Letter to USTR Zoellick on Implementation of the TRQ Agreement by the People’s Republic of China

Dear Ambassador Zoellick:

The National Cotton Council of America has serious concerns with the way in which the People’s Republic of China has chosen to implement its obligations contained in the bilateral and multilateral agreements on China’s accession to the World Trade Organization with respect to cotton and cotton products. While China has issued regulations stating how it intends to implement the new tariff rate quotas and announced a TRQ for cotton of approximately 820,000 metric tons in February, our review of those regulations and information we have gathered from sources within China, indicate that China is not changing the way it approaches cotton and cotton textile trade. In other words, China is not implementing the U.S. – China bilateral agreement on China’s WTO accession and the multilateral agreement on China’s accession in a manner consistent with its obligations.

The National Cotton Council is the central organization of the United States cotton industry. Its members include producers, ginners, oilseed crushers, merchants, cooperatives, warehousemen, and textile manufacturers.

Reports indicate that China has allocated the cotton fiber TRQ as follows:

The USDA Fact Sheet on the U.S. / China agreement states, "Two-thirds of the TRQ will be reserved for import by the private sector. The United States and China have agreed on specific rules for TRQ administration to maximize the possibility that TRQ’s fill. Unutilized quota amounts will be reallocated to other importers."

The allocation of the TRQ established by China denies national treatment to cotton fiber imports. Out of the 820,000 metric ton quota, only 50,000 tons represents true, private sector access. The 270,000 tons allocated to State Trading Enterprises will only be utilized if the government of China determines to make purchases. The 500,000 allocated to the "processing trade" may only be imported by textile mills that promise to export the resulting textile product. This quantity of the TRQ cannot compete freely in China’s internal cotton and cotton textile market. If the mills do not re-export the resulting textile products, they will be penalized by the loss of subsequent quota and by being retroactively charged the over-quota duty rate on the in-quota amount. By implementing the TRQ in this fashion, China has used the WTO accession agreement to further increase its cotton textile exports to the United States while shielding its own industry from competition.

Other aspects of implementation seem designed to reduce the possibility that TRQ’s fill. For example, the small 50,000 metric ton quota allocated to the private trade has been divided between hundreds of private textile mills. These small units, however, are commercially impracticable in contrast to obligations stated in the agreements that "allocations will be established for commercially viable shipping quantities."

Not only was the allocation delayed by over three months, the time period in which companies could request quota allocation this year was unnecessarily short. In addition, end-users must accurately anticipate their needs 12 months in advance in order to participate in the program.

The most serious shortcoming in China’s approach is its clear intent to deny national treatment for imported cotton fiber. For a very long period, China has spurred its textile exports through various systems of tax rebates and tiered pricing. Despite China’s agreement with the United States and other WTO members, it appears that this manipulation is destined to continue. If cotton fiber is imported into China at the in-quota rate of duty, it should not matter whether that cotton is made into a shirt that is sold in China or is exported. The rules should be the same.

As the system now stands, China, as the largest potential market for cotton fiber exports – continues to protect its domestic textile market from competition with imports, despite its obligations not to do so. While China has acted to protect its domestic textile and apparel production, it is using the U.S. agreement to enhance its production of exported textiles and to increase dramatically its market access to the United States.

China’s approach to the cotton fiber TRQ will not result in meaningful market access for imported cotton fiber. It is not in conformity with the China’s bilateral and WTO obligations, nor is it consistent with WTO principles of national treatment. We are sending our International Trade Policy Counsel to China the week of May 20 to meet with representatives of the cotton and textile industries and the government to discuss the current situation. We urge you to begin consultations with China concerning cotton fiber market access and obtain a commitment from China to end the distinction between cotton fiber imports for its "processing trade" and those for use within China.

We would appreciate the opportunity to discuss these issues with you in more detail. We look forward to working with you to ensure that China lives up to its trade obligations.