United States Files WTO Case Against China Over Prohibited Subsidies

WASHINGTON DC − U.S. Trade Representative Susan C. Schwab announced today that the United States has requested World Trade Organization (WTO) dispute settlement consultations with the People’s Republic of China (China) regarding its provision of subsidies that appear to be prohibited by WTO rules.“We are committed to challenging China’s WTO-inconsistent practices that harm American workers and businesses,” said Ambassador Schwab.  “China’s use of market-distorting subsidies creates an uneven playing field and subverts China’s own efforts to foster consumption-led growth.” “We recognize that China has taken significant steps to open its market and reform its trade practices since becoming a Member of the WTO, and both countries are benefiting from a deeper and stronger trade relationship,” Ambassador Schwab added.  “However, where China has failed to meet its commitments, we will use the full array of tools available to secure compliance.  Our decision to bring this case to the WTO comes after our efforts at dialogue failed.”The Commerce Department works with USTR related to subsidies in multilateral fora such as the WTO.  Secretary of Commerce Carlos Gutierrez stated, “China is using prohibited subsidies to compete unfairly.  American workers, consumers, farmers and businesses benefit greatly from being able to buy and sell in the world marketplace, but others must follow the rules. China has not. The Bush Administration will continue to use every tool at our disposal to enforce U.S. trade law and to make sure others compete fairly.”Several of the subsidy programs at issue appear to grant export subsidies, which provide incentives for foreign investors in China and their Chinese partners to export to the United States and other markets.  These subsidies offer significant benefits and are available for all products made in China, including, for example, steel, wood, paper, and other manufactured products.  The companies targeted for many of these subsidies, i.e., companies with some foreign participation, accounted for nearly 60 percent of China’s exports of manufactured goods in 2005, according to a WTO report.  Other subsidy programs at issue provide incentives for companies in China to purchase domestic equipment and accessories, instead of buying from U.S. exporters. By subsidizing Chinese exports to the United States and denying U.S. exporters a fair opportunity to compete in China, these subsidy programs unfairly impact U.S. manufacturers and their workers.  Elimination of the subsidies will help level the playing field for U.S.-based manufacturers and, in particular, for America’s small and medium-sized businesses across a range of industries.  The subsidies being challenged also are inconsistent with clearly stated Chinese policies seeking to rebalance China’s economy with greater emphasis on domestic consumption-led growth rather than export-led growth, and to promote the efficiency of China’s domestic manufacturers.   BackgroundChina applies a series of measures that, by allowing for refunds, reductions, or exemptions from taxes and other payments owed to the government, appear designed to subsidize exports of manufactured goods or to support the purchase of domestic over imported equipment and certain other manufacturing inputs.  These measures appear to be contrary to a number of WTO rules, including the explicit prohibitions against export subsidies and import substitution subsidies set forth in the WTO Agreement on Subsidies and Countervailing Measures. Particularly given the extensive involvement of the Chinese government in commercial activity in China, disciplines on subsidies were a critical issue in the negotiations leading to China’s December 2001 accession to the WTO.  The importance of this issue is reflected in China’s express commitments in its accession protocol to abide by WTO prohibitions on the granting of export and import substitution subsidies.  However, the Chinese government has continued to use a number of industrial policy tools − including these kinds of subsidies − to support Chinese industry.The United States has repeatedly raised its concerns about these subsidies in discussions with relevant Chinese officials.  Nevertheless, China has taken no steps to withdraw these measures. The United States has previously brought the only two disputes in the WTO against China, and the U.S. and China settled a third dispute on the eve of a planned U.S. WTO filing.  The first case was filed in March 2004; it involved value-added tax rebates that discriminated against imported semiconductors.  The two sides were able to resolve that dispute during the consultation phase, ensuring fair access to a market worth over $2 billion to U.S. manufacturers and workers in the semiconductor industry (source: http://www.ustr.gov/assets/Document_Library/Fact_Sheets/2004/asset_upload_file847_6464.pdf). A second dispute, brought last year by the United States, the European Communities and Canada, challenges Chinese regulations that impose local content requirements in the auto sector through discriminatory charges on imported auto parts.  That dispute has led to the establishment of a panel to adjudicate the matter. A third dispute, involving China’s antidumping duties on U.S. kraft linerboard, was resolved in January 2006 shortly after the United States informed China that it would soon be filing a request for WTO consultations. China terminated the antidumping order on kraft linerboard, eliminating the unfair barrier to U.S. paper products. (source:  http://www.ustr.gov/Document_Library/Press_Releases/2006/January/China_Terminates_Antidumping_Duty_Order_on_Kraft_Linerboard.html)Consultations are the first step in a WTO dispute.  Under WTO rules, parties that do not resolve a matter through consultations within 60 days may request the establishment of a WTO dispute settlement panel. USTR issued its top-to-bottom review of U.S.-China trade policy on February 14, 2006, in a report entitled, “U.S. - China Trade Relations: Entering a New Phase of Greater Accountability and Enforcement.”  For further details regarding the Administration's subsidy monitoring and enforcement activities in 2006, see the joint USTR and Department of Commerce report entitled, “Subsidies Enforcement Annual Report to the Congress.”  These reports can be found at www.ustr.gov.  The Department of Commerce is responsible for enforcing the domestic countervailing duty law of the United States and assisting the Office of the United States Trade Representative in addressing subsidy in multilateral fora such as the WTO.