China, U.S. Settle WTO Chip Dispute

China has agreed to end a tax break that the United States had complained discriminated against U.S. and other foreign semiconductor manufacturers, settling a high-profile dispute and possibly easing trade tensions between Beijing and Washington.

The agreement, announced Thursday by U.S. Trade Representative Robert B. Zoellick, was hailed by some American business leaders as an important step in China’s willingness to abide by global trading rules. The Bush administration touted the deal as a victory in its efforts to level the economic playing field with the booming Asian nation.

The accord ends the first-ever World Trade Organization case filed against China, in which the United States contended that the tax break favored computer chips produced or designed in China, in violation of WTO rules.

American chip makers had argued that China, already the world’s third-largest and fastest-growing chip market, was using the preferential tax treatment to unfairly support its bid to become a major supplier of semiconductors, the small devices the control virtually all electronic products made today.

The settlement, U.S. business officials said, could signal that China may refrain from using similar tactics to favor other industries.

“The line had to be drawn here,” said Frank Vargo, vice president for international economic affairs for the National Assn. of Manufacturers. “If China had been allowed to continue this patently unfair treatment of imported semiconductors, it could well have sought to expand this practice to a growing range of manufacturing industries.

“This isn’t just about semiconductors -- even as important as that industry is,” he added.

Analysts say China’s agreement illustrates the growing interdependence of U.S.-China economic relations. While both nations increasingly compete against each other, they also are vital customers for each other’s products. Thus, they must be increasingly careful about inciting trade tensions.

In technology, for example, several U.S. firms, including giants such as Motorola Inc. and Intel Corp., have investments or joint ventures in China, hoping to capitalize on its fast-growing consumer society and huge base of export-oriented factories.

But they also compete against Chinese concerns. China imports 80% of its chips because its domestic semiconductor industry is still small, although rapidly growing.

Ending the tax break “levels the playing field for semiconductors,” said Jennifer Greeson, a policy spokeswoman for Santa Clara, Calif.-based Intel, the world’s largest chip maker, which had joined other U.S. chip makers in urging the Bush administration to file the WTO case against China in March.

The same customer-competitor dynamic works in textiles, a huge industry increasingly dominated by China. American retailers such as Wal-Mart Stores Inc. are major buyers of low-cost Chinese textiles and apparel, passing along those savings to U.S. consumers. At the same time, U.S. sock manufacturers, reeling from a steep surge in low-cost Chinese competition and plunging prices, recently petitioned the Bush administration to restrict imports from China.

The semiconductor deal also suggests that China may be more willing to accept the responsibilities that come with its rapid ascension into a global economic power. China’s admittance into the WTO in late 2001 -- partly a result of its surging growth -- subjects it to possible sanctions should it be found to have violated international trading rules.

Many American business and labor leaders, however, still contend that China uses government subsidies, low wages, an artificially cheap currency and other incentives to give it an unfair advantage in global markets. The U.S. trade deficit with China rose to $124 billion last year, the largest gap between America and any one nation.

Presumed Democratic presidential candidate Sen. John F. Kerry and other critics have charged that the Bush administration’s free-trade policies have failed to protect American jobs. A Kerry campaign spokesman, Phil Singer, described the chip agreement Thursday as “too little, too late.”

What’s more, China continues to make other moves that irk American businesses. Its decision this week to overturn Pfizer Inc.’s Chinese patent for Viagra, the male-impotence treatment, raises questions about its commitment to protecting intellectual property rights, U.S. drug industry officials said.

Yet, at the same time, China has taken steps to resolve various trade disputes in recent months, including easing restrictions on U.S. cotton and soybean exports.

Three months ago, Beijing and Washington settled another semiconductor-related dispute, involving a proprietary security technology that China had planned to impose on wireless networking chips.

The latest chip agreement will end a program under which semiconductors produced or designed in China were eligible for partial rebates from a 17% value-added tax. Under the accord, payments to companies already taking advantage of the tax break will stop by April 1, 2005.

U.S. Trade Representative Zoellick said the agreement would “ensure that our high-tech firms have full access to one of our fastest-growing markets.”

The accord is likely to be of particular help to smaller U.S. semiconductor companies, which compete with Chinese firms to provide chips for consumer electronics and other lower-tech industries, said David Wu, an analyst with Wedbush Morgan Securities in Los Angeles. “It’s not really going to help Intel, because they make parts that China would have to buy anyway.”

U.S. exports of chips to China totaled about $2 billion last year, a small share of a market that is estimated at $25 billion, according to U.S. trade officials.

Comment from Chinese trade officials in Beijing was not immediately available.

Times staff writer Don Lee contributed to this report, and Times wire services were used in compiling it.