USTR complains about China to WTO -- Higher prices?

February 7, 2007

U.S. Trade Representative Susan C. Schwab requested that the World Trade Organization (WTO) dispute settlement consultations with China regarding its subsidies prohibited by WTO rules.

The complaint is that China is offering tax breaks to foreign investors and their Chinese partners for any product exported outside of China. These companies accounted for 60% of China’s exports of manufactured goods in 2005, according to a WTO report.  China is also offering tax breaks to companies in China to purchase domestic equipment, instead of buying from U.S. exporters, which also face higher trade tariffs.

What the U.S. trade complaint against China means:
The complaint will trigger a 60-day trade consultation, in which negotiators will try to reach a resolution. If that fails, then the WTO hearing panel will judge the case. If the panel decides China had, in fact, issued subsidies that were in violation with their WTO membership agreement, then the U.S. will be allowed to issue trade sanctions.

Some experts say that, since it comes when President Bush is submitting his budget to Congress, the complaint is an attempt to show that the Administration is taking an aggressive stance against China’s exports to the U.S. This would be a way to show Congress that they don’t need to enforce their own sanctions, as almost happened last April.

It would also show Congress that the Administration is serious about reducing the trade deficit, now nearing $800 billion.
By showing support for a strong U.S. economy, perhaps the Administration is also showing support for the additional spending on the Iraq War that is in the 2008 budget.
Finally, it might also show that the Administration supports the WTO process, and free trade, just one week after Secretary Schwab announced the U.S. support of Doha.

However, the impact on China and the rest of the world must also be weighed. According to the U.S. Treasury Department, China has $300 billion of U.S. debt, making them the second largest holder after Japan who has $600 billion. Furthermore, many U.S. multinational corporations, who have moved their manufacturing facilities to China, would be hurt by an elimination of sanctions.

Finally, U.S. complaints against China seem ironic to those countries who think that the Doha round of trade talks were stymied because of U.S. (and EU) refusal to curtail subsidies to their domestic agribusiness lobbies. So far, China has refused comment, other than to say it is a “pity” that the U.S. has taken this action.

Action steps:
Unless you are employed by a U.S. industry that is affected, subsidies for Chinese exports lower the cost of living for you, as does free trade in general. Therefore, watch how this complaint plays out over the next 60 days, and hope that China, as our second largest banker, doesn’t decide to stop lending us money to buy their subsidized products.

Source: USTR web site.