TRADE: U.S.-China Subsidy Deal Draws Mixed Reviews

By IPS Correspondents Reprint | | Print |

Abid Aslam

WASHINGTON, Nov 30 2007 (IPS) - China has agreed to scrap some trade subsidies, handing U.S. officials a rare chance to claim success in international affairs.

Industry reaction has been upbeat, but workers remain unimpressed as the impact remains to be seen.

Beijing said Thursday it had signed a memorandum of understanding rescinding a raft of tax breaks and subsidies that Washington had challenged earlier this year as unfair and in violation of World Trade Organisation (WTO) rules.

The concessions come in the run up to high-level trade talks scheduled for next month and aimed at reducing Sino-U.S. economic tensions.

A similar deal was reached with Mexico, which had joined the U.S. complaint at the WTO, China’s mission to the Geneva-based institution announced.

Beijing thus headed off a formal WTO ruling under which it might have been found guilty of stacking the deck against U.S. and Mexican competitors with measures that encouraged Chinese firms to export more than they otherwise would and rewarded them for using domestic, rather than imported, goods.

“This outcome represents a victory for U.S. manufacturers, producers, and their workers,” Trade Representative Susan Schwab told reporters here. The offending Chinese tax incentives and subsidies would be abolished by Jan. 1, she said.

Industry quickly chimed in. “The settlement of this case is great news,” the National Association of Manufacturers, the largest U.S. industrial exporters’ lobby, said in a statement.

“China is to be commended for recognising that these subsidies were illegal and for acting responsibly to eliminate them without going through prolonged litigation. We hope this is a harbinger of things to come,” it added.

The AFL-CIO, a federation of some 54 unions claiming a combined membership of some 10 million U.S. and Canadian workers, demanded stronger action to reduce the U.S. trade deficit with China.

“This is an important accomplishment,” John Sweeney, the AFL-CIO president, said of the Chinese decision.

“However, we hope that USTR and the Bush administration will show equal diligence in addressing worker rights violations, import safety and currency manipulation, all of which contribute to the enormously lopsided trade imbalance between the United States and China,” he said, referring to the U.S. trade representative’s office.

China ran a record trade surplus of 187.6 billion dollars with the United States in the first nine months of this year and seems set to surpass last year’s surplus of 232.5 billion dollars. Workers and politicians have been baying for an end to the haemorrhage.

Democrats in Congress are advancing measures that would make it easier to impose tariffs on imports and thus protect U.S. firms against China’s subsidies and weak currency.

Schwab said the administration of President George W. Bush remained opposed to such punitive measures. The administration succeeded in bringing Beijing around because it shunned a punitive approach in favour of negotiation, eventually buttressed with litigation at the WTO – an appropriate route since both countries are members.

“The agreement demonstrates the two great trading nations can work together to settle disputes to their mutual benefit,” she told reporters.

Sweeney, however, said the U.S. complaint and its resolution were too long in coming.

“These subsidies should have been eliminated when China joined the WTO six years ago,” he said.

Just how much U.S. exporters and their workers stand to benefit from Thursday’s deal remains to be seen. Officials and analysts alike have said the impact will be more than symbolic because the subsidies applied across steel, information technology, and other major sectors of China’s export economy and to all companies with foreign investors or joint-venture partners. Such companies are said to make about 60 percent of China’s exports.

The agreement is aimed at helping U.S. companies against Chinese competitors but since it covers firms in which foreigners hold a stake, at least some of the cost will be borne by U.S. investors and partners.

Another three U.S. complaints – involving auto parts and intellectual property rights protections – remain pending at the WTO.

These and other issues are to be taken up in China Dec. 12-13, during the next round of the Strategic Economic Dialogue. Washington’s delegation, to be headed by U.S. Treasury Secretary Henry Paulson, also is expected to ask Chinese officials to ease limits on U.S. bank investments.

Beijing has previously scrapped tax breaks deemed offensive by Washington and has begun to allow its currency to rise gradually against a weak dollar – moves that signal not only that it is willing to accommodate Washington’s needs but also that it feels itself in a strong enough economic and financial position so to do.

Separately, China and the European Union said this week they would launch a series of high-level trade talks in March.