China Eases Taxes on U.S. Chipmakers

The semiconductor industry is hailing a trade deal between the United
States and China ending China’s tax policy that effectively priced U.S. exporters
of integrated circuits out of China’s $19 billion integrated circuit market.

The deal, which U.S. and Chinese trade officials announced Thursday,
would end China’s policy of giving rebates to domestic producers of integrated circuit makers, while levying a 17 percent Value
Added Tax (VAT) on imported semiconductors.

U.S. based chipmakers and manufacturers had argued that the policy was in effect a tariff designed to keep other competitors out of China’s market
for such chips.

During a press conference Thursday, U.S. trade officials said China’s tax
policy caused U.S. exporters of integrated circuits to China to pay up to
five times as much tax as local Chinese manufacturers. It was also seen as a
way for China to induce manufacturers to set up more plants in the country;
but U.S. semiconductor makers and other countries argued that it skewed
investment patterns and decisions on the best place to build a semiconductor

“America is the global innovator. American ingenuity has spurred
far-reaching gains in human achievement, and we need to ensure that there is
a level playing field so that our innovators and manufacturers continue to
lead the world,” said U.S. Trade Representative, Robert B. Zoellick, in a

Officials said the deal means that, effective immediately, China will not
certify any new semiconductor products or manufacturers for eligibility for
VAT refunds. In addition, China will no longer offer VAT refunds that favor
semiconductors designed in China, and by April 1 of next year, China plans
to stop providing VAT refunds on Chinese-produced semiconductors to current

The Semiconductor Industry Association (SIA) cheered the arrangement. The
Information Technology Industry Council (ITI) also put out a statement
praising the outcome of the settlement talks.

“It was very important to get this issue resolved,” said John Greenagel,
a spokesperson for the SIA. “This settlement eliminates a de facto tariff”
that China had imposed on chipmakers outside the country.

U.S. trade officials say 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 a recent 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.

The U.S. filed a complaint over the policy with the World Trade
Organization in March.
The complaint by the U.S. Trade Representative was the first WTO case filed
against China by any WTO Member. The final deal is expected to reach the WTO
in Geneva next week.

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