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United States Critical Of China's Protectionist Tax Regime

by Mary Swire,, Hong Kong

22 December 2003

China has made scant progress towards implementing reforms pledged when it acceded to the World Trade Organisation, and continues to practice protectionist trade policies in the sphere of taxation, according to the United State’s senior trade negotiator, Robert B. Zoellick.

In an annual report submitted to Congress, Zoellick commented that China’s “uneven and incomplete WTO compliance record can no longer be attributed to start-up problems,” and identified a number of “systemic concerns” that will make progress on future Sino-American trade relations “problematic.”

In his report, Zoellick noted “China’s questionable use of certain tax policies to favor domestic production”, which has led to “an increasing use of industrial policies to encourage domestic industries at the expense of imports from abroad or foreign businesses operating in China.”

“This latter phenomenon is particularly apparent in the automotive sector, where a proposed industrial policy threatens to undercut many US industry gains in China's market,” the report said.

The dossier also criticized China’s VAT (Value Added Tax) system which raises “serious national treatment concerns, particularly with regard to the discriminatory rates being applied to imports versus domestically produced fertilizer and semiconductors.”

“In particular, China provides for rebate of a substantial portion of the 17 percent VAT paid by domestic manufacturers on their locally produced ICs (integrated circuits). China, meanwhile, charges the full 17 percent VAT on imported ICs, unless they were designed in China,” Zoellick observed.

The US Trade Representative pointed out additional concerns regarding China’s consumption tax system as it is applied to domestic and foreign producers.

“Under these regulations, China uses different tax bases to compute consumption taxes for domestic and imported products, with the apparent result that the effective consumption tax rate for imported products is substantially higher than for domestic products,” he observed.

The trade chief recommended to Congress that the US seek redress at the WTO’s dispute resolution body if China does not move on these issues.

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