Report On China's Industrial Policies Shows Numerous Industries Receive Illegal Subsidies

by King & Spalding

Manufacturers have long suspected that heavy state intervention is one secret of success for numerous Chinese exports, in addition to cheap labor and an undervalued currency. The recent Report on Chinese Industrial Policies (the "Report") prepared by King & Spalding for the Brazilian National Confederation of Industry ("CNI") demonstrates that these suspicions are correct. The Report identifies numerous national and sub-national subsidy programs available to Chinese industries and discusses the options available to industries being harmed by unfair Chinese subsidies. Although the report is directed at Brazilian industries, the information and analysis also are relevant to industries in other countries that are competing with Chinese imports.

The Report begins by discussing the close relationship between the Chinese Government and its constituent industries. The Report recognizes that China implemented numerous economic reforms in order to gain entry to the World Trade Organization ("WTO"). Despite decades of economic reform, however, People's Republic of China remains an authoritarian state governed by the Chinese Communist Party. The Chinese Government's presence in the economy remains extensive. State-owned enterprises ("SOEs") account for 40 percent of China's gross domestic product ("GDP"). The State-Owned Assets Supervision and Administration Commission ("SASAC"), for example, is a ministry-level organ that directly supervises and retains ownership in more than 100 major companies. The SASAC is estimated to be the largest shareholder on the planet.

According to the Report, the extensive support provided by the Chinese Government is guided by directives issued through five-year industrial development plans. Provinces and municipalities adapt and implement the national guidelines according to local conditions. There can be in excess of 100 subsidy programs in many jurisdictions.

The Report provides details on the numerous directives and guidelines issued by the Chinese Government. The Report pays particular attention to China's National 12th Five-Year Plan ("National Plan") (covering 2011 through 2015). The National Plan calls for Chinese industry to move up the value chain by producing higher-end products in order to provide higher wage jobs for Chinese workers. The National Plan focuses on economic restructuring, environmental and energy efficiencies, and scientific development. In particular, it emphasizes the development of seven strategic emerging industries ("SEIs") that together should account for eight percent of Chinese GDP at the end of the five-year period: (1) biology (biomedicines, biomedical engineering products, and biological agriculture); (2) new energy (nuclear, solar, wind, and biological energy technologies); (3) new materials (advanced structures, high performance fibers, and composites); (4) new energy automobiles (hybrids, electric vehicles, and fuel cells); (5) high-end equipment manufacturing (aerospace and railway equipment); (6) new generation information technology (next-generation networks, cloud computing, integrated circuits, high-end software and servers, and information services); and (7) energy saving and environmental protection (equipment, products, and services).

Sub-national jurisdictions are required to prepare economic and social development plans consistent with the National Plan. As indicated above, officials in these jurisdictions are encouraged to implement the national plans by adapting them to local conditions. The five-year plans for the following major provinces are discussed in the Report: Fujian, Guangdong, Jiangsu, Shandong, and Zhejiang. Fujian's five-year plan calls for increasing revenue in the SEIs by 20 percent annually and intends to finance this goal through means including a special development fund. For its part, Guangdong's five-year plan intends to support 500 industrial projects culminating in an industrial structure where SEIs are the "leading force" in the province by using "fiscal, financial, taxation, pricing, investment, industrial, land, population, environmental protection, and other relevant policies" to implement the plan. Jiangsu plans to coordinate the development of high and new technology industries with the development of SEIs. Shandong's plan calls for upgrading traditional industries and developing SEIs through policies on land, environmental protection, finance, government funds, and taxation. Different from the other provinces, Zhejiang's plan emphasizes agriculture, but it also calls for the government to help upgrade industrial structures, cultivate SEIs, and promote the integration of information technology with industry.

In addition to national and provincial five-year plans, the Chinese Government promulgates five-year plans for a limited number industrial sectors important to China's economic development. For the current five-year period, the Chinese Government published five-year plans for the industries including: cotton, textiles and apparel, biochemicals, electric appliances, footwear, green technologies, the oil industry, steel, and wind power generators. The Report identifies a wide variety of subsidies available to these industries, but the most common programs include government procurement, the provision of inputs at below-market prices, control of foreign trade, subsidized financing, tax relief, and land grants.

The Report notes that although China has notified only 93 national subsidy programs to the WTO, China has provided no information on its vast network of provincial and municipal subsidies. One U.S. Government survey identified an additional 200 programs identified through countervailing duty proceedings conducted by the U.S. Department of Commerce ("Commerce"). Those local subsidy programs included policy lending, income tax preferences, direct payment of funds, tax rebates, government procurement, preferential prices for land, and preferential electricity prices.

The Report concludes by discussing the remedies available to industries affected by such unfair trade policies. One avenue available to injured U.S. manufacturing industries is filing a countervailing duty investigation. A successful countervailing duty investigation will place additional duties on Chinese imports found to be injuring a competing U.S. industry. Generally, a countervailing duty investigation is brought concurrently with an antidumping duty investigation, which investigates the unfair pricing practices of a foreign industry. If U.S. industry is being prejudiced by subsidized Chinese products in foreign markets, it can also ask the United States government to file appropriate challenges at the WTO.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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