China Backs Down in Subsidies Case

China Backs Down in Subsidies Case

US Trade Representative Susan Schwab has come to an agreement with her Chinese counterparts over the subsidies case filed at the WTO Dispute Settlement Body. Yes, China engaged in all sorts of posturing, but at the end of the day, it backed down. Score one for the USTR [U-S-A! U-S-A!] The National Association of Manufacturers is understandably elated as well. It seems American politicians are keen on capitalizing on these gains by ramming through all sorts of legislation aimed at making China "play fair." Will China also give in on the intellectual property dispute, for instance? You could argue that China is keen on not angering the world with yet more subsidized exports as the US and EU are getting quite angry over mounting trade imbalances. IP is a more difficult issue though as policing the world's most populous nation for pirated software is not exactly an easy task. Anyway, let us begin the beguine with a Bloomberg recap that provides a good overview of things:

China agreed today to abolish subsidies that the U.S. had challenged at the World Trade Organization. Officials from the two nations signed an agreement in Geneva in which China agreed to eliminate a series of tax rebates on exports by the end of this year, the U.S. trade office said today. Another subsidy will end by the end of next year. In the meantime, the U.S. will suspend its WTO complaint.

``The agreement demonstrates the two great trading nations can work together to settle disputes to their mutual benefit,'' U.S. Trade Representative Susan Schwab said at a press conference in Washington.

The breakthrough bolsters the Bush administration as it tries to pry open the Chinese market to more U.S. products and head-off legislation in Congress aimed at punishing China for what many lawmakers says are unfair policies.

Treasury Secretary Henry Paulson, Schwab and other Cabinet officials are to travel to China early next month for a summit on issues ranging from easing caps on U.S. bank investments to clamping down on piracy of U.S.-made movies, music and software. [That's for the Strategic Economic Dialogue.]

The resolution of this complaint demonstrates that ``real results'' can come from engagement with China, Schwab said. ``This clearly shows the wisdom of serious dialogue over some legislative approaches that would simply impose retaliatory tariffs,'' she said.

China ran a record $187.6 billion trade surplus with the U.S. in the first nine months of this year, putting it on course to exceed last year's $232.5 billion trade gap and prompting complaints among lawmakers, union officials and small manufacturers.

In February, the U.S. lodged its complaint against China at the WTO, the largest one to date against the world's fastest growing major economy. The U.S. argued that the Asian nation violated global trade rules by unfairly subsidizing its steel, wood products, information technology and other industries. The case centered on tax rebates for foreign investors, including U.S.-owned companies, and Chinese exporters.

This is the second time a U.S.-filed WTO complaint has caused China to reverse course and withdraw provisions that the Bush administration argued violated global trade rules. China scrapped a rebate on a value-added tax on semi- conductors after the U.S. filed a case in 2005. A dispute over anti-dumping duties on kraft linerboard, a type of heavy-duty paper used in cardboard boxes and other shipping applications, was settled the day the U.S. was to file its complaint to the WTO.

Three other WTO cases are still pending: One on auto parts and two others concerning protections for intellectual property rights. Critics of the Bush administration say the resolution of this case shows that the U.S. needs to take tougher action against China to get it to remove barriers to exports, raise the value of its currency and clamp down on dangerous products, such as toys coated with lead paint.

For years, Democrats in Congress have presented to the U.S. Trade Representative's office a list of WTO cases the U.S. should bring. They are also mulling legislation that would make it easier for U.S. producers to get tariffs on Chinese imports to compensate for the effect of government subsidies or a weak Chinese currency.

``This is an overdue, yet welcomed step toward holding China accountable for its trading violations,'' Representative Sander Levin, a Michigan Democrat and chairman of the House Ways and Means trade subcommittee, said in a statement. Levin said his committee would still push for new measures aimed at China. ``We need a comprehensive trade policy toward China, requiring action on piracy, import safety, dumping and currency manipulation,'' he said. [Miss anything, Levin? Maybe you should throw in giant jellyfish as well.]

Others argued that the agreement today demonstrates the limits of U.S.-China summits, such as the one Paulson and Schwab will participate in next week. ``When the U.S. uses its power, it's effective with China,'' said Robert Cassidy, who helped negotiate China's accession to the WTO as a U.S. trade official in the 1990s. ``A more assertive trade policy would bring more real results.''

UPDATE: The Financial Times has a few more interesting tidbits on the emerging story in line with the idea that China was in the process of rolling back subsidies anyway:

The case, which covered a variety of industries including steel, wood products and information technology, had the potential to affect hundreds of millions of dollars’ worth of trade and tie up the countries in a lengthy legal dispute at the WTO. In Thursday’s deal, China agreed to eliminate illegal subsidies by January 1.

An official at the Chinese mission in Geneva denied that the agreement represented a total climbdown by Beijing. The official said that some of the subsidies had already been repealed and some were due for repeal under a new income tax law for enterprises. Other subsidies, such as a refund on value-added taxes for Chinese companies buying domestically produced equipment, were not prohibited under WTO rules, the official said.

Brendan McGivern, a lawyer at White & Case in Geneva, said the US had learned that threatening litigation concentrated minds in Beijing and made a negotiated settlement more likely. “Litigation kicks an issue right up the political system and raises its profile in the minds of senior officials,” he said.

Lawyers say China, which joined the WTO in 2001, appears to have moderated its initial view that WTO litigation was an intrinsically hostile and inflammatory act. The US, with the EU threatening to follow suit, has increased its use of legal tools in its many trade disputes with China, also imposing so-called “countervailing duties” against Chinese imports it considers to be illegally subsidised.

And here is the press blurb from the US Trade Representative's site. I've been a Susan Schwab admirer, strangely enough [1, 2], and this episode just shows you that she's a woman of action. There's a PDF file of her full remarks as well:

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 been 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.

I don't like tooting my own horn, but yes, I did say in February...

I would be wary of using the term "protectionist" here. Going by the WTO rule book, some of China's measures are difficult, nay, almost impossible to defend.

However, I am unsure whether this move by the Chinese is a prelude to giving in on currency revaluation and intellectual property. China likely moved on the subsidies matter in line with its goals to reduce pollution-intensive production (why subsidize it?) and lessen trade frictions a bit. As the Bloomberg article notes, EU and US officials will soon visit Beijing. On currency revaluation I think China will be more reluctant to make big moves, though I may be wrong. In any event, the yuan seems to be revaluing at a pretty decent clip that Chinese officials can point to as an act of good faith when EU officials visit soon and the SED begins again. Don't expect all parties to be holding hands and signing "kumbaya" anytime soon.