OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE
EXECUTIVE OFFICE OF THE PRESIDENT
WASHINGTON, D.C.
20508

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2004-22
FOR IMMEDIATE RELEASE:
MARCH 18, 2004

CONTACT:
RICHARD MILLS/NEENA MOORJANI
(202) 395-3230

U.S. Files WTO Case Against China Over
Discriminatory Taxes That Hurt U.S. Exports

WASHINGTON -U.S. Trade Representative Robert B. Zoellick announced today
that the United States has filed a case at the World Trade Organization
(WTO) regarding China's discriminatory tax rebate policy for integrated
circuits. Today's action begins a 60-day consultation period required under
WTO rules.

China provides preferential tax treatment to integrated circuits produced in
China, thereby disadvantaging U.S. and other imports. The United States
believes that this discriminatory tax policy is inconsistent with the
national treatment obligations that China assumed when it joined the WTO in
December 2001.

"U.S. manufacturers of semiconductors and other products have a right to
compete on a level playing field with Chinese firms," said Zoellick. "As a
WTO member, China must live up to its WTO obligations; it cannot impose
measures that discriminate against U.S. products. We have been pressing
these and other concerns with the Chinese. These discussions will continue
because we prefer compliance rather than litigation. However, the bottom
line is that China is discriminating against key U.S. technology products,
it's wrong, and it's time to pursue a remedy through the WTO."

China is a substantial market for U.S. semiconductor producers: U.S.
exports of integrated circuits to China were $2.02 billion in 2003. U.S.
exports of integrated circuits to China are subject to a 17 percent
value-added tax (VAT), costing approximately $344 million. However, China
taxes domestic products significantly less, by allowing firms producing
integrated circuits in China to obtain a partial refund of the 17 percent
VAT. As a result of the refund policy, the effective VAT rate on domestic
products can be as low as 3 percent. China also allows for a partial refund
of VAT paid on integrated circuits designed in China but manufactured
abroad. We believe that this policy is also inconsistent with China's
international trade obligations.

China's integrated circuit market is valued at approximately $19 billion,
the world's third largest. Although imports currently represent
approximately 80 percent of China's market, its semiconductor industry is
expanding rapidly, with substantial investment from foreign firms. The
United States believes that China's current VAT rebate policy not only
discriminates against U.S. products directly, but also distorts
international investment in the integrated circuit sector.

Background

One of the guiding principles of the WTO is that countries and consumers
benefit most when products have fair and equal access to markets without
regard to their national origin. Policies that discriminate against
products on the basis of national origin distort both purchasing and
investment decisions to the detriment of everyone. While WTO rules permit
countries to provide certain types of assistance to domestic industries,
they prohibit WTO members from supporting their industries by discriminating
against foreign products.

The United States has repeatedly engaged China regarding its integrated
circuit VAT rebate policy in an attempt to resolve the issue. These efforts
have not succeeded.

This is the first WTO case filed against China by any WTO Member.

Since China joined the WTO in December 2001, the United States has had a
number of concerns regarding China's WTO implementation. Substantial
progress has been made in areas such as agricultural biotechnology, express
delivery, insurance and auto financing rules without having to go through
the WTO dispute settlement process. In 2002 and 2003, for example, at the
request of the United States, China delayed implementation of stringent
biotechnology measures that would have prevented U.S. soybean exports from
entering the market. U.S. exports of soybeans to China over the past two
years were nearly $4 billion, and last month, China issued permanent safety
certificates that will allow trade in soybeans to continue uninterrupted.

Today's action begins a 60-day consultation period. If consultations fail
to resolve the dispute, the United States can request that a panel be
established to consider whether China is acting in accordance with its WTO
obligations.

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