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China to Eliminate Some Subsidies

China agreed to eliminate a dozen export and import subsidies by Jan. 1, settling a U.S. trade case but potentially increasing costs for apparel importers.

WASHINGTON — China agreed to eliminate a dozen export and import subsidies by Jan. 1, settling a U.S. trade case but potentially increasing costs for apparel importers.

The U.S. brought the World Trade Organization trade case against China in February, charging Chinese companies with foreign investment received tax breaks that broke global trade rules. Mexico later joined the case against China.

Hailed as a victory for the Bush administration, the settlement reached Thursday could help ease tensions ahead of high-level economic talks between the two countries next month and reduce pressure on Capitol Hill to crack down on the country in the face of a growing trade deficit. The U.S. deficit with China weighed in at a record $232 billion last year.

“This case was about standing up for American manufacturers and workers,” U.S. Trade Representative Susan Schwab said at a press conference detailing the settlement. “The Chinese government has been slow to emerge from its historical role controlling the economy. We have been urging China to eliminate all industrial polices, like these prohibited subsidies, which interfere so fundamentally with market-driven economic and trade outcome.”

The subsidies distorted trade either by encouraging exports or offering incentives to buy Chinese-made goods, thus making it harder for American companies to compete, she said.

Export subsidies included tax benefits that could help up to 60 percent of the country’s shipments abroad. For example, Chinese companies with foreign investment that exported more than 70 percent of their products could get their tax rate cut in half.

The impact of the action is unclear, given a lack of transparency in the autocratic Chinese system.

“These are the subsidies that we have been able to identify that are clearly prohibited by the WTO,” said Schwab. “We do not currently see any WTO-prohibited subsidies…that we would need to go after.”

Some of the remaining government subsidies, while not violating WTO rules, are still subject to countervailing duty trade cases from the Commerce Department if they run afoul of U.S. import laws. U.S. textile companies, however, can’t bring such cases on apparel because they require that a company makes a competing product.

Gary Hufbauer, a senior fellow at the Petersen Institute for International Economics, said the positive move will quiet the critics who claim China “doesn’t play fair.

“The second angle, which is probably just as equally important, is it gives Treasury Secretary [Henry] Paulson Jr., Schwab and Commerce Secretary Carlos Gutierrez, who are the chief lobbyists on this issue, a leg up with lawmakers to say ‘diplomacy works,'” Hufbauer said.

Though good news for U.S. manufacturers that complain their Chinese counterparts have an unfair advantage, the settlement does not end the subsidy issue in their eyes.

“It’s a good step,” said Cass Johnson, president of the National Council of Textile Organizations. “It’s one of many steps that need to be taken. The government has begun to peel the onion on how the Chinese government subsidizes their industry.”

But importers said the settlement could hurt them by raising costs.

“The assumption is as they eliminate subsidies, that will make costs in China go up,” said Stephen Lamar, executive vice president of the American Apparel & Footwear Association. “There are a lot of things that still make people want to source in China. On balance, people are still going to want to source in China.”

On Capitol Hill, the political implication for pending China legislation was difficult to gauge. Lawmakers appeared resolute in their drive to impose punitive duties on Chinese imports if the country does not raise the value of its currency.

“The most critical problem in relation to Chinese subsidies is domestic subsidies, not export subsidies,” Rep. Sander Levin (D., Mich.), chairman of the House trade subcommittee, said in a statement. “We need a comprehensive trade policy toward China requiring action on piracy, import safety, dumping and currency manipulation.”

Sen. Max Baucus (D., Mont.), chairman of the Senate Finance Committee and co-sponsor of a currency bill, indicated he also plans to keep up the pressure on China.

“I look forward to continued success in abolishing China’s other unfair trading practices without delay,” Baucus said in a statement.

Democratic leaders, who contend the undervalued currency gives Chinese exports an unfair advantage against the U.S., have said they plan to take up currency legislation next year.