INSIGHT: US opens another front in trade conflict with China

13 October 2011 15:51  [Source: ICIS news]

By Joe Kamalick

Relations between Hu Jintao and Obama get testyWASHINGTON (ICIS)--The White House has opened yet another front in the escalating US clash with China over its trading and currency policies, with the Obama administration mounting a challenge to what it called Beijing’s broad and intolerable subsidies.

US Trade Representative (USTR) Ron Kirk filed a lengthy complaint with the World Trade Organization (WTO), charging that China has failed to live up to its trading transparency requirements under the WTO by failing to disclose nearly 200 subsidy programmes that Beijing and provincial governments provide to Chinese manufacturers and exporters.

Kirk said the China subsidy situation is “simply intolerable”.

“Every member of the WTO is required to come clean on its subsidy programmes on a regular basis,” Kirk said, but “China has not notified [WTO] of its subsidy programmes in over five years.”

Under World Trade Organization rules, each member nation is supposed to notify WTO of its trade and other commercial subsidies on a regular basis.

That information would then be available to other WTO member nations for evaluation and possible complaint to the global trade organisation if a given nation’s subsidies are considered illegal under the rules.

“The notification obligation is particularly significant for members like China,” said Kirk, “where inadequate transparency in so many areas places a tremendous burden on other WTO members seeking to better understand China’s trade policy measures.”

Far from meeting its WTO obligations for periodic notification of its subsidies, said Kirk, since becoming a WTO member nation in 2001, China has submitted only one subsidies notification”.

“That notification took place more than five years ago and was noticeably incomplete,” Kirk said, adding that China has declined to provide details on its subsidies despite numerous requests by the US through the WTO.

Kirk said that the US would have preferred not to make its formal complaint to the WTO, “but we have done so to hold China ... accountable and to enforce the rules that all WTO members must follow”.

“The lack of transparency severely constrains the ability of WTO members to ensure that each government is playing by the rules,” Kirk said, and “it is past time for China ... to be transparent about its subsidy programmes.”

“It is simply not acceptable” that China continues to evade its transparency commitments, Kirk concluded.

In its lengthy submission to the WTO, the US detailed scores of Chinese export and import substitution subsidies, tax waivers or reductions for domestic manufacturers, the provision of free or discounted land for production facilities, and other benefits that give Chinese producers a competitive edge over foreign manufacturers and exporters.

Many of the subsidies identified by the US are for green technology or new energy development and manufacturing, including wind power generating equipment and systems, high-efficiency lighting, research and production assistance for energy-saving building materials, and solar photovoltaic equipment and demonstration projects.

In addition, said the USTR, multiple subsidies are being maintained by both the central government in Beijing and by local provincial governments for a broad range of exports under China’s “famous brand exports” policy.

Other subsidies among the nearly 200 listed by the USTR were for development of small- and medium-sized enterprises (SMEs) for export trade.

The charges put before the WTO note that in consultations between the US and Beijing in 2007, “China agreed to repeal these [subsidy] measures in 2007 and 2008” but with few exceptions has failed to do so.

Chinese companies also benefit from preferential income tax waivers and government forgiveness of tax arrears, exemption from real estate taxes, and Beijing government reimbursements for import tariffs and foreign taxes that Chinese firms had to pay abroad.

Among the many alleged subsidies were those made by Beijing to support China’s alcohol, citric acid and monosodium glutamate sectors.

The timing of the USTR’s complaint to the WTO about China’s subsidies is no accident. 

It comes just days after several other salvos were launched toward Beijing by irate members of Congress, alleging trade cheating and an “intolerable level” of Chinese industrial spying and technology theft against the US.

The complaint to the WTO over Chinese subsidies that the US has publicly ignored for five years or more also comes as new public opinion polling shows that a solid majority of Americans see China as a long-term threat, and with one in four Americans seeing the Middle Kingdom as an outright enemy.

At a USTR hearing last week where multiple US industries and companies aired their grievances against Beijing, Claire Reade, assistant US trade representative for China affairs, noted that “significant questions had arisen regarding China’s actions” in the context of its WTO obligations.

“Issues of particular concern arose in a range of areas,” Reade said, “including intellectual property rights, industrial policies, trading rights and distribution services, agriculture, services and transparency.”

“Often, we traced these problems to China’s pursuit of industrial policies that rely on trade-distorting government intervention to promote or protect China’s domestic industries,” she said.

“This year’s written submissions underscore that concerns remain about China’s observance of WTO rules in a number of areas, including China’s implementation of specific commitments it made upon acceding to the WTO." Reade said, citing the many complaints submitted to the USTR in the last year.

As the White House and USTR targeted China’s subsidies and general trade policies, the US Senate put a shot across Beijing’s bow by passing a bill aimed at China’s undervalued currency.

Sponsored by Democrat Senator Sherrod Brown of Ohio, S-1619, the “Currency Exchange Oversight Reform Act”, won a solid and bipartisan vote of 63-35 in the Senate.

The bill would require the US Treasury Department to report annually on misaligned or undervalued currencies, and it would mandate retaliatory action by the White House against nations that fail to correct their monetary manipulations.

In addition to the annual review and report by Treasury, the bill would allow US companies to bring a formal complaint before the Department of Commerce (DOC) and the US International Trade Commission (ITC) to allege currency manipulation by a foreign country.

If the agencies’ investigation confirmed the company’s allegations, the Commerce Department could impose countervailing duties against selected imports from the offending nation.

China reacted sharply to the Senate vote, the Associated Press reported, with Beijing’s foreign ministry warning that S-1619 would cause “severe damage” to US-Sino trade ties if it became law.

The bill faces an uncertain future in the House of Representatives. While it is popular among both Republicans and Democrats (a similar bill was passed in 2010), the House Republican leadership is opposed to it and may keep the bill from coming up for a full House vote.

But the number and variety of frontal attacks on China’s trade policies, currency manipulation and industrial espionage by the White House and bipartisan members of Congress are highly significant on their face.

Equally or perhaps even more significant is the fact that the White House in particular has decided to advance these charges against Beijing in a highly public fashion, waving the get-tough flag after basically ignoring the subsidies issue.

It could signal a sea-change in US policy towards and relations with China.

($1 = €0.72)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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