The Office of the United States Trade Representative

U.S. and China Resolve WTO Dispute Regarding China's Tax on Semiconductors

Resolution of Trade Spat Provides Real Results To U.S. High Tech Manufacturers

WASHINGTON – The United States and China have agreed on a resolution to their dispute at the World Trade Organization (WTO) regarding China’s tax refund policy for integrated circuits. The resolution will ensure full market access and national treatment for U.S. integrated circuits in China, the world’s fastest growing semiconductor market and an export market worth over $2 billion to American manufacturers and workers. Today’s agreement resolves the first WTO case filed against China by any WTO Member.

Effective immediately, China will not certify any new semiconductor products or manufacturers for eligibility for VAT refunds. China will no longer offer VAT refunds that favor semiconductors designed in China. And, by April 1 of next year, China will stop providing VAT refunds on Chinese-produced semiconductors to current beneficiaries. Under China’s tax policy, U.S. exporters of integrated circuits to China paid up to five times as much tax as local Chinese manufacturers. These policies disadvantaged U.S. manufacturers as well as U.S. firms that design integrated circuits.

“America is the global innovator. American ingenuity has spurred far-reaching gains in human achievement, and we need to ensure that there is a level playing field so that our innovators and manufacturers continue to lead the world,” said U.S. Trade Representative, Robert B. Zoellick. “These are real, concrete results. Today’s agreement complements our successful resolution of the wireless internet encryption issue in late April, and will ensure that our high-tech firms have full access to one of our fastest growing markets. Day in and day out, we are working hard to enforce trade rules, deliver real results to American workers and ensure that there is a level playing field for American exporters.”

China is the world’s third largest consumer of integrated circuits, with a market value of approximately $19 billion. Although imports currently represent approximately 80 percent of China’s market, its semiconductor industry is expanding rapidly, with substantial investment from foreign firms. China’s VAT refund policy not only discriminated against U.S. products directly, but also has distorted international investment in the integrated circuit sector. China is a substantial market for semiconductors produced in U.S. factories: U.S. exports of integrated circuits to China were $2.02 billion in 2003.

The agreement, once implemented, will resolve the case that the United States initiated at the WTO on March 18, 2004, and is the culmination of several rounds of discussions between negotiators and legal experts from the two countries. The United States and China held formal consultations in Geneva -- which included delegations from third parties Japan, the European Communities, and Mexico -- as well as meetings in Washington and Beijing.


U.S. exports of integrated circuits to China are subject to a 17 percent value-added tax (VAT). However, China has taxed domestic products significantly less, by allowing firms producing integrated circuits in China to obtain a partial refund of the 17 percent VAT. As a result of the refund policy, the effective VAT rate on domestic products can be as low as 3 percent. China also has allowed for a partial refund of VAT paid on integrated circuits designed in China but manufactured abroad.

An integrated circuit or semiconductor is an electronic device that can be switched to conduct or block electric currents. Most semiconductor devices are made from silicon, although other materials, such as gallium arsenide, can also be used. Virtually all electronics used today -- from antilock brakes in automobiles to satellite systems and computer applications -- incorporate semiconductors.

One of the guiding principles of the WTO is that countries and consumers benefit most when products have fair and equal access to markets without regard to their national origin. Policies that discriminate against products on the basis of national origin distort both purchasing and investment decisions to the detriment of everyone. While WTO rules permit countries to provide certain types of assistance to domestic industries, they prohibit WTO Members from supporting their industries by discriminating against foreign products.

If consultations had not resolved the dispute, the United States would have had the right to request that a WTO dispute settlement panel be established to consider the issue.

The United States and China will notify the agreement next week to the WTO in Geneva.