A Chinese Subsidy Puzzle to be Unpacked

Two large developing countries are setting up to tackle each other in the WTO. It was announced on 28 February 2007 that the government of Mexico has requested consultations with China (the People’s Republic of China ‘the PRC’) under the WTO’s Rules and Procedures Governing the Settlement of Disputes, a precursory process to an action in the WTO trade court.

The essence of the Mexican complaint is that local content requirements in domestic production processes in the PRC are WTO incompatible because these types of domestic provisions discriminate against foreign products beyond negotiated tariff concessions. In specific terms the PRC grants its companies (many are State controlled enterprises) taxation refunds, reductions and exemptions which would be otherwise collected by their government in return for using Chinese originating inputs in their production processes.

These measures are judged by Mexico to provide the tax breaks in the PRC on the condition that those enterprises purchase domestic over imported goods, or on the condition that those enterprises meet certain export local performance criteria. Accordingly, Mexico considers that these measures are WTO inconsistent and as being illegal subsidies. Furthermore the measures accord imported products less favourable treatment than that accorded to domestic products, and they thus violate a core and basic WTO legal principle, that of ‘national treatment’ (under Article III:4 of the GATT – the General Agreement on Tariffs and Trade 1994).
The request finds its legal basis in the GATT (Article XXII:1 of the GATT), the Agreement on Subsidies and Countervailing Measures (Articles 4 and 30), the Agreement on Trade-Related Investment Measures (Article 8) and is also contrary to the conditions of the PRC’s Protocol of Accession (the document containing the conditions upon which China was allowed to join the WTO back in November 2001).
The matter is interesting in that it indicates that the usual suspects in the 1st World are not the only ones that are actively distorting trade with illegal subsidies. From a South African perspective this case will be notable to follow for 2 reasons. Firstly South Africa is currently courting the PRC to conclude a bilateral free trade agreement. This means that South Africa (with its SACU partners) is considering duty free (or partly duty free access) for a host of products that are seemingly being heavily subsidised in China. This is a valid concern that has been vociferously raised by the local business community, especially in the textile and clothing sectors. The progress in this case should provide valuable information for SACU’s negotiators in deciding which products can equitably be afforded tariff preferences in a free trade agreement with China. Secondly this case may be a portent of what may lie ahead for South Africa itself as regards illegal subsidies in the motor industry. It has long been held (notably by Australia and the EU) that the South African motor industry support programme (the MIDP) is in fact merely a local content scheme, similar in some aspects to the Chinese schemes now challenged by Mexico. It is not inconceivable that a Mexican success in this case may encourage others to take a closer look at the South African motor industry. South Africa may this find it of value to look after its systemic interests, which seem both defensive under the FTA and offensive under the MIDP, and follow the proceedings via limited participation in the matter as a so-called 3rd party.