China blocked a US request on Tuesday for a World Trade Organisation investigation into tax exemptions and refunds that Washington says give Chinese businesses an unfair advantage. In a first-time filing to the WTO's Dispute Settlement Body, the United States said it was "deeply concerned" about the practices it said violated world trade rules.
"China offers tax refunds, reductions and exemptions that discriminate against imported products ... or that subsidise China's exports," it said its request for a panel.
Mexico lodged similar complaints in a separate request for a panel which China also blocked on Tuesday. WTO procedures allow countries to turn down initial requests for panels to give more time for consultations. On the second request, a panel is set up automatically. The next Dispute Settlement Body meeting is set for August 31. The United States and Mexico agreed on Tuesday to merge the complaints into one dispute to be handled by a single panel. China, in its submission to the Dispute Settlement Body, said it was "regrettable" the two complainants chose to pursue arbitration instead of continuing with bilateral talks.
It said it believed its tax laws were "fully consistent" with WTO subsidy rules and said the complaints reflected "misunderstanding" and "misallegation" on the part of the United States and Mexico.
China-US trade is a highly sensitive issue in the United States. Many US lawmakers and manufacturers blame Chinese state subsidies and Beijing's exchange rate policy for the United States' record trade gap with China, which hit $232.6 billion in 2006 and is on track to surpass that this year. Although China eliminated one subsidy programme challenged by the two countries, it also passed a revised income tax law that Washington says appears to give new prohibited subsidies.
The case is the second brought by the United States against China due to be considered by the WTO's Dispute Settlement Body. The United States, European Union and Canada asked the world trade arbiter last year to investigate whether China's local content requirements discriminated against foreign auto parts. Washington has also initiated a pair of cases against China over piracy and counterfeiting concerns, but those have not yet reached the panel stage.