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Schwab Wants to Make China Squirm Over Subsidy: Andy Mukherjee
By Andy Mukherjee
Feb. 6 (Bloomberg) -- Susan Schwab, the U.S. trade representative, has decided to make China squirm.
Sixty percent of Chinese-made goods sold in the U.S. are eligible for ``market-distorting'' export subsidies from the government, Schwab alleged last week in what is to date the biggest complaint against China at the World Trade Organization.
This is not an isolated attack on Chinese shrimp, furniture or brassieres. Between $122 billion and $158 billion of China's exports to the U.S. may be at stake, depending on which of the two trading partners' recordkeeping you want to believe.
The Commerce Ministry in Beijing called the U.S. complaint ``regrettable.''
This is the third time the U.S. has asked the global trade body to settle a dispute with China.
The first time the U.S. dragged China to the WTO was in March 2004, alleging unfair blockage of imported semiconductors. China gave in and changed its policy.
Then, in March 2006, Rob Portman, Schwab's predecessor, filed a complaint about similar discrimination against imported auto parts. That dispute is yet to be settled.
The latest U.S. case against China is also its most ambitious. The scope of the allegation covers the gamut of Chinese business practices with one notable exception: China's currency policy. It is a case that is meant to create pressure.
It's not a complaint that can be easily proven.
Export subsidies, which are banned under WTO rules, are getting increasingly hard to pin down. Most nations have learned how to structure the freebies in order to keep them safe from legal challenge.
Subsidy Culture
A case in point is the U.S., which provides billions of dollars of support to farmers through programs that distort global trade but don't have to be classified as export subsidies.
Similarly, the explicit subsidies in China don't purportedly seek to boost exports. Their objectives vary from providing budgetary support to weak banks and unprofitable state-owned enterprises to promoting science and technology.
Then there are the largely unrecorded subsidies dished out by local governments, which seek to lure investors with a bouquet of freebies, including zero-rental leases and cheaper bank loans to discounts on electricity and phone bills.
A University of Nottingham study last year evaluated the impact of these ``production subsidies'' on more than 98,000 firms in China. The researchers found strong evidence of handouts stimulating exports.
``Irrespective of the motive of local or central governments for extending production subsidies, the fact that subventions foster export activity might lead to suggestions of unfair trade practice,'' the report said.
Tax Rebate
The other thorny issue in U.S.-China trade relations is tax refunds. China's exporters, including U.S. multinationals, enjoyed rebates of 337 billion yuan ($43 billion) last year on value-added tax, the highest since 1994.
This, by itself, isn't a subsidy.
Under WTO rules, it is an acceptable practice for nations to protect their exporters from ``double taxation.''
When there's no domestic sale of the product, value-added tax can't be recovered from the final customer and ends up being a drag on the exporter's competitiveness. VAT rebates, therefore, are considered perfectly legitimate.
However, when the same concessions are tied to corporate profits, they become export subsidies and are deemed illegal.
That's a lesson that the U.S. learned when its effort to keep subsidizing exporters with corporate-tax breaks was held by the world trade body as illegal. Over three decades, the U.S. came up with three different laws to boost its exporters' profitability. Each had to be struck down, with the last -- the Extraterritorial Income Exclusion Act -- phased out since 2005.
The U.S., which depends more on direct taxes than indirect, thus finds itself at a disadvantage in playing the export promotion game. China has no such difficulty.
Economics Drive Change
The next step in the U.S.-China trade spat is consultations between the two trading partners.
The Chinese authorities, mindful of the pressures of the U.S. election cycle, will probably make small concessions so that the Bush administration has something to show for its efforts to a Congress controlled by Democrats.
Last year, China reduced the tax rebates for exporters of steel, non-ferrous metals and textiles. It may prune the rates even further to reduce its trade surplus.
A more advanced stage of the confrontation, where negotiations fail and the dispute has to be mediated by a WTO settlement panel, may yet be averted.
That doesn't mean China's export-led strategy is sustainable. The Chinese authorities are aware of the urgent need to contain the ballooning trade surplus and deliver on their promise of rebalancing the economy.
Increasing domestic consumption, lowering income inequality and arresting the damage to the environment are more pressing priorities for China than selling yet more widgets to the world.
(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Andy Mukherjee in Singapore at amukherjee@bloomberg.net .
Last Updated: February 5, 2007 12:20 EST
Bloomberg.com: Opinion
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