Lawyers say China faces hard slog in WTO against US

A man looks at computers on sale at a shop in Beijing's Zhongguancun area, also known as China's Silicon Valley, on Friday. The US filed a complaint to the WTO over China's preferential tax policies toward domestic producers of semiconductors used in electronic consumer goods such as computers and mobile phones. PHOTO: EPA

China might be ill-prepared to take on the fight against the US before the WTO over the way it taxes computer chips, lawyers and analysts here said on Friday.

The US filed a case against China at the WTO on Thursday, demanding that it stop taxing imported chips at higher rates than domestically produced chips. Chinese trade officials and semiconductor industry representatives responded with a mixture of caution and indignation.

"We're very disappointed the American business groups have taken this to the government," said Xu Xiaotian, the chief secretary of the China Semiconductor Industry Association. "But it won't affect us," he added. "We don't think it's a problem."

Chong Quan, a spokesman for China's Ministry of Commerce, which deals with trade matters, said the ministry was considering the filing and refused to answer further questions.

Some American lawyers and experts based in China described the Chinese government's response to the threat of the WTO case as flatfooted.

"We're in new territory here," said Lawrence Sussman, a tax lawyer with O'Melveny & Myers in Beijing who specializes in China's semiconductor sector. "China needs to take this seriously. They think the US is bluffing, but it's not."

Yet Sussman said there might well be legal precedents under which China could redraw its subsidies to protect them from WTO challenges. "I don't think it's an open and shut case," he added.

The tax policy under challenge was introduced in 2000 and imposes a value-added tax of 17 percent on imported semiconductors of 2.5 microns or less, while chips that are made or designed in China, whether by domestic or foreign companies, receive rebates that give them a 3 percent tax rate.

"If you analyze the costs, China doesn't have any advantages, not in labor or land," said James Hexter, a consultant with Mckinsey in Beijing. "What really brings advantage is the tax benefits."

But even if the tax scheme survives the legal challenge, China might not be able to overcome the technical and managerial hurdles preventing its local chip factories from catching up with advanced American and Taiwanese chipmakers, some Chinese officials and analysts said.

"The gap is quite clear," said an official with China's Ministry of Information Industry, who insisted that his name not be used. "We're at least three to five years behind the Taiwanese manufacturers. The gap is shrinking, but it's still big."

Nonetheless, the Chinese government remains committed to making semiconductors a key domestic industry by the end of the decade, the official added.

"It's developed into a high-profile, strategic industry," Hexter said of China's chip industry. "Any individual fab may not recover costs," he added, referring to the factories that make semiconductors to order, "but China has such potential as a high-tech powerhouse, it makes sense."

The Semiconductor Industry Association, based in San Jose, California, which lobbied Washington to take action against China's tax program, points to 19 new semiconductor plants that are scheduled to be built in China by 2008.