China Agrees To Drop Some Subsidies Affecting US Trade

China’s agreement with the US government to eliminate some of its subsidies affecting trade with
the United States could have some impact on textile and apparel trade, but it is not being viewed
as any major breakthrough. In February of this year, the US government filed a case with the World
Trade Organization (WTO) charging that a number of China’s “pervasive subsidies” are illegal under
WTO rules. As a result of the agreement, the United States will drop its case, providing the
Chinese demonstrate they are living up to their commitment.

The agreement received a decidedly mixed reaction in Washington. US Trade Representative
Susan C. Schwab said that the agreement is “concrete and welcome,” although many challenges still
remain. “I am very pleased that we have been able to sign an agreement with China that should lead
to full elimination of prohibited subsidies, and this agreement also demonstrates that two great
trading nations can work together to settle disputes in their mutual benefit,” she said.

Schwab noted the agreement is designed to settle a WTO case the United States and Mexico
initiated in February of this year. The United States had alleged that China was maintaining
several subsidy programs prohibited under WTO rules and that these programs were providing
significant benefits across a broad spectrum of industries in China. Although details of the
agreement have not been released, it is possible it could affect some of the subsidies used by
Chinese textile and apparel manufacturers.

Schwab said that if for any reason China fails to live up to terms of the agreement, the
United States has the right to restart the proceedings with the WTO.

While the agreement was welcomed by US textile manufacturers, the general feeling is that it
does not go far enough in solving subsidy problems, and it is viewed with some skepticism.
Importers, on the other hand, feel it could result in price increases for US consumers.

The United States Business and Industry Council, which represents some 1,500 small
manufacturers, blasted the agreement, charging that it is “utterly useless.” Council President
Kevin L. Kearns said the agreement fails to address the single-biggest problem — China’s
undervalued currency — and it fails to address the secrecy of the Chinese government’s policies. “
The Chinese are masters of the subsidy shell game, taking away with one hand and giving with the
other,” Kearns said, adding that “Chinese bureaucrats can pull these switcheroos much faster than
the US officials or businessmen can identify them.”

Cass Johnson, president of the National Council of Textile Organizations (NCTO), had a much
more temperate reaction, saying that while the agreement could be a step in the right direction,
much more needs to be done. “It’s like peeling an onion,” he said, “and this is just one layer.”
Johnson said a much more damaging subsidy is the undervaluation of China’s currency. In recent
testimony before the US International Trade Commission, NCTO cited 73 subsidies the Chinese
government uses to help its manufacturing industries.

Sen. Charles E. Schumer, D-N.Y., who is sponsoring legislation designed to address the
Chinese currency problem, said the action is a “small step on the long road toward playing more
fairly in global trade.”

December 4, 2007