Apparel Sourcing Intelligence - Worldwide

US launches WTO complaint against China’s “Demonstration Bases” export subsidies

In a move probably aimed above all at US politicians, the US government announced on February 11 the first steps in a formal WTO case against Chinese export subsidies for seven product groups, including textiles and apparel.

US Trade Representative Mike Forman said “the United States has pursued dispute settlement consultations with the Government of China” (a preliminary to filing a formal WTO complaint) over China’s Demonstration Bases-Common Service Platform export subsidy program” in “seven economic sectors and dozens of sub-sectors located in more than one hundred and fifty industrial clusters throughout China.”

The sequence of events connected with the dispute settlement consultations and any consequent setting up of a formal Dispute Resolution Panel is likely to take several years – and may not necessarily produce findings that will please America’s anti-trade lobby. The February 11 announcement, though, might have a faster effect on US legislators: by showing the US Adminstration is being firm against probable Chinese trickery, it helps Forman gain Congressional support for his attempts to get “fast track” Trade Promotion Authority legislation approved to ratify a Trans-Pacific Partnership (TPP)  final agreement.

The Office of the US Trade Representative makes an impressive-sounding case about these newly uncovered Chinese export subsidies:

  • 179 Demonstration Bases in seven economic sectors and dozens of sub-sectors
  • Including:
    • (1) textiles, apparel and footwear;
    • (2) advanced materials and metals (including speciality steel, titanium and aluminium products);
    • (3) light industry;
    • (4) speciality chemicals;
    • (5) medical products;
    • (6) hardware and building materials; and
    • (7) agriculture.
  • Providing business support “through over 150 central government and sub-central government measures throughout China”
  • “China has given almost $1 billion over a three-year period to Common Service Platform suppliers that agree to provide discounted or free services to Chinese companies, including exporters located in the Demonstration Bases”

But the real impact is less clear. “There is evidence that certain Demonstration Base enterprises have received at least $635,000 worth of benefits annually”, Forman’s department says – but hardly a week goes by without the US (or British, or French, or…) government boasting about giving far bigger tax-funded benefits to multi-billion dollar corporations in their countries.

“In 2012 sixteen of the approximately 40 Demonstration Bases in the textiles sector accounted for 14 percent of China’s textile exports”, the USTR adds. That is simply how China (or any other country) works: industries cluster.

Global moral outrage outside the United States is likely to be muted: the “$1 billion over a three-year period to Common Service Platform suppliers” amounts to far less, per year, in handouts to exporters than the US typically gives its cotton farmers. If the EU handed out so little to cattle owners, there would be union-wide riots.

Forman is undoubtedly correct to say that “Due to China’s lack of transparency, it is difficult to assess the exact extent of the subsidies provided to enterprises in each of the 179 Demonstration Bases in China” – but it will be even tougher to assess, and get an independent panel of adjudicators to agree, how many of those subsidies infringe WTO rules. No-one claims (at least with a straight face) that China gives its exporters only such assistance as the WTO has approved  after careful scrutiny.

Under WTO rules, the US and China must now hold consultations for a minimum of 60 days in an effort to reach a mutually agreed solution. Should the two sides fail to resolve the matter within that time frame, Washington will then have the option of requesting that a dispute panel be formed to hear the case.

The formal WTO process will take time, and China will undoubtedly use it to bring analogous allegations against the US, or other Western trading nations. In the meantime, the immediate effect of Forman’s announcement, we suspect, is to demonstrate to Senators and House Representatives that the Obama administration is taking some action against China, after six years of apparent near-indolence.

Whether the announcement proves effective will not be revealed in three years’ time in a Geneva committee room – but over the next nine months, in Congressional votes over Trade Promotion Authority and subsequent votes for ratifying a TPP agreement.