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US Mounts Further Challenge To Chinese Subsidies

by Glen Shapiro,, New York

16 July 2007

The Office of the United States Representative announced last week that the United States has requested the World Trade Organization (WTO) to establish a dispute settlement panel regarding subsidies provided by China that appear to be prohibited by WTO rules.

USTR Spokesman Sean Spicer explained that:

“Although our two rounds of WTO consultations with China have been constructive, they have not resolved our concerns about China’s apparent use of trade-distorting subsidies that it pledged to eliminate upon joining the World Trade Organization."

“China has taken a positive step by repealing one of the subsidy programs we challenged, but much more needs to be done. We continue to prefer a negotiated settlement to this dispute, but without assurance of complete corrective action by China, we must continue to pursue the WTO process to enforce our rights.”

The US request for a WTO dispute settlement panel challenges several subsidy programs maintained by China that the United States believes are prohibited by WTO rules.

The US initiated the dispute over China's prohibited subsidies by requesting consultations with China in February of this year. Mexico also requested consultations with China on the same measures, later that month.

Shortly before joint consultations were held on March 20, 2007, China eliminated one of the subsidy programs challenged by the United States and Mexico, but also adopted a new income tax law providing additional tax breaks for qualifying firms.

In order to clarify whether these new tax breaks constituted new prohibited subsidies, the United States and Mexico requested supplemental consultations with China, which were held jointly on June 22, 2007.

Subsidies conditioned either on a firm's use of domestic over imported products or on exports are prohibited by the WTO Agreement on Subsidies and Countervailing Measures.

The US government has argued that they are inconsistent with other WTO obligations, including specific commitments undertaken by China as part of its WTO accession agreement to eliminate such subsidies before it joined the WTO on December 11, 2001.

Mexico has also reportedly called for the establishment of a WTO panel. Under WTO rules, the WTO Dispute Settlement Body (DSB) will consider the requests for the establishment of a panel at its next meeting on July 24, 2007.

In June, the United States government submitted a paper to the World Trade Organization (WTO) Negotiating Group on Rules proposing that certain "particularly trade-distorting subsidies" be prohibited.

“It’s time to take the next step in the development of stronger WTO rules that will rein in the use of industrial subsidies. In an increasingly global economy, foreign government subsidies provide a distinctly unfair competitive advantage,” explained United States Trade Representative Susan C. Schwab.

She continued:

“The subsidies we want to prohibit maintain inefficient production capacity in industries ranging from steel to semiconductors. Stronger rules for these types of subsidies would address significant trade-distorting practices of many of our trading partners that often lead to unfair trade.”

The US proposal would prohibit the following five types of subsidies if they are “specific” (i.e., are only given to a particular company or industry) and benefit a product that is exported or competes with imports:

  • Coverage of operating losses;
  • Forgiveness of government-held debt;
  • Lending to “uncreditworthy” companies;
  • Equity investments in “unequityworthy” companies; and
  • Other financing, such as “royalty-based” financing, that is not commercially available.

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