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WTO Panel To Examine China's Tax Regime

by Mary Swire,, Hong Kong

04 September 2007

The World Trade Organisation has announced that it is forming a panel to investigate complaints by the United States and Mexico that certain Chinese tax breaks and subsidies are in breach of world trade rules.

Friday's announcement came after a meeting of the WTO Dispute Resolution Panel earlier that day, and follows the second request for an investigation into Chinese taxes and subsidies by the US and Mexico. Under WTO arbitration rules, China was entitled to block the first request for an investigation by the two countries, but the second request is automatically granted.

The US first brought its complaint in February 2007, arguing that China operates export subsidy programs which provide incentives for foreign investors in China and their Chinese partners to export to the United States and other markets.

The United States Trade Representative has argued that the 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% 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 US exporters.

"We are concerned about a series of measures maintained by China that appear to constitute subsidies prohibited under WTO rules," US trade lawyer Juan Millan told the WTO's dispute body, according to the Associated Press. "China offers tax refunds, reductions, and exemptions that appear to be contingent on a firm's use of domestic over imported products or on a firm's export performance."

The Office of the US Trade Representative says that by subsidizing Chinese exports to the United States and denying US exporters a fair opportunity to compete in China, these subsidy programs unfairly impact US manufacturers and their workers. "Elimination of the subsidies will help level the playing field for US-based manufacturers and, in particular, for America’s small and medium-sized businesses across a range of industries," the USTR has stated.

China has said it would prefer to resolve the complaints through continuing negotiation rather than WTO arbitration, and has expressed the belief that its tax laws were fully consistent with WTO subsidy rules.

"It is very disappointing and deeply regrettable that the United States and Mexico pursued this matter further," was China's official response to the WTO's announcement.

"In the panel process, China will defend its position and interests and remain confident that relevant measures of China are consistent with its WTO obligations," the statement added.

In a separate case, Beijing has also blocked a request by the United States for the WTO to investigate China's enforcement and protection of intellectual property rights, which the US argues are inadequate, and provide a safe haven for pirates and counterfeiters.

In pursuing this action, the United States said that it is seeking to eliminate significant structural deficiencies that give pirates and counterfeiters in China a safe harbour to avoid criminal liability. The United States is also seeking to improve enforcement procedures at China’s border, and to give copyright owners more tools to prevent the production of unauthorized copies in China.

The United States requested WTO dispute settlement consultations with China over these issues in April, and the two countries held consultations in early June. But according to the US, China has not taken any steps to address these concerns during this period.

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