CHINA'S COMMITMENTS ON TRADE IN SERVICES UNDER THE WTO AND THE ECFA

11/01/2010

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The Cross-Straits Economic Cooperation Framework Agreement (the "ECFA") between Taiwan and China was signed on June 29, 2010 and took effect on September 12, 2010. The Agreement consists of 16 articles and 5 annexes, which cover trade in goods, trade in services, investment and dispute settlement. The signing of the ECFA demonstrates that both governments are willing to improve cross-strait economic relationship. Many have predicted that the ECFA would create tremendous economic opportunities for Taiwan, since Taiwan's goods and services would enjoy preferred treatment when entering China in comparison to other countries'. In addition to the elimination of restrictive measures, the ECFA also provides an "early harvest plan" for trade in services where both Taiwan and China initially commit to providing better market access for select services sectors.
l	Definition of "Service Suppliers"
	Under Annex V to the ECFA, Definitions of Service Suppliers Applicable to Sectors and Liberalization Measures under the Early Harvest for Trade in Services, the early harvest plan for trade in services applies to "service suppliers" who are either natural persons or judicial persons of Taiwan or China. Specifically, a judicial person service supplier should be an entity formed in accordance with the laws of either Taiwan or China and can be in the form of a company, a trust, a joint venture, a partnership, a sole proprietorship or an association.
	Furthermore, to be a qualified judicial person service supplier from either party to the ECFA ("Originating Party"), a supplier must (i) have provided in the Originating Party, for at least three consecutive years, the scope and nature of services that it intends to provide in the other Party (for banking institutions, insurance, securities and futures companies, stricter requirements on the length of operation history apply); (ii) have paid taxes in the Originating Party; and (iii) own or lease business premises in the Originating Party.
	It is noteworthy that the ECFA does not expressly set a requirement for the nationality of the judicial person service suppliers' ultimate shareholders. Thus, it appears that persons who are not nationals of Taiwan (or China, as the case may be) may be able to enjoy the benefits of the early harvest plan by establishing a judicial person in Taiwan (or China).
	For instance, if a Japanese enterprise wishes to enter a service sector in China that is included in the early harvest plan but not yet opened under the WTO, it may first establish a subsidiary in Taiwan, and then through this subsidiary, (i) render the same scope of services in Taiwan for three consecutive years, (ii) file annual income tax returns in Taiwan, and (iii) lease or purchase business premises in Taiwan. When all of these conditions are fulfilled, it may enter the Chinese market through this Taiwan subsidiary and enjoy the benefits of the early harvest plan.
l	Services under the Early Harvest Plan and China's Commitments under the WTO
	Several of China's commitments under the early harvest plan are more favorable to service suppliers from Taiwan than its current concessions under the WTO. Nonetheless, such commitments do not affect its horizontal commitments under the WTO and do not include any commitment on mode four of service supply – presence of natural persons. The following is a brief introduction of China's commitments on non-financial service sectors under the early harvest plan.
	1.	Service sectors prohibited under the WTO
		In China, the following service sectors are now open to service suppliers from Taiwan, but not foreign service providers under the WTO:
		(1)	Research and experimental development services on natural science and engineering (CPC 8510)
			Taiwan service suppliers are permitted to provide such services through equity joint ventures, contractual joint ventures or wholly-owned enterprises. Under the United Nations Provisional Central Product Classification (the "CPC"), CPC 8510 includes the research and experimental development services in the following fields: physical sciences (CPC 85101), chemistry and biology (CPC 85102), engineering and technology (CPC 85103), agricultural sciences (CPC 85104), medical sciences and pharmacy (CPC 85105), and other natural sciences (CPC 85109)
		(2)	Specialty design services (CPC 87907)
			Same as CPC 8510, Taiwan service suppliers may set up equity joint ventures, contractual joint ventures or wholly-owned enterprises to provide specialty design services in China. The CPC describes the "specialty design services" under this category as "services consisting in creating designs and preparing patterns for a variety of products by harmonizing aesthetic considerations with technical and other requirements." This category includes furniture designs, interior designs and decorations and aesthetic designs for various other consumer products, but excludes design of industrial products or graphic design.
		(3)	Hospital services (CPC 9311)
			Taiwan service suppliers may establish wholly-owned hospitals in Shanghai Municipality, Jiangsu Province, Fujian Province, Guangdong Province and Hainan Province. In other provinces, Taiwan service providers are permitted to set up hospitals through China-Taiwan joint venture or cooperation in China. Taiwan service providers must abide by relevant regulations on foreign investment in hospitals through joint venture, cooperation or sole-ownership.
	2.	Service sectors with superior commitments under the ECFA
		(1)	Where Taiwan wholly-owned enterprises are allowed
			For the following service sectors, China's specific commitments under the WTO of mode three supply are qualified. In this regard, the early harvest plan under the ECFA provides better treatments for Taiwan service suppliers.
			(a)	Software implementation services (CPC 842), convention services (CPC 87909) and input preparation services (CPC 8431)
				Under the WTO, China opened the markets for these services only to joint ventures, although allowing foreign majority ownership. However, under the early harvest plan, Taiwan service suppliers may establish wholly-owned enterprises to provide convention services, input preparation services and services under CPC 842, which includes systems and software consulting, systems analysis, systems design, programming and systems maintenance services.
			(b)	Aircraft repair and maintenance services (CPC 8868)
				Under the WTO, foreign service suppliers are permitted to establish joint ventures for providing aircraft repair and maintenance services in China. However, it is required that the Chinese side hold controlling shares or be in a dominant position in the joint ventures. Under the early harvest plan, Taiwan service suppliers may establish wholly-owned enterprises to provide repair and maintenance services. The only condition is that such Taiwan service suppliers or the principal investors of a group of co-investors from Taiwan must be judicial persons.
		(2)	Where superior commitments are made
			(a)	Accounting, auditing and book-keeping services (CPC 862)
				Before the ECFA, the "Temporary License to Perform Auditing services", which Taiwan accounting firms have to have for providing any auditing services in China, was valid for only six months. Under the early harvest plan, such a license is now valid for one year.
			(b)	Audiovisual services (CPC 83202)
				Under the WTO, China imposes a quantitative restriction on importation of motion pictures for theatrical releases on a revenue-sharing basis of 20 movies per year. Under the early harvest plan, however, Taiwan-produced motion pictures are exempt from the quantitative restriction, contingent upon the following conditions:
				i.	The movie concerned is a Chinese language motion picture;
				ii.	The production company is established in accordance with Taiwan law;
				iii.	The production company owns more than 50% of the copyright of the movie concerned;
				iv.	The movie is approved by competent authority in China; and
				v.	At least 50% of the principal personnel (e.g., director, screenwriter, leading actor/actress, and so on) of the production crew are Taiwan residents.
l	The Future
	The early harvest plan in Annex IV of the ECFA is a basis for future negotiations between the two governments. Although the plan still lacks details for implementation and requires further consultation, it will likely be the focus of the next round of negotiations. It is anticipated that a formal services agreement will not only create trade opportunities for local service suppliers in Taiwan but also for foreign service suppliers who are interested in providing services in China through a Taiwan subsidiary or joint venture entity.