The economic integration in the European Community began in the 1950s. In July 1968, tariff union was established among the EC members. The establishment of the European Single Market was basically completed in 1993. The European single currency – Euro, was officially launched on 1 January 1999, marking the establishment of the European Economic and Monetary Union among the members of the EU.

On 1 May 2004, the EU was expanded to 25 members, with the full membership extended to ten countries of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. On 25 April 2005, Romania and Bulgaria signed the Treaty of Accession and will become the full members of the EU as of 1 January 2007. In addition, the EU has initiated negotiations for accession with Croatia and Turkey.

In October 2004, leaders of the 25 EU Members States signed the Treaty Establishing a Constitution for Europe, marking a further step towards deepening the integration based on the Constitution. However, the referendums held in France and the Netherlands on 29 May and 1 June 2005 respectively vetoed the Constitution. At the EU summit held in June 2005, leaders of the EU Member States decided to suspend the process of voting for the approval of the Treaty Establishing a Constitution of Europe and the deadline for approving the Treaty was extended.

A series of common policies have been gradually developed and completed during the process of integration over the last 50 years, and among them, those closely related to trade include the Common Commercial Policy, the Common Agricultural Policy, the Common Fishery Policy and the Common Consumer Protection Policy.

2.1 Legislation on trade and investment

2.1.1 Legislation on trade administration

Article 133 of the Treaty establishing the European Community lies at the foundation of the EU Common Commercial Policy. The Article provides that the Common Commercial Policy shall be based on harmonization with emphasis on the revision of tariff rates, the conclusion of tariff and trade agreements, the harmonized adoption of trade liberalization measures, export policies and protection. The Treaty of Nice extends the Common Commercial Policy to cover the fields of trade in services, intellectual property rights and investment.

The implementation of the Schengen Agreement has greatly facilitated the free movement of people, goods, capital and service within the EU. By the end of 2005, the Treaty had 25 signatories including 13 old EU members (Britain and Ireland excluded) as well as Norway and Iceland. All the ten new EU members are also signatories to the Schengen Agreement which will be implemented after 2006 depending on the actual situation of each Member State. Switzerland approved the accession to the Schengen Agreement by means of referendum and will be a member to the Agreement as of 2007.

Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code (or the Community Customs Code) and its implementation rules and Council Regulation (EEC) No 2658/87 of 23 July 1987 on the tariff and statistical nomenclature and on the Common Customs Tariff made uniform regulations on the common customs tariff (including commodity classification list, harmonized tariff rates, preferential tariff rates and GSP), rules of origin and Customs valuation.

2.1.2 Legislation on investment administration

The Treaty establishing the European Community provides that decisions on investment policies be kept within the competence of Member States based on their respective conditions, provided tha t they are in conformity with relevant treaties or EU laws. Each Member State can formulate its own investment policies and laws based on its own conditions.

2.2 Trade administration

2.2.1 Tariff system

2.2.1.1 Tariff level

In 2005, products with tariff rates below 10 percent accounted for 79 percent, among which products with zero tariff rates accounted for 27 percent of the total. After the enlargement, all the new Member States except Hungary and Malta which have the arrangement for the transitional period implement the Common External Tariff (CET) upon accession. In general, the weighted average tariff rate based on the trade volume has decreased from 9 percent to 4 percent in the ten new members.

2.2.1.2 Tariff administration

The EU exercises the Common Customs Tariff, implementing uniform tariff rates and administration. Council Regulation (EEC) No. 2658/82 on the tariff and statistical nomenclature and on the Common Customs Tariff lies at the foundation of the EU tariff administration. The tariff system of the EU adopts the CN code in line with the Harmonized System run by the World Customs Organization. An updated version of the tariff rates list is published as a Commission Regulation by the EU every year. The collection of Customs tariffs is rather complicated in the EU. Most products are subject to ad valorem duties, yet non ad valorem duties such as compound duty, mixed duty, and other technical duties are applied to certain agricultural products, chemical products, salt, glass, spare parts for watches and clocks, etc. Seven measures are adopted by the EU in the collection of the mixed duty. In addition, some agricultural products are subject to multiple technical duties including seasonal duties. Furthermore, the EU also adopts the measure of autonomous tariff suspensions and quotas which allows a total or partial waiver of the normal duties applicable to imported goods. If such a measure applies to a limited quantity of goods it is referred to as a quota, if the quantity is unlimited it is known as a suspension. In principle, only raw materials, semi-finished goods or components not available within the Community can benefit from a suspension.

In January and July 2005, the EU adjusted the tariff rates on certain industrial, agricultural and fishery products and suspended tariff on some products in the categories of vegetables, food, chemical products, plastics, textiles, ceramics, glass, optical products, and machinery and electronics. Meanwhile, tariffs which were originally suspended were again imposed on certain products in the above categories.

2.2.2 Import administration

2.2.2.1 General import quotas

Pursuant to Council Regulation (EC) No 520/94 of 7 March 1994 establishing a Community procedure for administering quantitative quotas and its implementation rules and Commission Regulation (EC) No 738/94 of 30 March 1994 laying down certain rules for the implementation of Council Regulation (EC) No 520/94 establishing a Community procedure for administering quantitative quotas, the EU adopts a uniform import quota regime, including the relevant import quota allocation methods, principles of import license administration and procedures for administrative decisions. Upon accession, the new Member States should terminate their original import quota administration and import licensing administration.

The EU divides importers into traditional ones and new ones when allocating import quotas. Import quotas are mainly allocated in the following three ways: method based on traditional trade flows, namely a priority one portion of the quota is reserved for traditional importers; method based on the order in which applications are submitted, or "first come, first served" principle; and method allocating quotas in proportion to the quantities requested. Quotas may be administered by one of the three methods or by a combination of these methods. When none is appropriate, the EU may adopt special administrative measures according to stipulated procedures.

The regulation does not apply to the agricultural products, to textile products or to the products covered by special import rules.

2.2.2.2 Import quotas for agricultural products

Pursuant to Council Regulation (EC) No 2200/96 of 28 October 1996 on the common organization of the market in fruit and vegetables and Council Regulation (EC) No 2201/96 of 28 October 1996 on the common organization of the markets in processed fruit and vegetable products, the EU exercises import quotas on certain imported agricultural products, including tomatoes, alliaceous vegetable, cabbages, lettuce, carrots, cucumbers, leguminous vegetables, fresh or chilled, nuts, plantains, figs, pineapples, citrus fruit, grapes, melons, apples, apricots, cherries, peaches, fresh and provisionally preserved fruit and nuts, and the processed products of the above-mentioned fruit and vegetables.

2.2.2.3 Import surveillance measures

Where the trend in imports of a product originating in a third country covered by Council Regulation (EC) No 3285/94 of 22 December 1994 on the common rules for imports and repealing Regula tion (EC) No 518/94 threatens to cause injury to Community producers, and where the interests of the Community so require, import of that product may be subject, as appropriate, to import surveillance measures of retrospective Community surveillance (surve illance over statistics) or prior Community surveillance. Surveillance documents issued by the relevant importing Member State regarding products subject to prior Community surveillance should be submitted. One surveillance method may not be applicable to all the EU Member States. And the validity of the method is one year.

2.2.2.4 Border examination and control

The EU requires that access of food and animals from a third country to the EU should be subject to inspection at the EU designated boarder inspection points.

2.2.2.5 Rules of origin

Rules of origin implemented by the EU are generally classified into two categories of non-preferential rules and preferential rules. Non-preferential rules are used for all kinds of commercial policy measures, like, for instance, anti-dumping duties and countervailing duties, trade embargoes, safeguard and retaliation measures, quantitative restriction, but also for some tariff quotas, for trade statistics, for public tendering, for origin marking, and so on. In addition, the EU's export refunds in the framework of the Common Agricultural Policy are often based on non-preferential origin. Preferential rules are applied to preferential arrangements signed between the EU and a third country, but also to autonomous preferential arrangements unilaterally made by the EU, such as GSP etc..

2.2.3 Export administration

Export licensing and end-user monitoring systems are applied to the export of certain products and technologies involving nuclear proliferation and weapons of mass destruction by the EU. In recent years, there have been great changes in the regulations governing the export control of products for both civilian and military uses in the EU. Pursuant to Council Regulation (EC) No 1334/2000 of 22 June 2000 on setting up a Community regime for the control of exports of dual-use items and technology, the EU strengthens the control over export activities involving invisible products such as software and technologies as well as export activities transmitted or transferred by means of "non-manual method" such as electronic media, fax and telephone. Meanwhile, the export examination and approval is extended to the supply of components, maintenance services as well as various technical services, rather than being limited to the product itself. The regulation still lists China among countries subject to weapon embargo. Products with military purpose are under strict control and basically prohibited to export to China.

2.2.4 Generalized system of preferences

The Generalized System of Preferences (GSP) of the EU is readjusted every ten years. The current GSP expired at the end of 2005. The Council Degree No. 980/2005 on the EU's new GSP schemes was passed in June 2005 and entered into force on 1 January 2006. The main amendments in the new Decree are as follows:

Firstly, the new simplified system has three schemes instead of five, of which the provisionary form of the second arrangement, the "GSP Plus", was effective as of 1 July 2005. The other two arrangements are General scheme and "Everything but Arms".

Under the General scheme, import rates on sensitive products are reduced by 3.5 percentage points compared with those of the MFN rates. Non-sensitive products are exempted from import duties. The "GSP Plus" scheme waivers all import duties on goods from the beneficiaries. To benefit from "GSP Plus" countries need to demonstrate that their economies are poorly diversified, and therefore dependent and vulnerable. More criteria must be met in order to be beneficiaries of "GSP Plus" scheme. According to the "Everything but Arms" arrangement, all products except arms from the 50 least developed countries in the world can enter the EU duty free. Secondly, the new GSP extends the coverage of products. Under the General scheme, product coverage increases from about 6900 to about 7200. It incorporates 300 additional products mostly in the agriculture and fishery sectors.

In addition, the new GSP simplified the mechanism for graduation. The former criteria of share of GSP imports, development index and export-specialization index have been replaced with a single straightforward criterion: share of the imports from GSP countries in the Community market. This share would be 15 percent, with 12.5 percent for textiles and apparel.

In line with the new GSP scheme, the EU will reevaluate the market share of the imports which enjoy GSP treatment to determine the "graduation" of a product. The new GSP scheme specifies that the case of textiles and clothing will be reviewed annually to properly reflect the possibility of sharp increases.

Up to now, most of China's industrial products (under 62 chapters of 14 sections) including textile products have all graduated, but agricultural and mineral products are still covered by the GSP scheme.

2.2.5 Trade remedy measures

The EU legislation governing trade remedies mainly includes Council Regulation (EC) No 384/96 of 22 December 1995 on protection against dumped imports from countries not members of the European Community, Council Regulation (EC) No. 2026/97 of 6 October 1997 on protection against subsidized imports from countries not members of the European community, and Council Regulation (EC) No 3285/94 of 22 December 1994 on the common rules for imports and repealing Regulation (EC) No 518/94 (regulation on safeguard measures) and relevant regulations.

According to Article 16 of the Protocol on China's Accession to the WTO, the EU published Council Regulation (EC) No 427/2003 of 3 March 2003 on the transitional product-specific safeguard mechanism for imports originating in the People's Republic of China and amending Regulation (EC) No 519/94 on common rules for imports from certain third countries and Council Regulation (EC) No 1995/2003 of 10 November 2003 amending Regulation (EC) No 427/2003 on a transitional product-specific safeguard mechanism for imports originating in the People's Republic of China. These regulations provide for the determination of market distortion and trade diversion, the procedures for investigation and bilateral consultation and the adoption of product-specific safeguard measures.

In line with Paragraph 242 of the Report of the Working Party on the Accession of China to the WTO, the EU published Council regulation (EC) No 138/2003 of 21 January 2003 amending Regulation (EEC) N0 3030/93 on common rules for imports of certain textile products from third countries, stipulating special safeguard measures applicable to China, including bilateral consultation and specific import restriction measures which might be adopted.

2.2.6 Other related system

2.2.6.1 The Common Agricultural Policy

The Common Agricultural Policy (hereinafter referred to as CAP), proposed in the Treaty establishing the European Community, is one of the earliest common policies adopted by the EU. On 30 June 1960, the European Commission formally proposed the scheme for the Common Agricultural Policy, which has been implemented since 1962.

In March 1999, the EU summit decided the financial framework for the period 2000-2006. The plan commonly referred to as Agenda 2000 intends to reform the CAP. The Council of Agricultural Ministers, in June 2003, approved the EU CAP Reform Scheme to change the form of agricultural subsidies, aiming at accomplishing the transformation process of the Common Agricultural Policy from price support to subsidizing farmers' income. Aid to farmers would no longer be related to the volume of goods they produce. The farmers' and consumers' interests need to converge even further. Farmers are being encouraged to produce high-quality products, in quantities more in line with demand and to use sustainable farming practices that safeguard the environment.

In the Ministerial Declaration adopted at the sixth WTO ministerial conference held in Hong Kong in December 2005, the EU committed to abolish its cotton export subsidies with other developed members in 2006 and to remove all kinds of export subsidies to agricultural products before the end of 2013. In addition, the EU is implementing a special funding package of Euro 5.8 billion with duration of three years specifically tailored to the needs of agriculture, agricultural development and adjustment of new members after enlargement.

2.2.6.2 The Common Fisheries Policy

According to the Common Fisheries Policy (hereinafter referred to as CFP), the EU decided to extend, as of 1977, its Member States' rights to maritime resources to 200 miles from their coasts in the North Atlantic and the North Sea which are regarded as the common fishing waters subject to the administration of the EU. The Member States authorize the European Commission to negotiate fishery agreements with third parties. The CFP was basically formed in 1983, mainly involving the distribution of fishing quotas among the EU Member States, the conservation of fishery resources and the sales of fishery products.

In December, 2002, the EU approved the reform program and decided to implement the new CFP as of 2003. The basic objectives of the new policy are to promote the sustainable development of the ecosystem, environment and economy of fisheries, as well as to conserve fish stocks, protect the marine environment and safeguard the economic viability of the EU fishing fleet by reducing the overcapacity of the fishing fleet, and providing economic aid to the fishing population who have given up fishing. The policy mainly contains the long-term measures on managing fisheries, policies on fishing fleet development, social and economic measures, the utilization of water and other resources and the participation and decision-making of the shareholders. The new CFP specifies that government funding for the fishing industry should be restricted to funds to improve security and working conditions on board. A Community Fisheries Control Agency due to start work in 2006 has been set up to coordinate the drive to uniformity.

2.2.6.3 The Common Consumer Protection Policy

Article 153 of the Treaty establishing the European Community lies at the foundation of the EU Common Consumer Protection Policy, which provides, "In order to promote the interests of consumers and to ensure a high level of consumer protection, the Community shall contribute to protecting the health, safety and economic interests of consumers, as well as to promoting their right to information, education and to organizing themselves in order to safeguard their interests." It is also provided that consumer protection requirements shall be taken into account in defining and implementing other EU policies, and that apart from implementing the Common Consumer Protection Policy, the EU Member States may formulate more stringent protective measures on condition that the contents are in conformity with the provisions laid down in the Treaty establishing the European Community and that the European Commission is notified.

The consumer policy strategy for 2002-2006 adopted in May 2002 states that the EU Common Consumer Protection Policy should lay emphasis on guaranteeing essential health and safety standards, enabling individuals to have an input when these policies are made, ensuring that consumer concerns are integrated into the whole range of relevant EU policy areas, and establishing a coherent and common environment so that shoppers are confident about making cross-boarder purchases.

2.2.6.4 Taxation regime

The Treaty establishing the European Community provides that decisions on taxation regime be kept within the competence of Member States based on their respective conditions provided that they are in conformity with relevant treaties or EU regulations. Therefore, significant differences exist among the taxation regimes of each Member State.

The main priority for the EU tax policy is to address the concerns of tax obstacles to all forms of cross-border economic activity and of unfair tax competition. Since 2001 the EU has presented options for coordinated action to tackle tax obstacles and inefficiencies in the company tax, VAT, excise duties, and car tax areas. The European Commission is also of the view that more transparency and information exchange would help to reduce the risk of financial and corporate malpractice.

2.2.6.5 Customs administration

The EU carries out the uniform customs administration. After the enlargement, the customs administration of the new EU Member States is integrated with the EU uniform customs administration system. To promote trade facilitation and improve customs surveillance and administration, the EU started to implement "Customs 2007" as of January 2003. The plan aims to establish customs electronic information sharing system and an electronic customs declaration system among the Member States as well as to provide technical support of the new Member States so as to assist these countries in approaching the EU unified level of common customs procedures and trade facilitation.

Customs administrative measures with different transitional periods for some new Member States accessed in 2004 regarding certificates of origin, the import of agricultural products, value added tax and tariff quotas for specific products have been adopted based on the different conditions of those members. With the improvement of the electronic customs declaration system and the implementation of the deposit account system in the EU, the customs procedures of the new Member States will be gradually simplified.

2.3 Investment administration

The Treaty establishing the European Community provides that decisions on investment policies be kept within the competence of Member States. The Treaty establishing a Constitution for Europe signed in October 2004 made amendments to the trade and investment policies. The Constitution Treaty integrates the jurisdiction over foreign direct investment (including foreign investment inflow and overseas investment) previously belonging to Member States into the EU Common Trade Policy, making it the exclusive rights of the EU. However, the Treaty has not taken effect yet.

2.4 Competent authorities

Currently, when decisions concerning the Common Commercial Policy (including foreign trade agreement negotiations) are made by the EU, proposals should be tabled by the European Commission in the first place. The European Council of Ministers (sometimes together with the European Parliament) makes decisions after consulting the Article 133 Committee. When formulating Common Commercial Policy within the European Commission, the Directorate-General for Trade (hereinafter referred to as DG Trade) shall work together with experts from designated departments of the Member States. Meanwhile, opinions of various stakeholders, in particular of the business circles and of the intermediary agents, shall be sought.

2.4.1 The European Council of Ministers

The European Council of Ministers (hereinafter referred to as the Council) is the decision-making body of the Common Commercial Policy. Following the relevant voting procedures, the Council shall decide whether to adopt a policy, initiate negotiations on trade agreements with third countries, approve an agreement, give the European Commission the mandate for negotiation, set up negotiation objectives for the European Commission, etc. During the negotiation with a third country, the European Commission shall inform and consult Member States via the Article 133 Committee, and the decision shall be made by the Council, not by any other bodies on its behalf.

When a decision is made by the European Council of Ministers, the principle of "qualified majority" is usually followed while "unanimity" is applied in certain specific cases. In November 2004, the European Council of Ministers began to adopt the new "qualified majority" voting scheme as provided in the Treaty of Nice, which means "qualified majority" is satisfied by 232 and up voters out of the total of 321 voters as well as more than half of the Member States. Meanwhile, the positive votes should represent at least 62 percent of the EU population.

2.4.2 The European Parliament

Pursuant to the Treaty establishing the European Community, the European Commission shall consult the European Parliament in trade agreement negotiations. In routine work, the European Commission usually informs the European Parliament of its activities in the field of trade affairs. The European Parliament shares with the Council of Ministers the decision-making rights on certain trade legislation. The power of the European Parliament regarding the trade policy and regulations is greatly enhanced after the Treaty of Nice took effect.

2.4.3 The European Commission

The European Commission (hereinafter referred to as the Commission) is the executive body of the EU. According to Article 133 of the Treaty establishing the European Community, the competence of the Commission in the trade area includes implementing Council decisions, submitting proposals to the Council for Common Commercial Policy implementation, making recommendations on negotiations and conducting negotiations on trade agreements with trading partners at the mandate of the Council. In certain areas, the Commission has its own decision-making rights such as promulgating the regulations and decisions on antidumping.

DG Trade of the Commission is responsible for the implementation and administration of the Common Commercial Policy.

2.4.4 The Article 133 Committee

The Article 133 Committee, set up according to Article 133 of the Treaty establishing the European Community, is composed of representatives of the 25 Member States. Each Member State has one full and one substitute member to represent it on that committee. The major functions of the Committee are to coordinate the EU's trade policy, to provide consultancy to formulate the Common Commercial Policy of the EU, and to be in charge of the preliminary review of the relevant trade policy proposals to the Commission.