expected China’s WTO commitments would have 

on their companies, most survey respondents reported that they expected 

a positive or very positive impact. These positive expectations were 

generally consistent for firms in all sectors, but services firms had a 

somewhat higher percentage (93 percent) of positive and very positive 

expectations compared to manufacturing firms and agricultural firms (79 

percent and 62 percent, respectively). Some respondents expected little 

or no impact on their business in China. A smaller group of respondents 

reported that they thought China’s WTO membership would have a negative 

impact on their business. Figure 3 shows the expected impact of 

implementation of China’s WTO commitments for respondents to both our 

mail survey and to the structured interviews in China.



Figure 3: Expected Impact of China’s WTO Commitments on Survey and 

Structured Interview Respondents’ Business in China:



[See PDF for image]



Note: The number of survey respondents was 190. None of the survey 

respondents expected a “Very negative” impact. The number of structured 

interview respondents was 46.



Source: GAO survey of U.S. companies on China-WTO issues, question 11; 

GAO structured interviews of U.S. companies on China-WTO issues, 

question 5.



[End of Figure]



Most companies expected to begin to experience an overall business 

impact from China’s WTO commitments in the next few years, but this 

view was not unanimous. About one-fifth of survey respondents reported 

that they expected an immediate impact or had already experienced an 

impact. More than half of the survey respondents expected to begin to 

experience an overall business impact from China’s WTO commitments 

sometime from less than 1 year to 4 years. In contrast, a small 

fraction of respondents expected to begin to experience an impact in 5 

to 10 years or never expected to experience an impact from China’s WTO 

commitments. About one-tenth of respondents did not know or had no 

basis to judge how soon their companies might begin to experience an 

impact. Table 2 summarizes these company responses.



Table 2: U.S. Company Expectations for When Impact of China’s WTO 

Commitments Will Begin:



Time period: Immediately/has already occurred; Number of respondents: 

40; Percentage of respondents: 21.



Time period: Less than 1 year; Number of respondents: 20; Percentage of 

respondents: 11.



Time period: From 1 to 2 years; Number of respondents: 56; Percentage 

of respondents: 30.



Time period: From 3 to 4 years; Number of respondents: 39; Percentage 

of respondents: 21.



Time period: From 5 to 10 years or more; Number of respondents: 6; 

Percentage of respondents: 3.



Time period: Never, no effects expected; Number of respondents: 7; 

Percentage of respondents: 4.



Time period: Don’t know/no basis to judge; Number of respondents: 20; 

Percentage of respondents: 11.



Note: Percentages are based on the 188 respondents who answered this 

question.



Source: GAO survey of U.S. companies on China-WTO issues, question 12.



[End of table]



Company Views on Impact:



Company representatives that we interviewed in China made comments that 

lend support to the general expectation that change will be positive, 

but many believed that China’s implementation would be incremental and 

would be tempered by China’s desire to protect its workers. One 

representative said that his company planned to boost investments and 

build a national business in China. He explained that his company 

expected to obtain trading rights and national treatment in taxes as a 

result of WTO. Others explained that demand for services had already 

increased, that the trajectory of the reforms resulted in immediate 

benefits, and that the lowering of trade barriers had helped a great 

deal. One representative noted that some impact began before accession, 

but that the full impact from WTO implementation will be incomplete for 

some time to come. Similarly, another individual stated that all the 

commitments would eventually be implemented but that the time needed 

for implementing different commitments would vary considerably. A 

representative who agreed that it will take time for WTO concepts to 

take hold also said that the impact is dependent on how forceful the 

central government continues to be about WTO reform.



Broad Range of Goals for U.S. Companies in China Reflects China’s WTO 

Membership:



Our survey of U.S. companies with a presence in China, which was 

conducted soon after China’s accession to the WTO, asked respondents to 

identify their current goals for doing business in China. The company 

goals that survey respondents most frequently identified were 

“establish a presence for the future,” “increase exports to China,” and 

“benefit from lower labor costs,” as shown in table 3. Identification 

of these three company goals follows logically from survey respondents’ 

identification of the commitment areas that their companies considered 

important. First, because many companies may want to establish a 

presence for the future, this may explain why rule of law reform is 

important. Second, many companies may want to increase exports to 

China. This may drive their interest in lower market access 

restrictions resulting from China’s WTO commitments. Third, some 

companies may want to take further advantage of China’s low wages once 

China implements some fundamental market reforms and liberalizes some 

investment measures. Even firms with a history of more than 10 years in 

China identified these goals as priorities for their companies.



Table 3: U.S. Company Goals in China That Survey Respondents 

Identified:



Company goal: Establish a presence for the future; Number of 

respondents: 103; Percentage of respondents: 55.



Company goal: Increase exports to China; Number of respondents: 79; 

Percentage of respondents: 42.



Company goal: Benefit from lower labor costs; Number of respondents: 

76; Percentage of respondents: 40.



Company goal: Expand a regional base in China; Number of respondents: 

56; Percentage of respondents: 30.



Company goal: Expand a distribution network in China; Number of 

respondents: 44; Percentage of respondents: 23.



Company goal: Establish a distribution network in China; Number of 

respondents: 43; Percentage of respondents: 23.



Company goal: Benefit from foreign investment incentives in China; 

Number of respondents: 37; Percentage of respondents: 20.



Company goal: Benefit from the cost or quality of raw materials in 

China; Number of respondents: 36; Percentage of respondents: 19.



Company goal: Establish a regional base in China; Number of 

respondents: 35; Percentage of respondents: 19.



Company goal: Other; Number of respondents: 21; Percentage of 

respondents: 11.



Note: Of the 191 survey respondents, 188 identified at least one of 

these goals for their companies. Numbers do not add up to 191 because 

respondents could identify more than one goal. About one third of 

survey respondents selected only one item to characterize their 

company’s goals in doing business with China, while about two thirds of 

respondents identified more than one goal for their companies. :



Source: GAO survey of U.S. companies on China-WTO issues, question 14.



[End of table]



Some Goals Vary for Manufacturing, Agricultural, and Services Firms:



Manufacturing, agricultural, and services firms reported slightly 

different priorities in their companies’ most frequently identified 

goals. A larger percentage of manufacturers identified benefiting from 

lower labor costs (49 percent) and the cost or quality of raw materials 

(27 percent) in China as company goals compared to agricultural or 

services firms (38 and 18 percent, and 0 and 12 percent, respectively). 

Similarly, a larger percentage of manufacturers identified increasing 

exports to China (50 percent) as a company goal than either 

agricultural or services firms (38 percent and 27 percent, 

respectively).



Company Views on Goals for China:



More than half of the companies that we interviewed in China reported 

that China’s official membership in the WTO had changed their company’s 

goals and expectations for future business opportunities in China to a 

moderate or great extent. Specifically, 16 company representatives said 

their goals had changed to a great extent while 12 reported their goals 

had changed to a moderate extent. When asked to describe the extent to 

which their company’s goals had changed, responses varied widely and 

focused on their companies’ operations. On one end of the spectrum were 

several companies whose operations had already changed as a result of 

China’s recent WTO membership. For example, one corporate 

representative in China noted that China’s WTO membership had resulted 

in big increases in demand for his company’s services and that his firm 

will also be allowed to provide a wider range of services to its 

clients in the future. In another example, a service provider looking 

forward to broader distribution rights speculated that if China had not 

gained WTO membership, his company would likely have withdrawn 

completely from China.



At the other end of the spectrum were companies whose goals remained 

relatively unchanged. These companies focused on their ability to 

operate in China regardless of China’s WTO commitments. One company 

representative said, “We’re here, and we know how to operate.” This 

respondent emphasized that he hoped that China’s WTO membership would 

open new opportunities, but his company was not relying on that 

possibility. Other representatives said that, “WTO does not change our 

operations at all,” and that “we’ve been here a long time without WTO.” 

Another company representative explained that the future will be more 

open but that his company had already been planning for expansion for 5 

to 10 years because China is a major focus of its Asia operations. 

Similarly, another company representative noted that “WTO will improve 

the market down the road, but the market exists with or without WTO.”:



Finally, representatives of several companies that we interviewed 

expressed uncertainty regarding how China’s WTO membership would affect 

their companies’ goals and operations in China. Several firms with 

agricultural interests or dependent on agricultural inputs for their 

manufacturing operations discussed their early concerns about China’s 

implementing rules and regulations, which indicated problems that could 

affect their goals. One firm cited China’s promulgation of agricultural 

regulations as well as recent prohibitions on investment in specific 

agricultural sectors. A representative of another agricultural firm 

noted that as a result of agricultural compliance issues that Chinese 

officials had raised since China’s WTO accession, his business had 

experienced greater difficulties doing business in China. A 

representative of a U.S. company operating a joint venture in China 

summarized his company’s uncertain expectations as follows: “Future 

goals depend on the whole dynamic of forcing the Chinese government to 

be more liberal and systematic as well as more fair in terms of legal 

protection.”:



Company Activities Expected to Increase in China:



In addition to expressing views on their companies’ goals in doing 

business with China, survey respondents also indicated how the 

implementation of China’s WTO commitments would affect their companies’ 

activities. About 85 percent of the respondents that completed this 

survey question expected their companies’ overall activities in China 

to greatly or somewhat increase. Almost 15 percent of the respondents 

expected their overall activities to stay the same, while only one 

respondent expected overall business activities to greatly decrease. 

Expectations for how the implementation of China’s WTO commitments 

would affect specific company activities are shown in figure 4.



Figure 4: U.S. Company Expectations for Activities Affected by 

Implementation of China’s WTO Commitments:



[See PDF for image]



Note: Percentages for the individual activities are based on the number 

of respondents who made a judgment about the importance of each 

commitment area. Therefore, the percentages do not include respondents 

who checked “Uncertain” or “Not relevant,” or did not provide an 

answer. See the survey results in appendix II for a breakdown of these 

responses.



Source: GAO survey of U.S. companies on China-WTO issues, question 15.



[End of Figure]



Corporate representatives whom we interviewed reiterated these 

expectations for an overall increase in company activities. Some 

companies told us that they hoped to increase their manufacturing base, 

their number of offices in China, and/or their investment in China in 

the next few years. Other companies predicted that implementation of 

China’s WTO commitments could create many additional business 

opportunities. One company representative noted that there is currently 

a “boom mentality” in China.



For a few business activities, survey respondents reported mixed 

expectations regarding how they would be affected by the implementation 

of China’s WTO commitments, as shown in figure 4. Specifically, an 

almost equal percentage (about 50 percent each) of the respondents 

reported that the geographic diversity of their companies’ investments 

in China would either increase or stay about the same. With regard to 

investment in existing facilities in China, 50 percent of the 

respondents expected their companies’ activities to increase, while 47 

percent expected their companies’ activities to stay about the same. 

Fifty-four percent of the respondents indicated that their investment 

in new facilities in China would increase, while 44 percent indicated 

that their investments would stay about the same.



At least 5 percent of the companies responding expected two activities 

to decrease. First, ventures with Chinese partners will reportedly 

decrease for 16 percent of the respondents. Implementation of China’s 

WTO commitments will allow foreign-invested enterprises in some sectors 

to operate wholly owned foreign enterprises rather than being 

restricted to joint ventures. For example, a services firm that we 

interviewed reported that it has been restricted by requirements that 

it have Chinese partners but hopes to transition to a wholly owned 

foreign enterprise in 3 to 5 years. Second, competition from foreign or 

Chinese firms located in China will reportedly decrease for 9 percent 

of the respondents. One respondent addressed his company’s hopes that 

WTO will “level the playing field” for U.S. companies in China. For 

example, leveling the playing field for U.S. companies could include 

encountering decreased competition from China’s state-owned 

enterprises as market forces lead to the further closure of inefficient 

and unprofitable companies and as foreign-invested (joint venture) 

enterprises lose the benefit of discriminatory practices once China’s 

WTO-related reforms are implemented.



Companies Expect Impediments to Implementation of China’s WTO Reforms:



U.S. companies with business activities in China expected a number of 

impediments to implementation of China’s WTO reforms. Views varied 

concerning the expected ease or difficulty of implementing specific 

commitment areas, but we were able to identify some common themes from 

our survey and structured interviews. Companies generally expected many 

of China’s WTO commitment areas to be relatively difficult for Chinese 

officials to implement, especially many of those they considered 

important. Large numbers of respondents expected reforms to be 

generally difficult or did not know what to expect in terms of WTO 

implementation throughout specific locations in China and/or in terms 

of China’s various levels of government. Companies also described 

numerous challenges that China faces as it continues to reform its 

economy and implement its WTO commitments.



Many Commitments Expected to Be Difficult to Implement:



Companies with a presence in China had different expectations regarding 

Chinese officials’ implementation of particular WTO commitments. Our 

analysis of survey responses showed that 7 of the 30 commitment areas 

listed in the survey ranked “High” in difficulty, 13 commitment areas 

ranked “Medium” in difficulty, and 10 of the commitment areas ranked 

“Low” in expected difficulty for the Chinese government to 

implement.[Footnote 11] Furthermore, when asked whether each WTO 

commitment area would be easy or difficult for the Chinese government 

to implement, respondents expected that two-thirds of the commitment 

areas listed in the survey would be relatively difficult to 

implement.[Footnote 12] However, large numbers of respondents 

(sometimes as many as 50 respondents) did not know what to expect 

concerning the ease or difficulty of specific commitment areas or said 

some were not applicable to their business.



Companies most frequently identified five commitment areas related to 

rule of law reform as the WTO commitments that they expected to be 

relatively difficult to implement. Respondents also expected some non 

rule-of-law-related commitment areas to be relatively difficult for 

Chinese officials to implement. These included reforms to the operation 

of state-owned enterprises, which are related to fundamental market 

reforms; and standards, certification, registration, and testing 

requirements, which are related to market access reforms. On the other 

hand, most of the commitment areas that are related to reforming 

China’s foreign investment measures were considered relatively less 

difficult for China to implement. Table 4 shows the company responses 

indicating the commitment areas deemed difficult for the Chinese to 

implement (in terms of the number of “difficult” responses each 

commitment area received). Our interviews with representatives of U.S. 

companies in China generally supported these findings.



Table 4: U.S. Company Expectations for Difficulty in Implementing 

China’s WTO Commitment Areas:



Commitment areas: Consistent application of laws, regulations, and 

practices; [Empty]; Reform: Rule of law; Number of Cases: 141; Number 

Responding “Difficult”: 116; Percent: 82.3.



Commitment areas: Intellectual property rights; [Empty]; Reform: Rule 

of law; Number of Cases: 137; Number Responding “Difficult”: 111; 

Percent: 81.0.



Commitment areas: Enforcement of contracts and judgments/settlement of 

disputes; [Empty]; Reform: Rule of law; Number of Cases: 138; Number 

Responding “Difficult”: 106; Percent: 76.8.



Commitment areas: Independence of judicial bodies; [Empty]; Reform: 

Rule of law; Number of Cases: 129; Number Responding “Difficult”: 99; 

Percent: 76.7.



Commitment areas: Equal treatment between Chinese and foreign entities; 

[Empty]; Reform: Rule of law; Number of Cases: 135; Number Responding 

“Difficult”: 100; Percent: 74.1.



Commitment areas: Operation of state-owned enterprises; [Empty]; 

Reform: Fundamental market; Number of Cases: 107; Number Responding 

“Difficult”: 79; Percent: 73.8.



Commitment areas: Transparency of laws, regulations, and practices; 

[Empty]; Reform: Rule of law; Number of Cases: 144; Number Responding 

“Difficult”: 105; Percent: 72.9.



Commitment areas: Standards, certification, registration, and testing 

requirements; [Empty]; Reform: Market access; Number of Cases: 110; 

Number Responding “Difficult”: 60; Percent: 54.5.



Commitment areas: Subsidies for Chinese firms; [Empty]; Reform: 

Fundamental market; Number of Cases: 103; Number Responding 

“Difficult”: 54; Percent: 52.4.



Commitment areas: Price controls including dual and discriminatory 

pricing; [Empty]; Reform: Fundamental market; Number of Cases: 96; 

Number Responding “Difficult”: 49; Percent: 51.0.



Commitment areas: Market access for services; [Empty]; Reform: Market 

access; Number of Cases: 111; Number Responding “Difficult”: 56; 

Percent: 50.5.



Commitment areas: Scope of business restrictions; [Empty]; Reform: 

Investment measures; Number of Cases: 121; Number Responding 

“Difficult”: 59; Percent: 48.8.



Commitment areas: China’s application of safeguards against U.S. 

exports; [Empty]; Reform: Rule of law; Number of Cases: 95; Number 

Responding “Difficult”: 45; Percent: 47.4.



Commitment areas: Equal treatment in taxation; [Empty]; Reform: 

Fundamental market; Number of Cases: 118; Number Responding 

“Difficult”: 54; Percent: 45.8.



Commitment areas: Equal treatment for access to funding, supplies, and 

human resources; [Empty]; Reform: Fundamental market; Number of Cases: 

111; Number Responding “Difficult”: 50; Percent: 45.0.



Commitment areas: Quantitative import restrictions (licensing and 

tendering requirements); [Empty]; Reform: Market access; Number of 

Cases: 98; Number Responding “Difficult”: 44; Percent: 44.9.



Commitment areas: Technology transfer requirements; [Empty]; Reform: 

Investment measures; Number of Cases: 103; Number Responding 

“Difficult”: 46; Percent: 44.7.



Commitment areas: Customs procedures and inspection practices; [Empty]; 

Reform: Market access; Number of Cases: 126; Number Responding 

“Difficult”: 56; Percent: 44.4.



Commitment areas: Foreign exchange restrictions; [Empty]; Reform: 

Investment measures; Number of Cases: 131; Number Responding 

“Difficult”: 58; Percent: 44.3.



Commitment areas: Distribution rights; [Empty]; Reform: Fundamental 

market; Number of Cases: 108; Number Responding “Difficult”: 45; 

Percent: 41.7.



Commitment areas: Quotas; [Empty]; Reform: Market access; Number of 

Cases: 91; Number Responding “Difficult”: 36; Percent: 39.6.



Commitment areas: Trading rights (ability to import and export); 

[Empty]; Reform: Fundamental market; Number of Cases: 123; Number 

Responding “Difficult”: 48; Percent: 39.0.



Commitment areas: Export subsidies; [Empty]; Reform: Fundamental 

market; Number of Cases: 84; Number Responding “Difficult”: 32; 

Percent: 38.1.



Commitment areas: Tariffs, fees, and charges; [Empty]; Reform: Market 

access; Number of Cases: 122; Number Responding “Difficult”: 44; 

Percent: 36.1.



Commitment areas: Local content requirements; [Empty]; Reform: 

Investment measures; Number of Cases: 101; Number Responding 

“Difficult”: 33; Percent: 32.7.



Commitment areas: Number of products subject to state/designated 

trading; [Empty]; Reform: Fundamental market; Number of Cases: 91; 

Number Responding “Difficult”: 29; Percent: 31.9.



Commitment areas: Establishment and employment requirements; [Empty]; 

Reform: Investment measures; Number of Cases: 115; Number Responding 

“Difficult”: 32; Percent: 27.8.



Commitment areas: Restrictions on partnerships and joint ventures; 

[Empty]; Reform: Investment measures; Number of Cases: 111; Number 

Responding “Difficult”: 30; Percent: 27.0.



Commitment areas: Requirements for minimum amount of production that 

must be exported; [Empty]; Reform: Investment measures; Number of 

Cases: 97; Number Responding “Difficult”: 25; Percent: 25.8.



Commitment areas: Export restrictions; [Empty]; Reform: Market access; 

Number of Cases: 99; Number Responding “Difficult”: 20; Percent: 20.2.



Note: Percentages for the individual commitments are based on the 

number of respondents who made a judgment about the ease or difficulty 

of implementation. Therefore, these percentages do not include 

respondents who checked “Don’t know,” “Not applicable,” or did not 

provide an answer. Appendix II provides a breakdown of these responses.



Source: GAO survey of U.S. companies on China-WTO issues, question 17.



[End of table]



Difficult Commitments Also Most Important:



In general, the commitment areas expected to be the most difficult to 

implement were those that survey respondents also identified as most 

important. Specifically, our analysis identified rule of law-related 

commitment areas as the commitment areas of greatest importance to 

respondents’ companies and also showed that respondents expected these 

reforms to be the most difficult for China to implement, as shown in 

table 5. Reforms to China’s state-owned enterprises (SOE) were also 

expected to be difficult for China’s government officials to implement 

but were relatively less important to survey respondents. Companies we 

interviewed explained that reforming SOEs creates a huge challenge for 

the Chinese and will take a number of years, but that other reforms 

will have a more immediate impact on their companies’ ability to do 

business in China and are consequently more important to them.



Our analysis identified another group of commitments respondents 

expected to be both moderately important and moderately difficult for 

the Chinese to implement. This group is comprised of 37 percent of the 

commitment areas and includes a range of fundamental market, market 

access, and investment measure-related reforms. Some commitment areas 

related to these three types of reforms may appear easier for Chinese 

officials to implement, because, in some cases, the reforms require 

specific regulatory or legal changes rather than more systemic legal 

changes associated with rule of law.



Finally, our analysis showed that various other commitment areas were 

expected to be relatively less difficult for the Chinese to implement. 

However, while tariffs, fees, and charges and trading rights were 

expected to be less difficult for Chinese officials to implement, these 

commitment areas were still rated “High” in importance. It is important 

to note that all the commitment areas that emerged as low in both 

importance and difficulty were still important to at least 20 percent 

of survey respondents.



Table 5: Survey Respondents’ Views on Importance of Commitment Areas by 

Difficulty of Implementation:



Importance of commitment area.



High; Expected difficulty of implementation: High: 1. Consistent 

application of laws, regulations, & practices; 2. Intellectual Property 

Rights; 3. Enforcement of contracts & judgments/Settlement of disputes 

in Chinese court system; 4. Independence of judicial bodies; 5. Equal 

treatment between Chinese & foreign entities; 6. Transparency of laws, 

regulations, & practices; Expected difficulty of implementation: 

Medium: [Empty]; Expected difficulty of implementation: Low: 1. Trading 

rights; 2. Tariffs, fees, & charges.



Medium; Expected difficulty of implementation: High: [Empty]; Expected 

difficulty of implementation: Medium: 1. Standards, certification, 

registration, & testing requirements; 2. Price controls including dual 

and discriminatory pricing; 3. Market access for services; 4. Scope of 

business restrictions; 5. Equal treatment in taxation; 6. Equal 

treatment for access to funding, supplies, & human resources; 7. Other 

quantitative import restrictions; 8. Technology transfer requirements; 

9. Customs procedures & inspection practices; 10. Foreign exchange 

restrictions; 11. Distribution rights; Expected difficulty of 

implementation: Low: 1. Establishment & employment requirements; 2. 

Restrictions on partnerships & joint ventures.



Low; Expected difficulty of implementation: High: 1. Operation of 

state-owned enterprises; Expected difficulty of implementation: 

Medium: 1. Subsidies for Chinese firms; 2. China’s application of 

safeguards against U.S. exports; Expected difficulty of implementation: 

Low: 1. Export subsidies; 2. Local content requirements; 3. Number of 

products subject to state/designated trading; 4. Requirements for 

minimum amount of production that must be exported; 5. Export 

restrictions; 6. Quotas.



Note: Commitment areas ranked “High” in importance or difficulty if 

more than 60 percent of respondents selected “Important” or 

“Difficult.” Commitment areas ranked “Medium” if 41 to 60 percent of 

respondents selected “Important” or “Difficult.” Commitment areas 

ranked “Low” if 40 percent or less of respondents selected “Important” 

or “Difficult.” The percentages for the individual commitments were 

based on the number of respondents who made a judgment about importance 

and the ease or difficulty of implementation for each commitment area.



Source: GAO survey of U.S. companies on China-WTO issues, questions 16 

and 17.



[End of table]



Mixed Views for Implementation by Level of Government and Region:



Companies we surveyed also expressed mixed views regarding the ease or 

difficulty expected for implementation in various locations and for 

different levels of government in China. For example, almost as many 

respondents expected reforms to be very or somewhat easy for the 

national/central level of government as those who expected reforms to 

be very or somewhat difficult. Similarly, an almost equal number of 

respondents expected officials in China’s major cities[Footnote 13] to 

have an easy or difficult time making reforms. Nevertheless, survey 

respondents expected China’s local and provincial governments and 

autonomous regions to have the most difficulties implementing reforms. 

Table 6 provides a summary of these responses.



Table 6: U.S. Company Expectations for China’s Reforms, by Level of 

Chinese Government:



Level of government: National/central level; (N=159); Number of 

respondents expecting reforms to be easy: 66; Percentage of respondents 

expecting reforms to be easy: 42; Number of respondents expecting 

reforms to be difficult: 65; Percentage of respondents expecting 

reforms to be difficult: 41.



Level of government: Major cities 

(Beijing, Chongqing, Shanghai, Tianjin); (N=158); Number of respondents 

expecting reforms to be easy: 57; Percentage of respondents expecting 

reforms to be easy: 36; Number of respondents expecting reforms to be 

difficult: 60; Percentage of respondents expecting reforms to be 

difficult: 38.



Level of government: Other cities, towns, or local level; (N=136); 

Number of respondents expecting reforms to be easy: 17; Percentage of 

respondents expecting reforms to be easy: 12; Number of respondents 

expecting reforms to be difficult: 99; Percentage of respondents 

expecting reforms to be difficult: 73.



Level of government: Provincial level; (N=153); Number of respondents 

expecting reforms to be easy: 25; Percentage of respondents expecting 

reforms to be easy: 16; Number of respondents expecting reforms to be 

difficult: 96; Percentage of respondents expecting reforms to be 

difficult: 63.



Level of government: Autonomous regions; (N=97); Number of respondents 

expecting reforms to be easy: 8; Percentage of respondents expecting 

reforms to be easy: 8; Number of respondents expecting reforms to be 

difficult: 79; Percentage of respondents expecting reforms to be 

difficult: 81.



Note: Percentages for the individual levels of government are based on 

the number of respondents who made a judgment about the ease or 

difficulty of reform. Therefore, these percentages do not include 

respondents who checked “Don’t know,” or did not provide an answer. See 

appendix II for a breakdown of these responses.



Source: GAO Survey of U.S. Companies on China-WTO Issues, question 21.



[End of table]



Company representatives whom we interviewed provided a number of 

explanations for these expectations by level of government. For 

example, one company representative compared China to Europe, in that 

each Chinese region is like a different country and they each have 

different rules and regulations. Another company official explained how 

differences within China play out at the local level. He believed that 

the local officials have a different mind-set, because existing 

approval processes are their livelihood (he cited import inspections as 

an example). In his view, local officials want to protect the domestic 

market and local suppliers from losing jobs. A specific example 

provides further context for understanding how these differences relate 

to specific business operations. As one company representative 

explained, he believed that there is no unified customs system and 

therefore, customs procedures will be slow to change. In his view, 

state directives often do not get to local customs authorities and 

authorities may interpret the directives differently.



Another reason that might help explain the varied expectations by level 

of government is that many respondents’ knowledge about different parts 

of China is limited. Specifically, more respondents selected “Don’t 

know” than “Yes” or “No” for 24 of the 26 locations listed in the 

survey when asked whether they expected that reforms would be 

relatively difficult for the Chinese to implement. Beijing and Shanghai 

were the only locations where more respondents expected reforms to be 

relatively easy to implement (compared to the number of respondents who 

did not know whether reforms would be difficult and the number of 

respondents who expected reforms to be difficult to implement). With 

regard to Beijing, 43 percent of the respondents expected reforms would 

be relatively easy to implement, while 22 percent of the respondents 

expected reforms to be difficult to implement. In Shanghai, 54 percent 

of the respondents expected that reforms would be relatively easy to 

implement, while 15 percent of the respondents expected reforms to be 

difficult to implement. Respondents also expected reforms to be more 

difficult to implement in locations where fewer U.S. companies have a 

presence in China. These locations included the western provinces 

(Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, and Tibet), Guizhou and 

Yunnan, Sichuan, Heilongjiang, and Inner Mongolia.[Footnote 14]



Company Views on the Challenges Ahead for WTO Implementation:



Companies’ overall positive expectations for their future in China were 

tempered by their views regarding the domestic challenges China faces 

as it implements WTO-related reforms. Company representatives described 

the numerous challenges China faces during implementation of its WTO 
commitments.

[Footnote 15] Their comments covered a spectrum of opinions 

ranging from the broad view that, overall, China’s accession would be 

great for China and the United States, to less enthusiastic 

expectations based on their companies’ experiences in China. One 

representative said that WTO has huge potential for his company and 

implementation of China’s commitments could radically improve his 

company’s ability to operate. Another representative explained how 

expectations were somewhat mixed within his own company: “It should be 

positive, but our immediate expectations are not very high. The 

intentions are good, and the Chinese have made radical reforms. The 

desire is there on the part of the Chinese.” Other U.S. companies noted 

a somewhat neutral reaction to China’s early months of WTO membership. 

A representative of one U.S. multinational that has invested in China 

since the 1980s said that WTO has not improved matters much for his 

company. A service provider said his company has held off on optimistic 

expectations, because the results of implementation could be positive 

or negative depending on available opportunities to provide services in 

China and regulations forthcoming from the Chinese government. Another 

respondent expressed his company’s skepticism as follows: “[Our company 

is] very concerned that China will do as they see fit, without regard 

to the WTO agreement.” Other respondents referred to the uncertainty of 

doing business in China through observations that:



* implementation would only extend as far as necessary in order to 

satisfy the international community,



* policies on paper often differ from actual practice,



* particular government agencies will make implementation difficult in 

China despite seeming to comply [with China’s WTO commitments], and:



* the pace of change and degree of compliance will likely be irregular.



Company representatives’ open-ended comments regarding the challenges 

ahead generally focused on three common explanations for these 

anticipated challenges: China’s ability to implement rule of law-

related reforms, China’s need to protect its domestic interests, and 

China’s culture and its emphasis on relationships.



Rule of Law Challenges:



Several company representatives explained why they believe that China 

will experience the greatest challenges in implementing its rule of 

law-related WTO commitments. One respondent to our survey characterized 

China’s current “standard” approach to legislation as follows, “Pass a 

gray law, see how it goes, modify interpretation accordingly.” Another 

respondent noted that “for rule of law issues, there isn’t a structure 

in place and a structure won’t be in place for a long time.”:



Several other company representatives whom we interviewed provided 

numerous examples to illustrate the difficulties anticipated with other 

rule of law-related reforms. Other explanations focused on the inherent 

barriers to transparency such as China’s history and culture; the 

evolutionary nature of the issue (for example, several respondents said 

that transparency is not a common concept in China); and a tendency to 

draft regulations and procedures that are deliberately vague. One 

company representative reported that Chinese agencies are likely to 

provide conflicting answers to business inquiries. In addition, several 

companies also cited consistent application of laws as a potential 

difficulty. At the central government level, China is committed to 

implementing WTO, but all cities and provinces understand WTO 

differently, in the view of one U.S. corporate representative. 

According to another interview respondent, China is so big that even if 

there is a central government policy, the policy may still vary 

throughout the country at different levels of government.



Other company representatives cited reforms to enforcement of laws and 

regulations relating to intellectual property rights (IPR) as another 

area fraught with difficulty. Respondents noted that Chinese officials 

have enacted reforms resulting in overall improvements to IPR 

protection, but that challenges continue. One company provided a 

specific example of a current problem that is expected to continue: 

“Local companies copy our product and packaging, even though these 

companies are operated by the local governments. Trademark registration 

takes at least 6 to 8 months. Even if a company wins a copyright case, 

you can’t get the government to enforce the copyright violation, so 

it’s not worth the time and money expended on filing a case.” IPR 

violations were also described by one company representative as a game 

embedded in China’s culture. Several respondents predicted that IPR 

would remain a problem in the years to come, because the government 

will not risk destabilizing the labor force by enforcing IPR laws and 

regulations.



China’s Need to Protect Its Domestic Interests:



Company representatives also described the domestic challenges China 

faces in protecting its domestic interests while implementing WTO 

commitments. Company representatives told us that they expected WTO 

reforms to be part of a long-term process, but they believed that the 

Chinese leadership is dedicated to living up to their WTO commitments. 

One individual noted that any change must be considered within the 

broader context of China’s political and economic environment. In his 

words, “The final test will be how such change affects or impacts on 

domestic interests including the domestic economy and political 

interests and pressures.” Several respondents referred to the balancing 

act that China faces as it implements reform and dismantles state-owned 

enterprises while still needing to protect the labor force and maintain 

economic stability. One company assessed the likely result by saying 

that while China may comply with the letter of its commitments, the 

process of reforming sectors populated by state-owned enterprises will 

be slow in order to protect those industries and to avoid displacing 

large numbers of workers. One individual said that China will not forgo 

domestic stability to meet WTO requirements and therefore, domestic 

firms will continue to be favored.



China’s Culture and Its Effect on Business Relationships:



A number of companies noted the need to remain attentive to cultural 

differences in doing business with China and their expectations that 

implementation will be a lengthy and gradual undertaking. Several 

corporate representatives mentioned the continued importance of 

personal relationships, known as “guanxi” in China. For example, one 

respondent noted that in China relationships are more important than 

policy and policy is more important than the rule of law. Another 

respondent echoed this theme and encouraged patience with the Chinese 

and their culture. Specifically, with reference to China’s WTO 

commitments, he said, “Patience and understanding will reap rewards. 

China bashing will not.”:



Another company representative advised that although it might be 

necessary to apply pressure to ensure that Chinese officials adhere to 

WTO rules, it is important to do so in a manner that does not cause 

officials to lose face.



Concluding Observations:



If implemented, China’s commitments will open China’s economy and 

reform its trading activities, thereby expanding U.S. companies’ 

opportunities for investing in China and for exporting goods, 

agricultural products, and services to China. Understanding U.S. 

companies’ expectations is fundamental for policymakers to judge the 

degree to which the benefits of China’s WTO membership are being 

realized. As you have requested, over the next several years we will 

continue to gather the views of the business community regarding 

China’s implementation of its WTO commitments and report the results to 

you.



We are sending copies of this report to interested congressional 

committees. We will make copies available to others on request. In 

addition, the report will be available at no charge on the GAO Web site 

at http://www.gao.gov.



If you or your staff have any questions about this report, please 

contact me at (202) 512-4128. Other GAO contacts and staff 

acknowledgments are listed in appendix VII.



Susan S. Westin

Managing Director

International Affairs and Trade:

Signed by Susan S. Westin:



[End of section]



Appendixes:



Appendix I: Objectives, Scope, and Methodology:



The Chairman and the Ranking Minority Member of the Senate Finance 

Committee and the Chairman and the Ranking Minority Member of the House 

Committee on Ways and Means asked us to undertake a long-term body of 

work relating to China’s membership in the World Trade Organization 

(WTO) and the monitoring and enforcement of China’s commitments. This 

work includes examining through annual surveys, the experience of U.S. 

firms doing business in China. The 2002 GAO Survey of U.S. Companies on 

China-WTO Issues and related interviews discussed in this report 

provided an opportunity for us to assess business views and 

expectations for their work in China while also exploring methods for 

soliciting business views on an annual basis in the future. Our 

objectives for this initial preparatory survey were to assess U.S. 

businesses’ (1) views about the importance of WTO-related commitments 

to their business operations in China, (2) views about the anticipated 

effects of China’s WTO-related reforms on their businesses, and (3) 

opinions regarding China’s prospects for implementing these reforms. To 

respond to our objectives, we mailed surveys to 551 selected chief 

executive officers (CEO) or presidents of U.S. companies with a 

presence in China; conducted structured interviews in China with 

representatives of 48 U.S. companies, two foreign-owned companies with 

operations in the United States and China, and representatives of two 

U.S. trade associations with representative offices in China; met with 

representatives of other U.S. business associations in China and the 

United States; and considered other surveys of U.S. businesses in 

China.[Footnote 16]



Survey Development:



We reviewed relevant documents related to China’s WTO accession and 

implementation to understand the context for questions included in our 

survey. These documents included China’s accession agreement, referred 

to as the Protocol on the Accession of the People’s Republic of China. 

This is a set of legal documents totaling more than 800 pages that 

describes China’s WTO commitments. It includes the protocol itself and 

the accompanying Report of the Working Party on the Accession of China. 

These documents describe how China will adhere to WTO principles and 

technical guidelines. Additionally, the agreement includes schedules 

for how and when China will grant market access to foreign goods and 

services, and several other annexes. We also consulted with high-level 

officials from several public and private sector agencies, 

organizations, and firms to obtain input on question development, 

survey administration, and prior surveys on related issues. 

Specifically, we refined our survey based on consultations with U.S. 

government agencies and offices including the Office of the U.S. Trade 

Representative, the Department of State, the Department of Commerce 

(International Trade Administration and Bureau of Economic Analysis), 

the Department of Agriculture, and the Congressional Research Service 

to discuss draft survey questions and methods of survey administration. 

In addition, we circulated the draft survey instrument among and sought 

comments from the following organizations: the American Chambers of 

Commerce in the People’s Republic of China, the American Farm Bureau, 

the Coalition of Service Industries, the Emergency Committee for 

American Trade, the National Association of Manufacturers, the U.S. 

Chamber of Commerce, and the U.S.-China Business Council. Finally, we 

participated in a feedback session with representatives of three 

private sector firms with a presence in China prior to pretesting our 

draft survey instrument.[Footnote 17] We conducted telephone pretests 

with representatives of five U.S. firms with a presence in China, which 

resulted in additional refinements to the survey instrument.



In the survey, we asked U.S. businesses to identify their business 

activities in China based on 25 agriculture/manufacturing categories 

and 18 services categories. For both agriculture/manufacturing and 

services, businesses could also choose an “other” category that allowed 

them to write in a description of their business activities in China. 

The agriculture/manufacturing categories were based on the Department 

of Commerce’s North American Industry Classification System. The 

services categories were based on the WTO’s services classifications 

and the U.S. Bureau of Economic Analysis’s services classifications 

used in its reports on services trade. The categories are shown in 

table 9 in appendix IV.



Sample Development:



Preparation of the sample for the survey on China-WTO issues required 

multiple steps. Our target population was the population of U.S. 

companies with a presence in China. However, consultation with the 

agencies, organizations, and firms previously mentioned confirmed that 

a comprehensive list of U.S. companies with investments in China did 

not exist. Consequently, we collected membership directories from the 

American Chambers of Commerce in the People’s Republic of China 

(Beijing; Chengdu, Sichuan; Guangdong; and Shanghai) and contact lists 

of American companies in China from the Department of Commerce’s U.S. & 

Foreign Commercial Service’s (FCS) offices in Beijing, Chengdu, 

Guangzhou, Shanghai, and Shenyang. We selected the names of all U.S.-

incorporated companies from these lists and entered them into a 

database. In cases where the nationality of incorporation was not 

identified, we obtained this information to the extent possible through 

searches of publicly available information and contacts with individual 

companies in the United States and China. We combined company names 

from these directories into a single list. A total of 3,139 company 

names was included in the database after we combined the names of U.S.-

incorporated companies from these sources. We excluded companies 

located in the United States, but whose ultimate parents were 

incorporated outside the United States (for example, we excluded 

companies incorporated in the British Virgin Islands). A total of 1,945 

company names remained in the database after completion of various 

automated steps to identify duplicate listings such as listings of 

multiple subsidiaries of the same parent company. Additional manual 

searching of the company names in the database and various business 

directories identified subsequent duplicate entries and further reduced 

the list to 1,695 company names. This list of 1,695 company names 

represented known U.S. companies registered with one of the five FCS 

offices and/or a member of one of the four American Chambers of 

Commerce in China with publicly available membership lists.[Footnote 

18] We then selected a random sample of 1,000 company names from the 

combined list of 1,695 companies. We chose to select a sample of 1,000 

companies based on the expectation that an unknown number of the 1,000 

companies would be identified as subsidiaries of other parent companies 

in the sample, or subsidiaries of companies not incorporated in the 

United States, and/or would not have contact information that could be 

located using publicly available information and individual contacts 

with the companies.



We searched a variety of sources, including the Leadership Directories’ 

Yellow Book, Nexis, and Internet search engines, in order to locate 

each company’s parent company name in the United States and/or to 

confirm the nationality of incorporation, locate corporate 

headquarters’ mailing addresses in the United States, identify the CEO 

or other most senior company officer’s name, and locate telephone 

numbers for reminder telephone calls. We also searched corporate Web 

sites, called companies, and looked at other business directories to 

locate mailing addresses, contact names, and telephone numbers. This 

process resulted in a final mailing list of 551 active U.S. companies 

with a presence in China and parent companies incorporated in the 

United States. The disposition of the random sample of 1,000 U.S. 

company names (after completion of our search for corporate contact 

information) is outlined in table 7.



Table 7: Disposition of Random Sample of 1,000 U.S. Company Names:



Disposition: Random sample selected from population of 1,695 company 

names; Number: 1,000.



Disposition: Contact information could not be located; Number: 191.



Disposition: Parent company incorporated outside the United States; 

Number: 157.



Disposition: Company name identified as duplicate listing; Number: 71.



Disposition: Other (out of business, no longer invested in China, 

etc.); Number: 21.



Disposition: Not a business (nonprofit organization, government 

organization, etc.); Number: 9.



Disposition: Included in final mailing list; Number: 551.



Source: GAO analysis of sample of 1,000 U.S. company names.



[End of table]



Survey Administration:



We mailed the first copy of our survey in early March 2002. In early 

April 2002, we mailed a second copy of the survey to all companies from 

which we had not received a survey response. Telephone reminder calls 

to nonrespondents began on April 17, 2002, and continued through May 

24, 2002. We mailed questionnaires to company CEOs and presidents at 

their headquarters offices in the United States, but a range of company 

officials in the United States and China, including managing directors, 

directors of international trade, and vice presidents, among others, 

completed the questionnaires.



U.S. Companies Responding and Not Responding to the Questionnaire:



Of the sample of 551 U.S. companies with a presence in China that we 

surveyed, responses indicated that 505 were eligible for inclusion in 

the sample. We received 191 usable questionnaires from eligible 

companies, for an overall response rate of 38 percent (191 usable 

responses/505 eligible sampled elements=38 percent). Because of this 

low response rate, we restricted our analysis to the subset of firms 

that participated in our survey, and we did not make estimates about 

the larger population of all U.S. businesses with a presence in China. 

The low response rate to the survey would threaten the validity of 

estimates made using these data, particularly if those not providing 

data were materially different from those who did provide data. As a 

result, the representativeness of weighted estimates for the population 

might be subject to significant bias. Because the survey results 

represent only responses received and are not projected to the 

population of U.S. companies with a presence in China, sampling errors 

have not been calculated. Therefore, we present survey results in this 

report in unweighted form, representing only those firms that 

participated in our study and that provided answers to the individual 

questions analyzed.



Other potential sources of errors associated with the questionnaires, 

such as question misinterpretation and question nonresponse, may be 

present. We included steps in the development of the questionnaire, the 

data collection, and data analysis to reduce possible nonsampling 

errors. Specifically, as previously discussed, we solicited feedback on 

a draft of the survey from numerous internal and external parties. We 

pretested the questionnaire with eligible representatives of U.S. 

companies with a presence in China to help ensure that our questions 

were interpreted correctly and that the respondents were willing to 

provide the information required. All nonrespondents received a follow-

up copy of the survey and a follow-up telephone call. All data were 

double-keyed during entry. We performed computer analyses to identify 

inconsistencies or other indications of errors and had all computer 

analyses reviewed by a second independent analyst. The final 

disposition of the 551 surveys is presented in table 8.



Table 8: Final Disposition of GAO’s Company Survey Respondents:



Disposition: Usable response received; Number: 191; Percent of total: 

35.



Disposition: Nonrespondent; Number: 174; Percent of total: 32.



Disposition: Refusal; Number: 140; Percent of total: 25.



Disposition: Ineligible (parent company incorporated outside the United 

States, company no longer invested in China, company out of business, 

etc.); Number: 26; Percent of total: 5.



Disposition: Undeliverable (questionnaires returned due to inadequate 

address or no forwarding address); Number: 20; Percent of total: 4.



Disposition: Total number of surveys mailed; Number: 551; Percent of 

total: 100.



Note 1: We calculated the response rate as follows: (Usable responses 

received) / Number of surveys mailed - [(Ineligible) + (Undeliverable)] 

= Response rate. Therefore, 191/551-(26+20)=38 percent.



Note 2: Totals do not add up to 100 percent due to rounding error.



Source: GAO survey results.



[End of table]



Structured Interviews:



We conducted structured interviews with representatives of 48 U.S. 

firms in Beijing, Guangzhou, Shanghai, and Shenzhen, China. These 

structured interviews gave us an opportunity to discuss survey 

responses in greater detail as well as to gain an understanding for the 

context of these responses, to determine whether responses to these 

questions varied between interview respondents in China and survey 

respondents based in the United States, to discuss the questions and 

survey administration issues with survey nonrespondents, and to obtain 

information from firms not included in the survey sample (including 

firms that did not appear in our random sample). Consequently, the 

firms that we interviewed included survey respondents and 

nonrespondents as well as companies not included in the mail survey 

sample. In addition to these criteria, our invitation list for the 

interview sessions also represented a broad cross section of the 

business sectors invested in China. We also interviewed representatives 

from two U.S. trade associations with offices in China in order to gain 

further insight into the possible range of business views. We discussed 

topics during the interviews that included the anticipated effects of 

China’s WTO membership, WTO compliance issues, and background issues to 

help us with our future work. Tabulations of the interview responses 

were independently verified.



Additional Limitations:



All firms that we interviewed or surveyed were assured that their 

responses would remain confidential. In spite of this, due to the 

sensitive and/or proprietary nature of the topics discussed, it is 

possible that the data presented in this report reflect the views of 

respondents only to the extent to which they felt comfortable sharing 

them with an independent agency of the U.S. Congress. In addition, 

respondents had varied knowledge of China’s WTO commitments and their 

application to their line of business.



We did our work in Washington, D.C., and in Beijing, Guangzhou, 

Shenzhen, and Shanghai, China. We performed our work from July 2001 to 

September 2002 in accordance with generally accepted government 

auditing standards.



[End of section]



Appendix II: GAO Survey of U.S. Companies on China-WTO Issues:



[See PDF for image]



[End of section]



Appendix III: GAO Structured Interviews of U.S. Companies about China-

WTO Issues:



[See PDF for image]



[End of section]



Appendix IV: Profile of Survey and Structured Interview Respondents:



This appendix summarizes key items of interest from the survey and 

structured interview results in order to present a profile of the 

companies providing the data discussed in this report. We asked survey 

and structured interview respondents a series of questions to describe 

their business operations in China. Detailed results are also included 

in the reprinted survey and structured interview guide found in 

appendixes II and III.



Respondents Came from a Wide Range of Industries, Locations, and Types 

of Operations:



The 191 respondents to our mail survey included companies from a wide 

range of industries, locations, and types of operations in China. For 

example, respondents included companies with business activities in all 

of the agriculture, manufacturing, and services categories listed in 

our survey. About 69 percent of respondents identified manufacturing as 

their primary business activity with China, while 25 percent of 

respondents identified services as their primary business activity with 

China. Only eight respondents (about six percent) identified 

agriculture as their primary business activity with China. Almost 60 

percent of respondents were relatively specialized and identified only 

one category to describe their business activities with China. 

Conversely, about 20 percent of respondents selected two categories to 

describe their business activities in China, and another 18 percent of 

respondents selected three or more categories to describe their 

company’s activities there. Table 9 displays the number of respondents 

included in individual categories to describe their business activities 

with China.



Table 9: Survey Respondents’ Business Activities with China:



Business category: Other manufacturing/industrial; Number selecting to 

describe any business activity with China: 40; Number selecting as 

primary business activity with China: 31.



Business category: Other services; Number selecting to describe any 

business activity with China: 23; Number selecting as primary business 

activity with China: 6.



Business category: Machinery (except electronic); Number selecting to 

describe any business activity with China: 20; Number selecting as 

primary business activity with China: 8.



Business category: Professional services (legal, accounting, medical, 

etc.); Number selecting to describe any business activity with China: 

18; Number selecting as primary business activity with China: 8.



Business category: Chemicals including pesticides, fertilizer, & 

pharmaceuticals; Number selecting to describe any business activity 

with China: 17; Number selecting as primary business activity with 

China: 8.



Business category: Semiconductor & other electronic components; Number 

selecting to describe any business activity with China: 17; Number 

selecting as primary business activity with China: 7.



Business category: Electronic equipment, household appliances & 

components; Number selecting to describe any business activity with 

China: 15; Number selecting as primary business activity with China: 2.



Business category: Computer & peripheral; Number selecting to describe 

any business activity with China: 14; Number selecting as primary 

business activity with China: 5.



Business category: Communication equipment; Number selecting to 

describe any business activity with China: 13; Number selecting as 

primary business activity with China: 3.



Business category: Business services; Number selecting to describe any 

business activity with China: 13; Number selecting as primary business 

activity with China: 5.



Business category: Computer, database, & related services; Number 

selecting to describe any business activity with China: 13; Number 

selecting as primary business activity with China: 4.



Business category: Plastic, rubber, clay, & related products; Number 

selecting to describe any business activity with China: 9; Number 

selecting as primary business activity with China: 2.



Business category: Textiles, apparel, accessories, & leather; Number 

selecting to describe any business activity with China: 8; Number 

selecting as primary business activity with China: 3.



Business category: Navigational, measuring, medical, & other control 

instruments; Number selecting to describe any business activity with 

China: 8; Number selecting as primary business activity with China: 3.



Business category: Motor vehicles, including body & parts; Number 

selecting to describe any business activity with China: 8; Number 

selecting as primary business activity with China: 5.



Business category: Miscellaneous manufactured products; Number 

selecting to describe any business activity with China: 8; Number 

selecting as primary business activity with China: 4.



Business category: Wood & paper products; Number selecting to describe 

any business activity with China: 7; Number selecting as primary 

business activity with China: 2.



Business category: Wholesale / Distribution; Number selecting to 

describe any business activity with China: 7; Number selecting as 

primary business activity with China: 1.



Business category: Transport services; Number selecting to describe any 

business activity with China: 7; Number selecting as primary business 

activity with China: 1.



Business category: Agriculture, forestry, fish, & hunting; Number 

selecting to describe any business activity with China: 6; Number 

selecting as primary business activity with China: 4.



Business category: Petroleum & coal; Number selecting to describe any 

business activity with China: 6; Number selecting as primary business 

activity with China: 4.



Business category: Telecommunication services; Number selecting to 

describe any business activity with China: 6; Number selecting as 

primary business activity with China: 0.



Business category: Food manufacturing; Number selecting to describe any 

business activity with China: 5; Number selecting as primary business 

activity with China: 1.



Business category: Furniture & related products; Number selecting to 

describe any business activity with China: 5; Number selecting as 

primary business activity with China: 1.



Business category: Aerospace products & parts; Number selecting to 

describe any business activity with China: 5; Number selecting as 

primary business activity with China: 1.



Business category: Insurance; Number selecting to describe any business 

activity with China: 5; Number selecting as primary business activity 

with China: 2.



Business category: Banking & all other financial services; Number 

selecting to describe any business activity with China: 5; Number 

selecting as primary business activity with China: 4.



Business category: Construction & related services; Number selecting to 

describe any business activity with China: 5; Number selecting as 

primary business activity with China: 0.



Business category: Tourism and travel-related services; Number 

selecting to describe any business activity with China: 5; Number 

selecting as primary business activity with China: 1.



Business category: Beverages & tobacco; Number selecting to describe 

any business activity with China: 4; Number selecting as primary 

business activity with China: 3.



Business category: Primary metals; Number selecting to describe any 

business activity with China: 4; Number selecting as primary business 

activity with China: 1.



Business category: Other transportation equipment; Number selecting to 

describe any business activity with China: 4; Number selecting as 

primary business activity with China: 1.



Business category: Retail / Franchises; Number selecting to describe 

any business activity with China: 4; Number selecting as primary 

business activity with China: 1.



Business category: Courier services; Number selecting to describe any 

business activity with China: 3; Number selecting as primary business 

activity with China: 0.



Business category: Educational services; Number selecting to describe 

any business activity with China: 3; Number selecting as primary 

business activity with China: 0.



Business category: Audio & video equipment; Number selecting to 

describe any business activity with China: 2; Number selecting as 

primary business activity with China: 1.



Business category: Audiovisual services; Number selecting to describe 

any business activity with China: 2; Number selecting as primary 

business activity with China: 0.



Business category: Environmental services; Number selecting to describe 

any business activity with China: 2; Number selecting as primary 

business activity with China: 0.



Business category: Recreational, cultural, & sporting services; Number 

selecting to describe any business activity with China: 2; Number 

selecting as primary business activity with China: 0.



Business category: Mining products; Number selecting to describe any 

business activity with China: 1; Number selecting as primary business 

activity with China: 1.



Business category: Manufacturing & reproducing magnetic & optical 

media; Number selecting to describe any business activity with China: 

1; Number selecting as primary business activity with China: 0.



Business category: Products imported into the U.S. under special tariff 

provisions; Number selecting to describe any business activity with 

China: 1; Number selecting as primary business activity with China: 1.



Business category: Health-related & social services; Number selecting 

to describe any business activity with China: 1; Number selecting as 

primary business activity with China: 1.



Note: Of the 191 survey respondents, 188 selected at least one business 

category to describe any of their company’s business activities with 

China. Numbers do not add to 191 because respondents could select more 

than one business category for question 9. For question 10, 136 survey 

respondents selected a business category to describe their primary 

business activities with China. :



Source: GAO Survey of U.S. companies on China-WTO issues, questions 9 

and 10.



[End of table]



Respondents reported that they carry out these business activities in 

facilities and offices across all of China. Beijing, Shanghai, and 

Guangdong were the most frequent responses to the question of where 

companies had a facility or other presence among all of the Chinese 

locations listed in our survey (listed in order of frequency of 

responses). In fact, only a few respondents (less than five) did not 

have a facility or other presence in Beijing, Guangdong, or Shanghai. 

About 46 percent of respondents had a facility or other presence in one 

or more of these three locations, while another 45 percent were located 

in Beijing, Shanghai, and/or Guangdong plus one or more other 

locations. Figure 5 shows the number of companies that reported having 

a facility or other presence in each location in China listed in our 

survey.



Figure 5: Location of Facilities or Other Presence of Survey 

Respondents:



[See PDF for image]



Note: Respondents could select multiple locations.



Source: GAO survey of U.S. companies on China-WTO issues, question 19.



[End of Figure]



Respondents Conduct Business through Variety of Business Relationships:



Survey and structured interview respondents reported that they engage 

in a range of business relationships in their many locations throughout 

China. More than 50 percent of the respondents had one type of business 

relationship, about 25 percent had two types of business relationships, 

and more than 10 percent of the respondents reported three or more 

types of business relationships there. Representative offices, joint 

ventures, wholly owned foreign enterprises, and agents/distributors 

were the most frequently reported types of business relationships, 

respectively. Table 10 provides a description of each type of business 

relationship. Figure 6 displays the number of survey and structured 

interview respondents that reported each type of business relationship.



Table 10: Survey and Structured Interview Respondents’ Types of 

Business Relationships in China:



Type of business relationship: Agent/distributor in China; Definition: 

Handles internal distribution and marketing/representation of products 

in China.



Type of business relationship: Representative office; Definition: 

Easiest type of offices for foreign firms to set up in China to perform 

“liaison” activities. Most cannot sign sales contracts, directly bill 

customers, or supply parts and after-sales services for a fee.



Type of business relationship: Branch office; Definition: Can engage in 

production and business activities. Used to develop networks and 

explore investment opportunities in China.



Type of business relationship: Joint venture; Definition: Partnership 

between Chinese and foreign entities. In an equity joint venture, all 

parties contribute capital, operate the venture, and share in the 

risks, profits, and losses in proportion to their equity investment. 

Contractual, or cooperative, joint ventures do not require equity 

participation by all parties. However, a contract between the partners 

sets forth the terms of the partnership, including the proportions in 

which products, revenue, and profits are distributed.



Type of business relationship: Wholly owned foreign enterprise; 

Definition: Maintains maximum operating independence from Chinese 

participation. Can fully access all corporate resources and technology 

from the parent company and more effectively protect their 

technologies. Venture is wholly owned by foreign investors.



Type of business relationship: Limited liability company; Definition: 

Generally refers to a business structure where investors share the 

risks, profits, and losses jointly and in proportion to the amount of 

investment. The registered capital of the venture is not divided into 

shares, but is instead accounted for by capital contribution 

certificates, which cannot be traded on exchanges.



Type of business relationship: Company limited by shares; Definition: 

Also known as a foreign-invested stock/share company. Refers to an 

enterprise that divides all capital into equal shares, which are 

distributed to shareholders in proportion to the amount of their 

investment. The shares may be traded on exchanges.



Note: Types of business relationships as shown in the GAO survey and 

structured interview guide of U.S. companies on China-WTO issues in 

appendixes II and III.



Source: U.S. Department of Commerce; Ministry of Foreign Trade and 

Economic Cooperation, People’s Republic of China; International 

Monetary Fund; and Organization for Economic Co-operation and 

Development.



[End of table]



Figure 6: Number and Types of Survey and Structured Interview 

Respondents’ Business Relationships in China:



[See PDF for image]



Note: Respondents could select all business relationships that applied.



Sources: GAO survey of U.S. companies on China-WTO issues, question 2; 

and GAO structured interviews of U.S. companies about China-WTO issues, 

question 1.



[End of Figure]



More than 40 percent of the survey respondents reported that their 

companies both imported from and exported to China as part of these 

business relationships. More than one quarter of the respondents 

reported that they only exported to China. Almost one quarter of the 

respondents reported that they neither import from nor export to China. 

Companies that neither import from nor export to China include 

businesses operating representative offices and service providers, 

among others.



Size and Experience of Respondents Vary:



Survey respondents also varied with respect to the number of employees 

in the United States, the number of employees in China, and the length 

of time that their companies had engaged in business relationships with 

China. Large companies, those with 500 or more employees in the United 

States, accounted for about 60 percent of the respondents. In contrast, 

only 20 percent of the respondents reported having more than 500 

employees (including joint venture employees) in China.



Table 11: Survey Respondents’ Years in China, by Company Size:



Years in China: 0 to 5 years; Small-& medium-sized enterprises: Number: 

22; Small-& medium-sized enterprises: Percent: 39; [Empty]; Large 

companies: Number: 22; Large companies: Percent: 17.



Years in China: 6 to 9 years; Small-& medium-sized enterprises: Number: 

18; Small-& medium-sized enterprises: Percent: 32; [Empty]; Large 

companies: Number: 39; Large companies: Percent: 31.



Years in China: 10 years or more; Small-& medium-sized enterprises: 

Number: 17; Small-& medium-sized enterprises: Percent: 30; [Empty]; 

Large companies: Number: 66; Large companies: Percent: 52.



Note: Percentages are based on the 184 respondents who identified their 

company’s number of years in China and number of employees in the 

United States (survey questions 3 and 6). Therefore, these percentages 

do not include respondents who did not provide an answer to either 

question 3 or 6. Appendix II provides a breakdown of these responses. 

Totals may not equal 100 percent due to rounding errors.



Source: GAO survey of U.S. companies on China-WTO issues, questions 3 

and 6.



[End of table]



Respondents to our survey had a strong base of experience to draw on as 

they answered our questionnaire. Respondents reported business 

relationships with China ranging from less than 2 years to more than 20 

years, with 6 to 9 years and 10 to 20 years as the most frequent 

responses. Most of the respondents had engaged in a business 

relationship with China for more than 5 years. In fact, more than half 

of large company respondents had been in China more than 10 years. 

Smaller companies that responded to our survey had generally maintained 

a presence in China for fewer years than large companies. Figure 7 

shows the length of time that survey respondents had engaged in a 

business relationship with China.



Figure 7: Length of Time That Survey Respondents Had Been in Business 

Relationship with China:



[See PDF for image]



Note: The number of survey respondents was 188.



Source: GAO survey of U.S. companies on China-WTO issues, question 3.



[End of Figure]



Companies with a longer history in China and agriculture/manufacturing 

firms reported that they were already profitable more frequently than 

companies with a shorter history in China or firms whose primary 

business activity in China focused on services. Specifically, for 

companies engaged in a business relationship with China for 6 to more 

than 20 years, about 72 percent of them reported that they were already 

profitable. Among companies engaged in a business relationship with 

China for 5 years or less, only about 43 percent of them reported that 

they were already profitable. Overall, about 66 percent of respondents 

engaged in agriculture/manufacturing reported that they were already 

profitable compared to less than 50 percent of the respondents only 

engaged in services activities.



[End of section]



Appendix V: Profile of U.S. Investment and Trade

with China:



U.S. investment and trade with China have grown significantly over the 

past decade. U.S. companies have increased their presence in China 

through manufacturing and service operations, and both exports and 

imports of goods and services have risen dramatically, including those 

of small-and medium-sized companies. In addition, many U.S. companies 

have integrated operations in which trade occurs with their affiliates 

in China.



U.S. Investment in China:



Total U.S. direct investment in China reached nearly $10 billion in 

2000, according to the U.S. Department of Commerce (on a historical-

cost basis), making the United States the second largest source of 

foreign direct investment in China. This amount represents nearly 27 

times the amount of U.S. foreign direct investment in China in 1990. 

U.S. investment in China followed a different pattern from overall U.S. 

investment worldwide. Figures 8 and 9 show the percentages of foreign 

investment worldwide and U.S. foreign direct investment by industry 

sector in China in 2000. The largest portion of worldwide U.S. direct 

investment abroad went to finance, insurance, and real estate, which 

accounted for 40 percent of total U.S. investment abroad. However, in 

China, finance, insurance, and real estate accounted for less than 10 

percent of U.S. investment in 2000. In China, the largest portion of 

U.S. foreign direct investment went to manufacturing, which accounted 

for almost 60 percent of investment. Globally, manufacturing accounted 

for less than 30 percent of U.S. investment in 2000. This difference 

reflects China’s foreign direct investment policy, which aimed at 

guiding direct investment into targeted industries in accordance with 

China’s economic and industrial development strategy. The targeted 

economic sectors include infrastructure (such as roads) and high-

technology industries.



Figure 8: U.S. Foreign Direct Investment Worldwide, 2000:



[See PDF for image]



Source: GAO analysis of Bureau of Economic Analysis Survey of Current 

Business, 2000.



[End of Figure]



Figure 9: U.S. Foreign Direct Investment in China, 2000:



[See PDF for image]



Source: GAO analysis of Bureau of Economic Analysis Survey of Current 

Business, 2000.



[End of Figure]



U.S. Trade with China:



U.S. exports of goods and services have also grown significantly over 

the past decade. In terms of trade in goods, U.S. exports totaled 

almost $18 billion in 2001, making China the ninth largest market for 

U.S. goods. The United States was also the top export destination for 

China in 2001, as $102 billion in goods from China were imported here. 

As a result of this difference between exports and imports, the United 

States has had a trade deficit in goods with China since 1983. In terms 

of exports, U.S. small-and medium-sized companies accounted for a 

growing share of companies that export to China. In 1999, about 83 

percent of companies that exported to China were small-and medium-sized 

firms compared to about 77 percent in 1992, according to the U.S. 

Department of Commerce. In addition, the value of these exports to 

China rose 85 percent from 1992 to 1999. Nonetheless, large firms still 

accounted for more than 70 percent of total U.S. exports to China in 

1999.



U.S. exports to China include products such as transport equipment, 

electrical machinery, office machines, oilseeds, and fruits. Figure 10 

shows the distribution of U.S. exports to China in 2001 by broad 

industrial groupings. This distribution of U.S. exports to China is 

very similar to the distribution of U.S. exports to the world overall. 

For example, machinery, electronics, and high-tech apparatus; auto 

vehicles, other vehicles, and parts; and chemicals, plastics, and 

minerals were the three major exporting sectors, both worldwide and to 

China in 2001.



Figure 10: U.S. Exports to China, 2001:



[See PDF for image]



Note: Industrial categories are based on aggregate groupings of the 

international harmonized system used to classify imports and exports 

(see appendix I for more information on these categories).



Source: GAO analysis of U.S. Department of Commerce official trade 

statistics.



[End of Figure]



U.S. private services exports to China have also grown over the past 

decade, rising from $1.6 billion in 1992 to $4.6 billion in 2000, 

according to the U.S. Department of Commerce. The United States 

maintains a services trade surplus with China, importing about $2.8 

billion in services from China in 2000. China is currently a relatively 

small market for U.S. services exports, making up less than 2 percent 

of total U.S. services exports in 2000.



For some multinational companies, investment and trade with China are 

integrated. Companies may establish a presence in China through foreign 

direct investment in order to supply goods and services to the Chinese 

market or to produce products in China for export. In 1999, the most 

recent year available for such data, U.S. businesses exported about $3 

billion in goods to their affiliates in China, according to the U.S. 

Department of Commerce. This accounted for nearly one quarter of total 

U.S. exports to China in that year. In addition, U.S. parent companies 

sold nearly $500 million in services to their affiliated companies in 

China, accounting for about 10 percent of total U.S. cross-border sales 

of services to China in 2000. In order to supply services abroad, 

companies can either provide the service from the United States (cross-

border trade) or establish affiliates in foreign countries to supply 

the foreign markets directly. In the case of China, U.S. businesses 

provided about $1.7 billion in services through local affiliates in 

1999. This is more than double the amount provided in 1998 ($800 

million) and has grown annually since 1993, the first year for which 

these figures were available.[Footnote 19]



[End of section]



Appendix VI: Summary of Other Business Surveys of U.S. Companies in 

China:



We identified and reviewed similar surveys that other organizations had 

conducted of U.S. companies in China to help us develop our own 

questionnaire and to increase our understanding of issues of interest 

to companies doing business in China. These surveys, administered 

between 1998 and 2001, were sponsored by U.S. government agencies, 

professional associations, and consulting firms and had response rates 

ranging from just under 5 percent to just under 30 percent. Table 12 

summarizes the surveys we reviewed in terms of their sponsors, 

populations, response rates, key survey topics, WTO-related findings, 

and other relevant factors.



Table 12: Recent Surveys of Companies with a Presence in China on WTO-

Related Issues:



Survey: (1) Survey of U.S. Business in China; Sponsor: U.S. Embassy-

Beijing, with assistance from Gallup China; Administration date: 

December 1998; Survey population: Members of the Beijing American 

Chamber of Commerce and U.S. companies in China identified by FCS; 

Response rate information: The methodology section stated that 286 

responses were received and that that the sample consisted of 1,025 

firms in China. This implies that the response rate was about 28%; Main 

survey topics: * Company profiles; * Imports and exports to China; * 

Reasons for entering the China market; * Contractual obligations; * 

Dispute resolution; * Profitability; * Growth and development; * 

Business outlook/ expectations; * Relations with government agencies; 

Questions relevant to GAO survey: The majority of respondents rated the 

lack of transparency of laws and regulations, the cost of doing 

business, customs procedures, and foreign exchange rate risks as worse 

than expected. About three quarters of the respondents said they 

planned to expand their Chinese operations during the next 5 years. 

Around 40% reported they were not profitable.



Survey: (2) WTO Compliance Assessment Mission to China: May 2000 Trip 

Report; Sponsor: Department of Commerce with some American Chamber of 

Commerce assistance; Administration date: May 2000; Survey population: 

U.S. companies in China on the American Chamber of Commerce’s and U.S.-

China Business Council’s lists; Response rate information: The report 

stated that the survey was sent to about 400 companies.; The FCS 

official responsible for the survey told us that about 60 companies 

responded. This implies that the response rate was about 15%.; Main 

survey topics: * Expected difficulty with China’s WTO obligations; * 

USG compliance assistance priorities/ monitoring problems; * Concerns 

with retaliation for reporting WTO problems; * Understanding of WTO 

obligations; * WTO training; Questions relevant to GAO survey: 

Respondents were concerned about China’s ability to enforce obligations 

consistently throughout the country. Corruption, local/provincial 

implementation, IPR, and transparency were also viewed as major 

problems. The majority of respondents recommended that the USG 

establish a compliance team in China and educate the Chinese 

government.; The majority of respondents reported that they did not 

understand the WTO obligations for their sector.; About two thirds of 

respondents reported that they needed WTO training.; About half of the 

respondents reported that they feared retaliation if they reported WTO 

problems.



Survey: (3) American Chamber of Commerce Annual Membership Survey (key 

findings reported in the 2002 White Paper: American Business in China); 

Sponsor: Beijing American Chamber of Commerce; Administration date: 

2001; Survey population: Member companies of the Beijing American 

Chamber of Commerce; Response rate information: The report stated that 

172 member companies responded to the American Chamber of Commerce 

annual survey.; Earlier, the report noted that the Beijing American 

Chamber of Commerce has more than 750 member companies. If those 750 

members constituted the survey sample, the response rate would have 

been around 23%.; Main survey topics: * Impact of the global economic 

slowdown; * American Chamber of Commerce members’ China operations; * 

Challenges in China’s business and legal environment; * China’s 5-year 

business outlook; Questions relevant to GAO survey: About two-thirds or 

more of the respondents were negatively affected by China’s weak 

transparency requirements, bureaucracy, weak enforcement of laws, 

restrictions on businesses, and protectionism.; Increased transparency 

was viewed as the major anticipated effect of China’s WTO entry. More 

than three quarters of the respondents expect WTO membership to have a 

positive impact on their company’s growth. More than three quarters of 

the respondents said their 5-year business plans were sensitive to WTO 

implementation.; More than three quarters of the respondents were 

concerned that the WTO agreement will be ignored, that new regulations 

will counter WTO, and that there will be increased protectionism.



Survey: (4) China 21[ST] Century WTO; Foreign Investment Into China: 

Fitness Survey; Sponsor: Deloitte-Touche Tomatsu; Administration date: 

October 2001; Survey population: Subscribers to CFO Asia Magazine, CFO 

US Magazine, and a China-specific newsletter. European executives were 

also surveyed in Europe. (Some respondents had a presence in China at 

the time of the survey, while others did not.); Response rate 

information: There were 680 respondents to this survey. A Deloitte-

Touche Tomatsu representative informed us that the response rate was 

4%.; Main survey topics: * Investment and return in China; * Operating 

in post-WTO China; * Financing challenges; * Restructuring to benefit 

from WTO; * Human capital challenges; * Fitness and preparation for WTO 

challenges; Questions relevant to GAO survey: Almost 90% of respondents 

in China reported that the importance of the Chinese market will 

increase as a result of WTO entry. About two-thirds of these 

respondents expected to expand existing product/ enterprise lines in 

China. China’s implementation of WTO commitments, regulatory 

environment, and distribution infrastructure were concerns for most 

respondents. More than two-thirds of respondents also cited increased 

competition from foreign competitors as a concern. Fraud / piracy, loss 

due to problems with receivables, political upheaval, and foreign 

exchange volatility were viewed as potential problems by about one-

third of respondents. Only 10% of respondents in China reported that 

they had a great deal of familiarity with China’s WTO commitments. 

However, almost two-thirds of respondents in China have a certain 

amount of familiarity.



Note: 	USG = U.S. government.



	CFO = Chief financial officer.



Source: GAO analysis of various surveys.



[End of table]



These surveys cannot be directly compared to our survey, because they 

were administered at different points in time to different populations 

and asked different questions. All of the surveys discussed here 

addressed issues that overlapped with the items considered in our 

survey. However, some of them had very different purposes than our 

survey. In addition, all of the other surveys had low response rates, 

which raises major questions about generalizing their results to the 

full populations from which the samples were drawn.



Nevertheless, we found that, at a very broad level --such as basic 

expectations about WTO --there were some similarities between the 

responses to the other surveys and the responses to our survey. 

Furthermore, the results of these surveys can sometimes provide further 

insights into the results that we obtained. For example, we asked a 

question about profitability, as did several of the other surveys. Our 

question asked how soon firms expected to be profitable. Other surveys 

asked about the profitability of investments and improvements in 

operating margins. While all of these questions probed the same issue, 

the way in which the questions were asked and the response options all 

differed; therefore, reporting on the other surveys’ results allows for 

some additional insights and perspectives. The sections that follow 

describe some of the main findings from these surveys in order to 

provide some context for our survey.



Effects of China’s WTO Membership:



Respondents to the other surveys were generally positive about the 

effects of China’s WTO entry. For example, more than three quarters of 

the respondents to the 2001 American Chamber of Commerce annual 

membership survey expected China’s WTO entry to have a positive impact 

on their companies. Respondents viewed the major positive impacts as 

increased transparency (85 percent), increased business scope (81 

percent), and increased investment options (66 percent). Almost 90 

percent of the China-based respondents to the 2001 Deloitte-Touche 

Tomatsu survey reported that the importance of the Chinese market will 

likely increase in the 3 years after China’s WTO entry. Almost two-

thirds of these respondents expected their companies to expand existing 

product or enterprise lines in China.



Challenges of Doing Business in China:



There are many difficulties with doing business in China, according to 

respondents to the other surveys. For example, almost two-thirds of the 

respondents to the 1998 U.S. Embassy Survey reported that problems with 

transparency were worse or much worse than they had expected. More than 

half of the respondents to this survey also reported that the cost of 

doing business, the problems with customs procedures, and the risks 

encountered in dealing with foreign exchange rates were worse than they 

had expected. Almost half of the respondents reported that 

protectionism, the enforcement of regulations, and intellectual 

property rights (IPR) protection were worse than expected. Similarly, 

at least two-thirds of the respondents to the 2001 American Chamber of 

Commerce annual membership survey indicated that transparency, 

bureaucracy, weak enforcement of laws, business scope restrictions, and 

protectionism negatively affected their companies.



Potential Compliance Problems:



The other surveys also listed a number of potential compliance 

problems. More than two-thirds of the respondents to the May 2000 

Department of Commerce survey foresaw difficulties with China’s ability 

to develop a WTO-compliant legal framework and enforce the obligations 

consistently throughout the country. About half of these respondents 

expected difficulties with or due to corruption, local/provincial 

implementation, IPR, transparency in practices, and/or transparency in 

regulations. More than three quarters of the respondents to the 2001 

American Chamber of Commerce annual membership survey were concerned or 

very concerned that China’s WTO agreement will be ignored, that new 

regulations will be enacted to counter WTO commitments, and that there 

will be increased protectionism by the Chinese government. China’s 

implementation of its WTO commitments was a concern for most 

respondents (about 90 percent) to the 2001 Deloitte-Touche Tomatsu 

survey.



The 2000 Department of Commerce survey asked a question on concerns 

about potential retaliation for reporting compliance problems to the 

U.S. government. About half of the survey respondents reported that 

they feared retaliation if they reported WTO compliance problems to 

U.S. government officials.



Profitability:



Questions about profitability generally yielded results similar to 

those obtained in response to our survey. Almost 60 percent of the 

respondents to the 1998 U.S. Embassy Survey reported that they were 

already profitable. Slightly more than 50 percent indicated that they 

had attained a return on their investment. About 50 percent of the 

respondents to the 2001 American Chamber of Commerce annual membership 

survey reported that their operating margins had improved either 

“substantially” or “somewhat” from 2000 to 2001, while about 25 percent 

of respondents reported that their operating margins had deteriorated 

either “substantially” or “somewhat” over the same time period. About 

50 percent of the respondents to the 2001 Deloitte-Touche Tomatsu 

survey expected their investments to be profitable in less than 3 

years, while slightly less than 33 percent expected investments to be 

profitable in about 3 to 4 years.



Familiarity with China’s WTO Commitments:



Two of the other surveys asked questions about respondents’ familiarity 

with China’s WTO commitments. Almost 66 percent of respondents to the 

2000 Department of Commerce survey reported that at the time they did 

not understand the WTO obligations for their sector. Only about 10 

percent of respondents to the 2001 Deloitte-Touche Tomatsu survey that 

were located in China reported that they were familiar with China’s 

commitments to a “great extent.” Sixty-four percent reported that they 

were familiar to a certain extent, while 25 percent reported that they 

had very little familiarity. The area in which respondents already in 

China most wanted to increase their familiarity was in taxation and 

customs commitments (74 percent), followed by marketing and 

distribution (59 percent), IPR and financial services (38 percent), 

technology transfer (33 percent), labor and benefits (31 percent), and 

venture capital investment (28 percent).



[End of section]



Appendix VII: GAO Contacts and Staff Acknowledgments:



GAO Contacts:



Adam Cowles, (202) 512-9637

Michelle Sager, (202) 512-2712:



Acknowledgments:



In addition to those named above, Carolyn Black-Bagdoyan, Ming Chen, 

Martin De Alteriis, Matthew Helm, Simin Ho, Stanley Kostyla, Janeyu Li, 

Rona Mendelsohn, Suen-Yi Meng, Beverly Ross, Richard Seldin, and 

Timothy Wedding made key contributions to this report.



FOOTNOTES



[1] Foreign direct investment data are 2000 statistics, from the 

Ministry of Foreign Trade and Economic Cooperation, People’s Republic 

of China. Export data are 2001 statistics, from the U.S. Department of 

Commerce, Bureau of the Census.



[2] Appendix VI describes several surveys of U.S. companies in China 

that were conducted by other organizations in recent years. These 

surveys obtained response rates that ranged from about 4 percent to 28 

percent.



[3] Definitions of the rule of law are numerous and varied. For the 

purposes of this report, we generally use the term to describe a 

society in which law is generally stable and transparent, is 

consistently and independently applied, and imposes meaningful 

restraints on government officials and entities and other members of a 

ruling elite.



[4] The four cities identified in our survey included Beijing, 

Chongqing, Shanghai, and Tianjin.



[5] China is divided into provinces, autonomous regions, and 

municipalities directly under the central government. According to the 

Chinese Constitution, regional autonomy is practiced in the autonomous 

regions where a number of people of minority nationalities live and 

organs of self-government have been established.



[6] For more information, see (forthcoming) World Trade Organization: 

Analysis of China’s Commitments to Other Members, GAO-03-4 (Washington, 

D.C.: Oct. 2, 2002).



[7] A patent is the right given to inventors to have exclusive rights 

for a specified time period for making, using, or selling a new, 

useful, nonobvious invention. Trademarks are words, names, symbols, or 

devices that manufacturers use to identify their goods and to 

distinguish them from the products of their competitors. Copyrights 

provide the exclusive right to reproduce, publish, and/or perform an 

original work in public and to make adaptations. Trade secrets involve 

the protection of undisclosed information. Integrated circuits are 

semiconductor chips.



[8] For additional information on the WTO’s dispute settlement 

mechanism, see U.S. General Accounting Office, World Trade 

Organization: Issues in Dispute Settlement, GAO/NSIAD-00-210 

(Washington D.C.: Aug. 9, 2000).



[9] Hong Kong, a Chinese Special Administrative Region, is the largest 

source of foreign direct investment in China.



[10] As defined by the U.S. Department of Commerce, small-and medium-

sized enterprises have fewer than 500 employees, while large companies 

have 500 or more employees.



[11] Commitment areas ranked “High” in difficulty if more than 60 

percent of respondents selected “Difficult.” Commitment areas ranked 

“Medium” if 41 to 60 percent of respondents selected “Difficult.” 

Commitment areas ranked “Low” if 40 percent or less of respondents 

selected “Difficult.” The percentages for the individual commitments 

were based on the number of respondents who made a judgment about the 

ease or difficulty of implementation for each commitment area.



[12] Specifically, 20 of the 30 commitment areas listed in our survey 

received a higher number of “Difficult” responses than “Easy,” “Neither 

easy nor difficult,” or “Don’t know” responses.



[13] Identified in our survey as Beijing, Chongqing, Shanghai, and 

Tianjin.



[14] For more information on the location of respondents’ facilities or 

other presence as well as their expectations for implementation 

difficulty in specific locations, see appendix II, questions 19 and 20.



[15] This section is based on open-ended comments that we received from 

U.S. company representatives in structured interviews in China as well 

as comments written in and attached to survey responses.



[16] Our summary of other surveys is included in appendix VI.



[17] For the purpose of this report, we defined “presence in China” to 

include all of the response items in survey question 2, as shown in 

appendix II.



[18] Although this survey population may not be representative of all 

U.S. businesses established in China, we selected our sample from this 

population because it provided the best information available.



[19] Worldwide, U.S. companies’ provision of services through a local 

affiliate has surpassed provision of services through cross-border 

trade since 1996.



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