SHANGHAI, China -- The United States is preparing to file a complaint with the World Trade Organization (WTO) against China because of its controversial value-added tax on semiconductors, raising the ante in a long-running trade skirmish over chips.
The complaint could come this week, according to media reports, and follows a warning last week by US Trade Representative Robert Zoellick.
During testimony before a Senate panel, Zoellick told lawmakers that China's 17 percent value-added tax on imported semiconductors was discriminatory. "If they don't stop it, we're going to take action," he said.
If the US files the complaint, it would be the first against China since the country joined the WTO in December 2001. Its value-added tax has long been a sore spot of contention because many foreign companies and governments view it as a back-door tariff that encourages capital investment in China to avoid the tax and exacerbates the US-China trade imbalance, which reached $123 billion in 2003, up from $103 billion in 2002.
During its start-up phase, the country's largest chipmaker, Semiconductor Manufacturing International Corp. (SMIC), often cited the VAT as a major advantage for drawing customers through its doors. That's because integrated circuits made in China qualify for an 11 percent rebate of the VAT; chips that are designed as well as made in the country qualify for a higher 14 percent rebate.
China's consumption of chips is expected to reach US$37 billion in 2004, an annual increase of 30 percent, according to market research firm Gartner Dataquest. The majority of these chips wouldn't be subject to the VAT because they are put into export products. But as China's domestic electronics market grows, more and more of those chips will be tagged by the VAT.
It's difficult to determine how much negative impact the tax has had. Even SMIC does not tout it anymore, possibly because the rebates can take up to a year to receive and are applied unevenly throughout China's massive bureaucracy. Chip designers have also said that a 17 percent tax still wouldn't justify having products made in China because of the lower yields of many China fabs.
Still, a wide array of industry organizations are demanding China abolish the VAT on semiconductors, including the Semiconductor Industry Association, the World Semiconductor Council and the US Information Technology Office. Any complaint would likely take a year or more to work its way through the WTO process.
Earlier this month, state-media quoted Guo Xiuming, an official at the Ministry of Information Industry, as saying: "The tax policy has not brought substantial damages on US firms, (so) I believe any action by the United States to bring the case to the WTO will likely fail." He also indicated that China would probably change its tax policies regarding semiconductors over the next few years as the industry develops, but gave no details.
The tussle over semiconductors comes just as China is also defending itself over intentions to implement a proprietary wireless LAN standard that effectively forces foreign semiconductor makers to work with local companies to produce compliant chips.
Last week, Intel Corp. said it would not be able to meet the government's June 1, 2004, deadline for compliance with the standard, citing an inability to guarantee delivery of a quality product by that time.
China's new standard, known as Wireless LAN Authentication and Privacy Infrastructure (WAPI), was implemented on December 1, 2003, as part of the nation's GB 15629.11-2003 Wi-Fi standard. The Chinese authorities are mandating WAPI even though it is incompatible with the formal IEEE 802.11x standard because they believe it is more secure than the .11b protocol.
Yet little is known on the street about the protocol. In Shanghai, many sellers of WLAN equipment say they haven't even heard of the standard, and insist that their current inventory of access points and client cards will be usable well after June 1.
PC maker Legend is telling retail customers that a new driver set will be downloadable from the web, which will make current .11x devices compatible with China's standard. The company also said the new drivers would not compromise performance of existing .11x systems.