China To End Subsidies Challenged by the United States in WTO Dispute
WASHINGTON, D.C. – U.S. Trade Representative Susan C. Schwab today announced that China has agreed to terminate subsidies that the United States alleged were illegal under World Trade Organization (WTO) rules.
"I am very pleased that today we have ben able to sign an agreement with China that should lead to full elimination of these prohibited subsidies. This outcome represents a victory for U.S. manufacturers and their workers. The agreement also demonstrates that two great trading nations can work together to settle disputes to their mutual benefit,” said Ambassador Schwab.
“Earlier this year, when China had not removed these market-distorting subsidies after we repeatedly voiced our concerns about them, the United States took action. This outcome shows that President Bush’s policy of serious dialogue and resolute enforcement is delivering real results. While many challenges still remain, today’s news is concrete and welcome.”
The Memorandum of Understanding (MOU) is designed to settle a WTO case the United States and Mexico initiated in February of this year. The United States had alleged that China was maintaining several subsidy programs prohibited under WTO rules and that these programs were providing significant benefits across the spectrum of industrial sectors in China − including steel, wood products, information technology, and many others. Mexico also filed as a co-complainant.
Most of the challenged subsidies were tied to exports, giving an unfair competitive advantage to Chinese products and denying U.S. manufacturers the chance to compete fairly with them in the United States and in third country markets. The remaining subsidies, known as “import substitution” subsidies, encouraged companies in China to purchase Chinese-made goods instead of imports. These subsidies were designed to give Chinese-made goods a significant edge in the China market over high-quality, fairly priced goods from the United States and other countries.
Under the MOU, China has committed to complete a series of steps by January 1, 2008 to ensure that the WTO-prohibited subsidies cited in the U.S. complaint have been permanently eliminated, and that they will not be re-introduced in the future. U.S. companies and workers will benefit from the removal of China’s trade-distorting subsidies much sooner than would have been possible if the United States had litigated this case to its conclusion. At the same time, if for any reason China does not meet its MOU commitments, the United States has the right to re-start WTO proceedings.
The United States initiated the dispute over China's prohibited subsidies at the WTO by requesting consultations with China on February 2, 2007. Mexico requested consultations with China on the same measures on February 26, 2007. Following two rounds of consultations, in March and June of this year, the United States requested in July that the WTO establish a dispute settlement panel to hear its claims. The WTO established a panel in late August.
Most of the subsidies we challenged are tax breaks benefiting foreign-invested enterprises, which are any firms with even a small amount of foreign investment, and were made available in every manufacturing sector.
According to a February 2006 Trade Policy Review report prepared by the WTO Secretariat, 58 percent of exports of manufactured goods from China came from FIEs in 2005, and that figure is growing.
Because these tax breaks are automatically available to the eligible enterprises, it would appear that a large amount of China’s exports have been benefiting from these pervasive subsidies.
This is the fifth dispute that the United States has brought against China at the WTO. The first one, brought in 2004, challenged China’s discriminatory tax treatment of imported semiconductors and, like the prohibited subsidies case, was resolved through a settlement where China removed the offending measures. The other three cases are currently pending before the WTO.
The United States, together with Canada and the European Union, requested a panel in September 2006 to examine China's regulations imposing local content requirements in the auto sector through discriminatory charges on imported auto parts. WTO panel proceedings in that dispute are underway.
The United States also requested a panel in August 2007 to examine deficiencies in China’s legal regime for protecting and enforcing copyrights and trademarks on a wide range of products. The WTO established a panel in September and panel proceedings are in progress.
In October 2007, the United States requested the WTO to establish a dispute settlement panel in a case challenging China’s restrictions on the importation and distribution of products of copyright-intensive industries such as theatrical films, DVDs, music, books and journals. A panel was established for this dispute on November 27, 2007.
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