The recent amendments to the Equity Joint Venture law have been hailed by the media as a step towards China's compliance with WTO rules and an incentive to attract more foreign investment. The most significant amendment in the Equity Joint Venture Law gives joint ventures more freedom in their procurement of raw materials and equipment. The "old" law stipulated that joint ventures must give priority to domestic suppliers and that imported materials and equipment must be purchased with foreign exchange raised by the joint ventures themselves. However, in practice, joint ventures could already buy most materials internationally. Priority to Chinese products was necessary if the foreign equivalent was more expensive or inferior in quality, and the government rarely intervened. Thus, the amendment adopts the current practice as a rule, which will provide Equity Joint Ventures with more confidence and certainty.
Any scheme that favors local products is contrary to WTO rules, because it potentially distorts trade. To give you an example, plans made by the Chinese Ministry of Foreign Trade and Economic Cooperation and the Ministry of Information Technology would require mobile telephone manufacturers to export at least 60% of their output, or that at least 50% of the total value of the telephones come from locally produced components. Such rules cannot be implemented under the new regulations.
Again, by amending the Joint Venture law, China has made another step towards compliance with WTO rules.
