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United States Launches Trade Enforcement Challenge to China’s Hidden and Discriminatory Tax Exemptions for Certain Chinese-Produced Aircraft

China’s Unpublished Tax Measures Discriminate Against Foreign Aircraft

Washington, D.C. – U.S. Trade Representative Michael Froman announced today that the United States has launched dispute settlement proceedings at the World Trade Organization (WTO) by requesting consultations with China on its measures exempting certain aircraft produced in China from value-added tax (VAT) while imposing those taxes on imported aircraft, affecting American-made aircraft and American parts producers who provide components to foreign-made aircraft.  China’s tax exemptions result in substantial discrimination against certain imported aircraft.  In particular, China imposes a 17 percent VAT on imported aircraft – generally those under 25 metric tons by weight, including general aviation and regional aircraft, while exempting from VAT such aircraft made in China.  China’s measures appear to breach WTO rules prohibiting discriminatory taxation on the basis of national origin. 

In addition, China has not published its tax exemptions for domestically produced aircraft.  China’s failure to publish these measures appears to breach the transparency commitments that China made when it joined the WTO.   

“China’s discriminatory, unfair tax policy is harmful to American workers and American businesses of all sizes in the critical aviation industry, from parts suppliers to manufacturers of small and medium-sized aircraft,” said U.S. Trade Representative Michael Froman.  “We’re also especially concerned that China attempted to hide this discriminatory tax policy.  Transparency of laws and regulations impacting trade is a core WTO commitment that China must uphold, just as it expects other countries to do.  For these reasons, the United States is filing a trade enforcement case to hold China accountable.  The Obama Administration is committed to strong trade enforcement to ensure that our trading partners play by the rules so that American workers and businesses get all of the benefits we've negotiated under our trade agreements, supporting high-quality U.S. jobs and strengthening the middle classWe are taking this action today because American workers and producers deserve a fair shot to compete – and win.”

“USTR’s decision to bring this case sends a strong and important message that the U.S. will not tolerate activities that put our workers and the businesses that employ them at an unfair disadvantage. Leveling the playing field is exactly why we have the World Trade Organization and rules of the road for international trade,” said Congressman Rick Larsen (D-WA). “Small and medium-sized airplane manufacturing is a job-creating industry for the United States. General aviation manufacturing supports 102,600 jobs in the U.S. and contributes $14 billion to our economy each year. Washington state is home to hundreds of aviation manufacturing suppliers, who make and sell parts to general aviation and regional jet manufacturers. These jobs suffer when countries like China subsidize their own products. I am pleased to see USTR holding the Chinese government accountable, and I hope to see more cases like this to make sure our workers get a fair shot.”

“The Chinese government is undermining fair competition and playing by their own set of rules. Punishing American small and medium sized aircraft and aircraft component manufacturers is a direct violation of WTO commitments, and I commend Ambassador Froman for announcing this enforcement action,” said Congressman Pat Tiberi (R-OH), former chairman of the House Ways and Means Subcommittee on Trade. “Fully enforceable trade commitments are essential to ensuring American-made products can compete on a level playing field around the world.  In addition to actions like the one Ambassador Froman is taking today, it is important that we send my bill, the Trade Facilitation and Trade Enforcement Act, which gives Customs and Border Protection stronger tools to enforce our trade laws, to the president’s desk as soon as possible. This is about protecting American workers from unfair treatment and increasing American competitiveness in the global marketplace.”

“Global trade has helped create countless jobs here in the United States,” said Congressman Dave Reichert (R-WA), chairman of the House Ways and Means Subcommittee on Trade. “With a strong trade agenda, we have the potential to continue growing these jobs and expand opportunities for businesses. However, the success of our global trading system depends on transparency and strong enforcement. Each partnering country must play by the same rules. Today's case is an important confirmation that enforcement matters.  At the same time, I will continue working through the customs conference committee to give USTR even more enforcement tools. I am committed to working with Ambassador Froman, USTR, and my fellow Members of Congress to ensure that our exporters are treated fairly.”

“I applaud the Ambassador's efforts to ensure that China plays by the rules, said Congressman Derek Kilmer (D-WA). We are in a global competition and we need to ensure that manufacturing businesses and workers on our shores are able to compete on a level field.”

American aerospace – including aviation – is a vibrant, innovative, and highly competitive U.S. sector incorporating world-class technology and expertise.  U.S. aerospace manufacturers of all types produce the largest trade surplus of any manufacturing sector, accounting for more American jobs tied to exports than any other industry, and these jobs provide higher average wages than the manufacturing sector in general.  The U.S. aerospace sector employs nearly 500,000 people.

Today’s action continues the Administration’s strong record enforcing U.S. rights under our trade agreements.  Since 2009, this Administration has brought 20 enforcement actions in the WTO, and won every single one decided thus far.  Recent WTO victories include:

  • In June 2014, the WTO found that China breached WTO rules by imposing unjustified extra duties on American cars and SUVs.  In 2013, an estimated $5.1 billion of U.S. auto exports were covered by those duties.
  • In August 2014, the WTO found that China breached WTO rules by imposing duties and quotas on exports of rare earths, tungsten, and molybdenum.  Those export restraints promote China’s own industry and discriminate against U.S. companies using those materials, which are key inputs by critical American manufacturing sectors, including hybrid car batteries, wind turbines, energy-efficient lighting, steel, advanced electronics, automobiles, petroleum, and chemicals. 
  • In January 2015, the WTO found that Argentina’s import licensing requirements and other import restrictions breach international trade rules.  These restrictions potentially affect billions of dollars in U.S. exports each year, including exports of energy products, electronics and machinery, aerospace equipment, pharmaceuticals, precision instruments, medical devices, motor vehicle parts, and agricultural products.
  • In June 2015, the WTO found in favor of the United States in a dispute challenging India’s ban on various U.S. agricultural products – such as poultry meat, eggs, and live pigs – allegedly to protect against avian influenza.  The WTO agreed with the United States that India’s ban breached numerous international trade rules, including because it was imposed without sufficient scientific evidence and was not based on international standards, which confirm that importing U.S. products is safe.

Background:

The United States has uncovered evidence of multiple Chinese measures that discriminate in favor of certain domestically produced Chinese aircraft by exempting them from a 17 percent valued added tax (VAT) that is applied to imported aircraft generally under 25 metric tons by weight.  The aircraft subject to the exemptions appear to range from general aviation aircraft, including propeller-driven general aviation aircraft and business jets, to certain agricultural aircraft, to regional jets such as China’s domestically produced ARJ21.  China also has failed to publish the measures that establish these exemptions.  

Discrimination against imported aircraft affects U.S. workers and businesses throughout the aviation sector, from U.S. producers of aircraft looking to export to China to aircraft component producers whose products are incorporated into aircraft in the United States or third countries for sale in China.

China’s aviation sector is one of the fastest growing aviation markets in the world, with a large potential demand for general aviation aircraft.  For example, Chinese regulatory agencies estimate an annual growth of approximately 19 percent per year in general aviation aircraft through 2020.

Consultations are the first step in the WTO dispute settlement process.  If the United States and China are not able to reach a mutually agreed solution through consultations, the United States may request that the WTO establish a dispute settlement panel to examine the matter.

See a copy of the consultation request letter here.