The Missing $1 Billion in the US Trade Complaint

On September 17, the United States notified the World Trade Organization (WTO) of its request for consultations with China on “China’s measures providing subsidies such as grants, loans, foregone government revenue, the provision of goods and services and other incentives contingent upon export performance to automobile and automobile-parts enterprises in China.” Under WTO rules and procedures, a request for consultations formally initiates a WTO dispute and gives the parties an opportunity to discuss and find a satisfactory solution before proceeding with litigation.

The complaint was filed as President Barack Obama made campaign stops in Ohio, a state that is home to numerous auto parts suppliers. According to a senior administration official, the complaint accuses China of providing $1 billion in illegal subsidies to auto and auto parts exporters between 2009 and 2011. The U.S. notification said:

Specifically, it appears that China provides various forms of export-contingent subsidies through a program establishing “export bases” for the automobile and automobile-parts industries in China. China then provides the export-contingent subsidies to the automobile and automobile-parts enterprises that are located in these “export bases” or that are designated as “export base” enterprises. To date, it appears that China has created automobile and automobile parts “export bases” in the following 12 municipalities: Wuhan, Tianjin, Chongqing, Shanghai, Guangzhou, Hefei, Wuhu, Xiamen, Taizhou, Changchun, Baoding, Liuzhou, as well
as in other localities in the provinces of Jiangsu, Shandong, Shanxi, Henan, Inner Mongolia, Heilongjiang, Liaoning, Hunan, Zhejiang, Yunnan, Guangdong, Fujian, Anhui, and Beijing.

Having built and run a major automotive components company for 15 of my 20 years in China, I was curious to find the $1 billion of subsidies that China has allegedly been giving to auto parts exporters. We exported 15 percent of our production and had factories in many of the locations listed, and other than the Value Added Tax (VAT) rebates that we received on exports, we never received any part of that $1 billion.

The U.S. can’t be referring to the VAT rebates when it talks about “foregone government revenue,” can it? The VAT took effect in China on January 1, 1994. The tax is 17 percent on most goods, and from the very beginning, the tax was zero on all exports. That makes sense. No one would expect a government to self-impose a tax on goods that it exports. Moreover, this policy was in place for all exported goods, not just auto parts, when China joined the WTO in late 2001.

To make certain that I wasn’t missing something, we checked the policies in Tianjin, one of the “export bases”that was named, to see what the government is offering to auto parts exporters. In 2009, the Tianjin government issued “Suggestions on Accelerating the Construction of the Tianjin National Export Base for Auto and Auto Parts” which includes government financial support as follows:

• A fund of no less than 100 million yuan ($15.9 million) to support activities such as research and development (R&D), third party testing, overseas market research, product development, and training on the laws and regulations and intellectual property registration in overseas countries.
• Preferential tax policies that provide tax deductions equal to 150 percent of actual R&D expenditures.
• Certain tax discounts for companies buying key foreign technologies and equipment and for those companies purchasing environmental protection, energy-saving, water-saving and safety equipment.
• A lower, 15 percent corporate income tax rate for qualified high-tech enterprises. (This policy has been available to all types of companies all over China for some time and is nothing new and different.)
• Interest-free loans to encourage the cooperation between auto parts companies and assemblers.
• Financial support for technology development.
• Financial support of no more than 50 percent of the total expenses required to build public service platforms.
• 10 percent of the amount spent by companies to attend overseas exhibitions and business shows.
• A certain level of capital to support talent training in overseas markets.

Even spread across a dozen export bases, it’s hard to find a $1 billion in that list. Besides, most of the items deal with technology, R&D and training and sound like activities that the U.S. Department of Commerce regularly engages in to promote American exports and the development of higher technology products.

There can only be one conclusion: the complaint filed by the U.S. was politically motivated and will quietly fade into the woodwork after November 6 and never amount to anything. Meanwhile, the relationship between the United States and China is further strained in the process. Both parties should cool the China rhetoric — it’s not helpful.

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