U.S. Spurns China’s Tax on Chips

U.S. Trade officials filed a case at the World Trade Organization
Thursday asking that China drop its 17 percent value-added tax (VAT) on
imported semiconductors and integrated circuits.

While not a legal lawsuit, the complaint suggests that the preferential
tax treatment to chips produced in China is harming the U.S. and other

In a statement, U.S. Trade Representative (USTR) Robert Zoellick
said the U.S. believes that the discriminatory tax policy is
inconsistent with the national treatment obligations that China assumed when
it joined the WTO in December 2001. The USTR complaint is the first WTO case
filed against China by any WTO Member.

“We have been pressing these and other concerns with the Chinese,”
Zoellick said. “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 cash cow for U.S. chipmakers like Intel , AMD
, Texas Instruments and Motorola . According to the Trade Office statistics, companies spent $2.02
billion in 2003 exporting processors into China.

The problem, say U.S.
officials, is that those chip exports are subject to a 17 percent VAT, which
can cost as much as $344 million. In contrast, China taxes its own companies
only a fraction of what it charges the rest of the world through the use of
a partial refund.

As a result of the refund policy, Chinese chip companies
may pay as low as 3 percent in taxes. China also allows for a partial refund
of VAT paid on integrated circuits designed in China but manufactured
abroad. Zoellick said his office felt that policy is also inconsistent with
China’s international trade obligations.

San Jose, Calif.-based Semiconductor Industry Association (SIA), has been
lobbying U.S. and Chinese trade officials, said it also advocates a level
playing field by either eliminating completely or reducing the VAT to 3
percent for all semiconductors. The trade group was a leading proponent of
China’s accession to the WTO and fought for congressional approval of
Permanent Normal Trade Relations with China.

“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,” SIA president George Scalise
said in a statement.

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. In its latest survey, the SIA said chip sales in January 2004
were up strongly over January 2003 levels, including a 34 percent rise in
the Asia Pacific market, propelled by growth in China. In comparison, the
Americas grew 14.8 percent, Europe 19.5 percent, and Japan 32 percent.

USTR officials are hoping that history is on its side in resolving
China’s VAT issue. Since China joined the WTO in December 2001, the United
States has had a number of
concerns regarding China’s WTO implementation.

Specifically, the USTR has
approached the Chinese 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 completing some 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.

“China has a vibrant and growing microelectronics industry that will be
further strengthened, as the U.S. industry was, by vigorous market-based
competition,” Scalise said. “We welcome competition from China, but
competition must take place on a fair playing field, unencumbered by market
barriers that distort investment while discriminating against foreign-made

Under WTO rules, the case filing starts a 60-day consultation period. If
U.S. Trade officials are unsatisfied with the results, they can ask for a
panel to find out if China’s tax breaks are in direct violation of WTO laws.
The USTR’s primary argument is based on GATT Article III (on “National
Treatment”), which says that a WTO member cannot impose taxes on imported
products that are greater than those imposed on domestic products.

“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.

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