[author: Elizabeth Owerbach]

On December 8, the United States launched a dispute (DS501) at the World Trade Organization (WTO) regarding tax exemptions on certain Chinese-produced aircraft. The United States has requested consultations with China, which is the first step in the dispute settlement process.

According to the Office of the United States Trade Representative, the Government of China has been exempting certain aircraft produced in China from a value-added tax (VAT), a tax that is imposed on imported aircraft. Importers of certain aircraft—including general aviation and regional aircraft, generally under 25 metric tons by weight—must pay a 17 percent tax, while the equivalent Chinese-produced aircraft are exempt. This practice, the United States alleges, violates WTO rules on discriminatory taxation. Furthermore, China has failed to publish these tax exemption measures, which the United States alleges violates WTO transparency rules.

In launching this dispute, the United States is seeking to protect U.S. manufacturers, and the 500,000 workers employed in the U.S. aerospace sector. The U.S. aerospace sector has the largest trade surplus of any U.S. manufacturing industry, resulting in the greatest number of U.S. jobs that are tied to exports.

U.S. Trade Representative Michael Froman stated that “China’s discriminatory, unfair tax policy is harmful to American workers and American businesses of all sizes in the critical aviation industry, from parts suppliers to manufacturers of small and medium-sized aircraft.” Ambassador Froman added that “[w]e are taking this action today because American workers and producers deserve a fair shot to compete—and win.”

On December 22, the European Union and Canada asked to join the United States in consultations with China. If the parties are not able to reach a mutually agreed upon solution during consultations, the United States may request that the WTO establish a dispute settlement panel.