US Complains to WTO About PR China's Tax Preference for Domestic Producers of Integrated Circuits

March 18, 2004. The U.S. filed a complaint with the World Trade Organization (WTO) against the People's Republic of China stating that the PRC's preferential tax treatment of integrated circuits produced in the PRC is discriminatory, and a violation of the PRC's WTO obligations.

U.S. Trade Representative (USTR) Robert Zoellick stated in a release [PDF] that "U.S. manufacturers of semiconductors and other products have a right to compete on a level playing field with Chinese firms ... 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."

The USTR release explains the tax preference. "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."

Sen. Charles Grassley (R-IA) praised the USTR. "I fully support the Administration's decision to get tough with China. Last week I chaired a hearing of the Finance Committee on the Administration's trade agenda. Ambassador Zoellick testified that we might need to bring a case against China. It's apparent that discussions with the Chinese over their blatant discriminatory tax policy have gone nowhere. So, we're forced to take the next step. I commend Ambassador Zoellick for his stand to assert our rights in the WTO."

Sen. Grassley (at right) continued: "Now, there's no question the United States has already benefited from China's membership in the WTO. But we can do better. It's been over two years since China joined the WTO. The honeymoon's over. The time for excuses is over. The message here is simple. China has to comply with its international trade obligations. This discriminatory tax is only one of a host of issues we have with the Chinese. They need to do a better job of enforcing intellectual property rights. They need to ensure that sanitary and phytosanitary measures are not used as disguised barriers to trade. And they need to avoid using technical commercial standards to exclude foreign participation in their economy. By that I'm referring to China's wireless encryption standard that's due to take effect in June."

The Semiconductor Industry Association (SIA) is pleased that the U.S. has acted. George Scalise, President of the SIA, stated in a release that the "SIA has been working in cooperation with USTR for more than a year to resolve our problems with China’s discriminatory Value Added Tax regime on semiconductors ... The USTR and the U.S. semiconductor industry believe in resolving this dispute through diplomacy.  Once it became clear that continued discussions had not been productive, it became necessary to begin the formal consultation process of the dispute resolution procedures provided for in the WTO."

The PR China joined the WTO in 2001. This is the first complaint that has been submitted to the WTO against the PR China.