March 17, 2004 – After two years of unsuccessful negotiations, the US reportedly is preparing to file a complaint with the WTO in protest of China’s chip taxation policies.
At issue is China’s value-added tax (VAT) policy, which levies a 17% tax on all semiconductors, but reduces that amount to 3%-6% for domestically produced chips. Despite lengthy negotiations, “it became clear that continued discussions had not been productive,” according to SIA president George Scalise.
China claims its policies are fair enough. “Last year we imported more than 80% of our semiconductors and I don’t see how much more open our market could be,” said Zhang Qi, director-general at the Ministry of Information Industry, quoted by Reuters.
That’s not enough for the US or the SIA, which advocates “eliminating completely or reducing the VAT to 3% for all semiconductors,” said Scalise. “China has a vibrant and growing microelectronics industry that will be further strengthened, as the US industry was, by vigorous market-based competition,” he said, comparing the stance against China’s chip taxes to the elimination of US tariffs against Japan in the 1980s. “We welcome competition from China, but competition must take place on a fair playing field.”
If the US decides to petition the WTO, it may not be alone. Steve Chen, Taiwan’s vice minister of economic affairs, hinted that Taiwan would consider filing its own complaint if the US follows through, according to China’s Economic Daily News. And Shoichi Nakagawa, Japan’s Minister of Economy, Trade, and Industry, said his country already has informed China of its intent to join the dispute as a third-party country, according to the Kyodo News Service.
This isn’t the first time that China’s VAT policies have come under fire. At its May 2003 meeting, the World Semiconductor Council appealed to China to eliminate the VAT as a function of its membership in the World Trade Organization. In response, in July 2003, four Chinese government associations}__the State Administration of Taxation, Customs General Administration, Ministry of Information Industry, and Ministry of Commerce}__reportedly formed a joint group to examine whether the VAT is in line with WTO rules, with one member suggesting the VAT could be lowered from 17% to 13%. Most recently, in October 2003 the SIA issued a study in which it claimed the VAT “distorts trade investments and imposes a cost penalty for semiconductor importers trying to compete for sales in China.”