U.S. Trade Representative (USTR) Michael Froman has asked the government of China for dispute settlement consultations at the WTO concerning a little known, but wide spread, export subsidy program.  The Chinese government appears to provide prohibited export subsidies to manufacturers and producers across seven economic sectors, including agriculture, located in more than one hundred and fifty industrial clusters throughout China.

The basic complaint is that the Chinese government provides free and discounted services through ‘Common Service Platforms’, cash grants and other incentives to enterprises that meet export performance criteria and are located in 179 Demonstration Bases (clusters of like industries). These have enterprises from one of seven sectors:  (1) textiles, apparel and footwear; (2) advanced materials and metals; (3) light industry; (4) specialty chemicals; (5) medical products; (6) hardware and building materials; and (7) agriculture.  The government operates this program through over 150 central government and sub-government measures.

According to information provided by the USTR office, it first learned of this program in 2012 when the USTR brought a WTO challenge to export subsidies that the Chinese government provided for auto and auto parts manufacturers pursuant to a “National Auto and Auto Parts Export Base” program.  The USTR’s office discovered additional information that China had created the Demonstration Bases program to provide prohibited export subsidies to many other industries. The Chinese government has given almost $1 billion over a three-year period to Common Service Platform suppliers that agreed to provide discounted or free services to Chinese companies, including exporters located in the Demonstration Bases. According to USTR Forman, these services include information technology services, product design services and worker training services.

The USTR argues this is an export subsidy under Article 3.1 of the Agreement on Subsidies and Countervailing Measures (ASCM), which prohibits subsidies contingent in law or in fact upon export performance. The U.S. consultation request lists 182 laws and regulations through which the Chinese government has implemented the program.

Consultations are the first step in the WTO dispute settlement process.  If the U.S. and China do not reach a solution through consultations, the U.S. may request the establishment of a dispute settlement panel. The rules established in the Dispute Settlement Understanding for general WTO disputes require 60 days to pass before a party can request the establishment of the panel. The ASCM requires in disputes involving prohibited subsidies the country accused of subsidizing shall begin consultations ‘as quickly as possible.’ If those consultations fail to resolve the dispute within 30 days from the request, the country asking for consultations can request the establishment of a dispute settlement panel.

According to a report by Inside U.S. Trade, a U.S. trade official was asked why they chose to pursue this issue in the WTO rather than by initiating a countervailing duty (CVD) case under U.S. law. He said the WTO case provides a more sweeping remedy allowing the U.S. to challenge the program at its roots rather than targeting specific products. A CVD case would likely target a more narrow class of products and require multiple cases, while at the WTO seven broad sectors can be addressed together. Also, a WTO challenge allows the U.S. to address third markets where Chinese and U.S. products compete.

In the talks with Chinese government officials one issue will be are these programs having a significant impact on trade. The USTR’s office seemed to anticipate that question and included two examples in the press release, “In 2012 sixteen of the approximately 40 Demonstration Bases in the textiles sector accounted for 14 percent of China’s textile exports and six of the ten Demonstration Bases specializing in seafood production accounted for 20 percent of China’s seafood exports.”

Equally important is the views of other countries. According to Inside U.S. Trade, U.S. officials discussed the case with officials from other countries before making it public and all expressed interest in the case. Mexico had requested consultations with China in 2012 on subsidies for textiles, but has not requested a dispute resolution panel be formed.

This case is only as good as the inside data the analysis is built on. The USTR press release said the case was developed by the Monitoring and Enforcement unit of USTR’s Office of General Counsel. They were helped by various branches of the government, including the Interagency Trade Enforcement Center (ITEC), created by the Administration to provide enhanced investigative and analytical resources.

The USTR’s office rejected the idea the new consultations were timed to influence support in Congress for Trade Promotion Authority (TPA) and the Trans Pacific Partnership (TPP) trade agreement which is nearing completion. Enforcement actions are taken according to their own internal timelines. At the press conference announcing the request for consultations, Froman shared the stage with six House Democrats and one House Republican from states producing products included in the seven sectors.

China’s Ministry of Commerce on its website said that it consistently follows WTO rules and denied that it unfairly subsidizes companies. The Chinese ministry said it will settle the issue according to WTO dispute procedures. What Chinese official do to unofficially retaliate may give some indication of the true value of the programs.

The outcome of the case may hinge on the issue of government financial help to encourage production for export. Government funding to help for research and development is not unusual. Most WTO countries make that assistance in general and not contingent on the amount exported.

 

Ross Korves is a Trade and Economic Policy Analyst with Truth About Trade & Technology (www.truthabouttrade.org).

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