- The Washington Times - Thursday, March 18, 2004

The United States yesterday filed the first case against China at the World Trade Organization, saying Chinese tax policies hurt U.S. semiconductor sales in the fast-growing market.

“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,” U.S. Trade Representative Robert B. Zoellick said in a statement.

U.S. industries and labor groups have increasingly complained about rapidly rising imports from China in numerous sectors, including clothing, furniture and other manufactured goods. They say China uses an undervalued currency, pirates music and software, represses wages and uses other methods to unfairly compete against American companies.

Democrats, meanwhile, have demanded stepped-up enforcement of U.S. trade laws.

The Bush administration has tried to avoid prohibiting Chinese imports from reaching the United States and instead is focusing on opening up the burgeoning market for U.S. exporters. The semiconductor case is meant, in part, to send a message that China should comply with WTO requirements.

“As a WTO member, China must live up to its WTO obligations; it cannot impose measures that discriminate against U.S. products. We have been pressing these and other concerns with the Chinese,” Mr. Zoellick said.

The case is likely to strain sensitive trade relations between the two countries — China already has rejected U.S. claims and said it would fight any complaint.

The Chinese Embassy in Washington did not return phone calls seeking comment. Before the United States formally filed the case, though, officials in China rejected U.S. complaints. Zhang Qi, a director-general at the Ministry of Information Industry, on Wednesday dismissed charges of protectionist policy, Reuters news agency reported.

“We’ve known about their intent for some time. If they want to lodge a complaint, let them go ahead,” she told Reuters in Shanghai. “Last year, we imported more than 80 percent of our semiconductors and I don’t see how much more open our market could be.”

The U.S. semiconductor industry supported Mr. Zoellick’s case.

“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 products,” said George Scalise, president of the Semiconductor Industry Association, a San Jose, Calif.-based group whose members include Intel Corp. and Motorola.

Democrats said the complaint failed to address broader problems with China.

“One case brought as a political talking point does not make up for the administration’s failure to develop a China trade policy over the past three years, while the trade deficit with China has skyrocketed in a period during which the U.S. has lost almost 3 million manufacturing jobs,” Rep. Sander M. Levin, Michigan Democrat, said in a statement.

The semiconductor case focuses on preferential tax treatment China gives to domestically produced goods. U.S. exports of semiconductors to China are subject to a 17 percent value-added tax (VAT). China refunds part of that tax to firms producing the semiconductors in China, effectively dropping the VAT rate on domestic products to as low as 3 percent, Mr. Zoellick said.

Mr. Zoellick said that such preferential treatment violates WTO rules.

U.S. semiconductor exports to China were $2.45 billion last year, according to the Commerce Department. They are the second-biggest U.S. export to China after soybeans.

China’s fast-growing semiconductor market is valued at $19 billion, making it the world’s third largest, Mr. Zoellick said.

Filing a case at the WTO starts a 60-day consultation period. If the sides do not negotiate a settlement, the case goes to a dispute settlement panel for resolution. The process can take at least 18 months.

China joined the WTO in December 2001, and this is the first case filed against the country.

“In a sense, it’s business as usual. This is the way things should happen when there is a dispute between members of the WTO,” said Howard Chao, head of the Asia practice for the law firm O’Melveny & Myers and an expert on business in China.

“This is a lot better than doing things outside the WTO process,” he said from the firm’s office in Menlo Park, Calif.

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