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China begins phasing out subsidies under WTO rules
2003-09-30
Business Weekly
China has begun eliminating subsidies to State-owned enterprises (SOEs) in accordance with its commitments to the World Trade Organization (WTO). And that, experts suggest, could be China's toughest challenge in meeting its commitments.
"Subsidies not in accordance with WTO rules will be eliminated before 2005," an unnamed Finance Ministry official said.
"Rules that contravene the WTO's norms will be revoked as soon as possible."
SOEs pose challenges to government efforts
"Calculating and regulating subsidies to SOEs are major projects for this year," the finance ministry official said.China signed the Agreement on Subsidies and Countervailing Measures (ASCM) before it joined the WTO.
China entered the global trade bloc in December 2001.
China promised the WTO it will phase out subsidies to SOEs which are losing money. China also agreed to eliminate by 2005 the system of granting Chinese enterprises' priority in obtaining loans and foreign currencies based on their exports.
China has revoked its export subsidies, reduced the average tariff rate from 15.3 percent, in 2001, to 12 percent, revised or repealed 2,300 laws and regulations and abolished the need in 4,159 specific situations to ask for governments' ratification in running businesses.
Revoking SOEs subsidies, however, is more of a challenge.
China's SOEs, throughout the nation's history, have born many burdens that should have been shouldered by society and the governments. These burdens include various welfare services to the enterprises' employees.
As a result, it is unfair and difficult to just eliminate subsidies to SOEs and not to offset their financial burdens, said Huang Weiping, a professor of economics at Renmin University of China.
In China, especially in poorer regions, many large SOEs operate even schools and hospitals.
The central and local governments have subsidized urban workers' food and oil expenses through SOEs since 1992 when the low-priced food supply system was revoked.
Such subsidies are not given to enterprises operating under other forms of ownership.
As a matter of fact, the government in recent years has drastically reduced subsidies to enterprises.
Ministry of Finance statistics indicate the government provided domestic enterprises -- mainly SOEs -- with 104.2 billion yuan (US$12.6 billion) in subsidies in 2000; in 2001, 74.1 billion yuan (US$8.9 billion); and last year, 64.8 billion yuan (US$7.8 billion).
The government has allocated 63.4 billion yuan (US$7.6 billion) this year for subsidies.
But considering governments' policy goals of maintaining social stability by subsidizing SOEs' low-income or laid-off workers, it is difficult to quickly eliminate China's SOE subsidization program, experts suggest.
Complicating the issue is the fact China's central and local governments own the SOEs. That makes it hard to determine if government investments are subsidies or capital infusion by the owner.
"The WTO's measures are not aimed at a specific enterprise ... They are designed to prevent subsidies from increasing firms' competitiveness and distorting market prices," said WTO legal expert Yu An.
Yu is deputy dean of Tsinghua University's Law School, and chairman of the Chinese Society of WTO Laws.
The WTO's measures do not distinguish subsidies meant to achieve social goals -- such as alleviating poverty and improving education -- from those used to enhance profits, Yu said.
The measures are based on the principle that enterprises hurt by subsidized rivals can sue, through the WTO, the governments that provide the subsidies,Yu said.
Due to the rising competitiveness of Chinese enterprises -- including some SOEs -- complaints and accusations against China's subsidies to SOEs are likely to increase in future.
Subsidies to achieve social goals should be provided through a public fiscal framework. In effect, that would ensure the subsidies will not only cover SOEs' workers, but workers from enterprises under all forms of ownership.
Such a system for social welfare programs would reduce the possibility of China's SOEs being sued by their foreign rivals.
But such a system cannot be created, or implemented, overnight.
Many SOEs still operate schools and hospitals for local communities. That will be the reality for some time. The government has no option but subsidize these firms.
In Northeast China's Heilongjiang Province, for example, SOEs spent 12.3 billion yuan (US$1.48 billion) in 2001 on social welfare programs, but received 9.76 billion yuan (US$1.18 billion) in government subsidies.
"Phasing out SOEs' subsidies will have to be a gradual process," said the finance ministry official.
The US Chamber of Commerce released a report earlier this month complimenting Beijing on taking initial steps to comply with the long list of WTO requirements.
Despite expressing anger over the exchange rate of China's currency, the report praised Beijing for not using the damaging outbreak of severe acute respiratory syndrome as an excuse to slow compliance with WTO rules.
The Bush Administration created a new Unfair Trade Practices Team, under the Commerce Department, earlier this month to accuse China of not protecting intellectual property rights.
The team also argued China's currency was undervalued, giving China an unfair advantage in the global economy and, as a result, costing US-based jobs.
"But I do not think the US practice will lead to a trade war between the two countries," WTO researcher Tu Qinquan said.
Tu is a senior research fellow with the WTO Research Center, which is affiliated with the Beijing-based University of International Business Economics.
"Although China has not done everything perfectly, the country's efforts to meet its WTO commitments are undeniable," Tu said.
"Rising US pressure is more the result of political needs ahead of the presidential election."
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