The United States is reportedly poised to complain to the World Trade Organization (WTO) about China's alleged violation of global trade rules by offering tax breaks to domestic producers of semiconductors. 

If filed, the complaint would be the first time the Bush administration has initiated such action against China, although clamorous outcries erupted in the United States as early as more than two years ago.

At issue is a 17 percent value-added tax (VAT) that China imposes on all semiconductors -- including imports.

US chip makers accuse the Chinese government of rebating all but 3 to 6 percent of that tax for domestic producers while levying the full tax on imports, giving domestic chip makers a huge advantage.

If the Americans were not intentionally making a fuss, they have mixed up the meanings of "tax rate" and "tax burden."

The VAT in China is applied at each link -- at a rate of 17 percent -- of the exchange of goods in the production process.

Chip making is a process composed of several links -- with each serving as the supplier of the next -- before the product finally comes out. At each link, the 17 percent VAT on the increased value is levied. Part of the taxation on the producer at each link is deducted because that portion has been paid and is included in the supply the producer buys from the previous link.

Because the deduction is made at each link, the final taxpayer appears to pay a much lower rate of tax, which is called tax burden. In fact, the chip maker has paid a full VAT -- the rate of which is 17 percent in China -- throughout the stage-by-stage process.

Due to taxation differences, however, US chip makers do not pay tax before the final consumption stage. In other words, US chips arrive at Chinese customs free of any taxation.

By levying a 17 percent VAT on them, the Chinese government puts overseas and domestic firms on a level playing field, although domestic makers are much weaker and vulnerable to market competition.

China's tax rebate policy for chip makers in the domestic market formerly stipulated the portion above the 6 percent line of the firms' "tax burden" -- not "tax rate" -- would be rebated.

Experts estimate that Chinese firms' real tax burden is not more than 6 percent, and in some cases as low as 3 or 4 percent. It means domestic firms cannot enjoy significant benefit from the policy.

Although the rate was later lowered to 3 percent, experts said it still does little to benefit domestic firms. And given the export tax rebate policy, whose rate used to be 17 percent, firms tend to export their products for greater tax benefits.

The US chip makers' outcry that Chinese rivals enjoy a tax rebate of more than 10 percent is obviously based on erroneous calculations.

A highly developed market economy like the United States boasts a great pool of brainy industrial experts. It is puzzling that the US government and industrial executives remain uninformed about the differences in the taxation systems of the two countries.

Their aberrance only reinforces the suspicion that what they really fear is not the breaking of the WTO national treatment principle, but that rapid growth in China's semiconductor industry will lead to increased competitions in the market.

China is the world's fastest-growing chip market, expected to reach US$30 billion by 2006. And semiconductors are the second largest US export to China.

But to hold their ground against domestic competition, some US firms should not resort to lame arguments -- or errors in arithmetic.

(China Daily March 19, 2004)