WORLD TRADE  
ORGANIZATION  G/SCM/Q2/CHN/41 
23 October 2008 
 (08-5145) 
Committee on Subsidies and 
Countervailing Measures Original:   English 
 
 
 
TRANSITIONAL REVIEW MECHANISM PURSUANT TO 
SECTION 18 OF THE PROTOCOL ON THE ACCESSION 
OF THE PEOPLE'S REPUBLIC OF CHINA 
 
Questions from the UNITED STATES to CHINA  
   The following communication, dated 23 October 2008, is being circulated at the request of the Delegation of the United States.   
 
_______________ 
 
 
Transparency 
 1. Since joining the WTO in 2001, China has su bmitted only one subsidy notification under 
Article 25 of the WTO Agreement on Subsidi es and Countervailing Measures ("Subsidies 
Agreement").  That notification was submitted in 2006 and did not include  any subsidy programs 
administered by sub-central governments.  As we have highlighted in prior submissions to this 
Committee, provincial and local authorities in China pl ay an important role in implementing industrial 
policy, including with regard to subsidization, a nd therefore the absence of information on sub-central 
government subsidy programs is particularly troubl ing.  Confirming the seriousness of this concern, 
the United States and other WTO Members on nume rous occasions have identified information 
indicating possible subsidy programs in a wide range of sectors administered by provincial or local 
authorities in China and have asked China to provi de information regarding these subsidies (see, for 
example, G/SCM/Q2/CHN/19, G/SCM/Q2/CHN/23 and G/SCM/Q2/CHN/33).  In response, China 
has only stated that it continues to study the most effective and efficient way to collect the necessary 
information and has not provided any timeframe within  which it expects to meet its WTO obligations.  
The United States again urges China to submit a full notification covering all subsidy programs 
administered at all levels of government.    
(a) In the continued absence of a notification covering sub-central government subsidy 
programs, can China explain the steps it is taking to compile the requisite information?   
 
(b) When does China expect to notify all of its subsidy programs at all levels of 
government in accordance with Article 25 of the Subsidies Agreement?  
 
Export-Contingent Subsidies 
 
2. A number of the questions previously raised  by the United States and other WTO Members 
address what appear to be unreported subsidy prog rams at various levels of government that are 
contingent upon export performance.  In addition, the United States continues to search for and obtain 
publicly available information indicating that author ities at various levels of government in China are G/SCM/Q2/CHN/41 
Page 2  
 
  providing additional subsidies that appear to be c ontingent upon export performance.  It is especially 
disturbing that some of these programs appear to  have been formulated and adopted under the 
direction of the central government.    
(a) Is there any mechanism in place for revi ewing new central government subsidy 
programs for WTO-consistency?  Please explain. 
 
(b) What efforts has the central government  made to review subsidy programs 
maintained or created by provincial and local authorities for WTO-consistency?   
 
Industrial Policy Administration 
 3. Please describe the relationship between th e central government's industrial policies and 
subsidy programs, such as those contained in or  called for by China's five-year plans, and the 
implementation of industrial polic ies and subsidy programs by the sub-central governments.   
 
4. How are subsidy programs at the sub-central  government level financed?  Are there cost-
sharing arrangements between or among different levels of government?  If so, please explain.  
 
State-Owned Enterprises 
 
5. China is currently consolidating state owners hip of large or strategically important state-
owned enterprises ("SOEs") under the State Asse ts Supervision and Administration Commission 
("SASAC").  The 150 or so SOE holding companies under SASAC control thousands of companies and account for the vast bulk of profits in the SOE sector and span a wide range of industries, including power generation and distribution, oil a nd petrochemical, telecom, coal, civil aircraft, 
machinery, autos, information technology, construc tion, steel, metals and chemicals.  Through this 
SASAC-administered consolidation process, Ch ina intends to regulate SOE investment and 
effectively limit it to core businesses, with SASA C determining what is core and non-core, on a 
company-by-company basis.  A similar consolidati on process is taking place at the provincial level.  
The manner in which SOE operations are financed , and in particular the manner in which SOE 
investments are financed, will likely raise increasing  concerns on a number of fronts, given the size 
and importance of the SOEs under SASAC control,  the government's hea vy reliance on industrial 
policies and the government's explicit goal of preservi ng a leading role for SOEs in China's economy.  
For example, in paragraph 46 of the Working Party Report accompanying its WTO Protocol of Accession, China committed that SOEs would operate  solely on a commercial basis and without being 
influenced by the government.    
Please explain how SASAC's consolidation efforts,  as well as the directives set forth in the 
Interim Measures for the Supervision and Administra tion of the Investments by Central Enterprises , 
Decree No. 2006-16, issued by SASAC in June 2006, and the Circular on Transmitting and Issuing 
the Guiding Opinions of the State-Owned Asset s Supervision and Administration Commission of the 
State Council on Promoting Adjustment of State- Owned Capital and Restructuring of State-Owned 
Enterprises , issued by the General Office of the State Council in December 2006, are consistent with 
these commitments.   
 
Land Administration  
 
6. Given the scarcity of land resources in Chin a, the price of land-use rights and how they are 
allocated are important considerations from both a market access standpoint and a competition 
standpoint.  They also implicate a more general co ncern with resource allocations and their effects on 
production and trade.  It is therefore of some  concern to the United States that the Chinese  G/SCM/Q2/CHN/41 
 Page 3 
 
 
  government is recentralizi ng control over land administration, with the objective, in part, to ensure 
that land use-rights are allocated in accordance w ith state industrial development policies.   
 
(a) Could China describe the ongoing efforts to recentralize the government's control 
over land administration?   
 
(b) Please explain how the Circular of the State Council on Strengthening Land Control , 
Guo Fa [2006], No. 31, issued by the State Council in August 2006, is being implemented.   
 
(c) Please describe the recently established National Land Superintendency and its role 
and powers.   
 
(d) Please describe China's compulsory national land-use plan as well as the individual 
and collective roles of the National Land Superintendency, the Ministry of Land and 
Natural Resources, the Ministry of Fi nance and the National Development and 
Reform Commission in implementing the national land-use plan.   
 
Fuel Subsidies – Price Controls  
 
7. In view of the significant financing cost  and growing environmental impact concerns 
associated with energy overconsum ption in China, please explain wh y China continues to subsidize 
fuel purchases to compensate for losses ab sorbed due to price controls.   
 
Domestic Support and Subsidies for China's Agricultural Sector 
 8. Article 4 of China's Enterprise Income Tax La w establishes a generally applicable enterprise 
income tax rate of 25 per cent.  However, Article  86 of China's Enterprise Income Tax Law, which 
became effective on 1 January 2008, wholly exempt s agricultural enterprises from the payment of 
enterprise income taxes with regard to certain agricultural activities and provision of services related 
to those activities.    
a. The United States requests information on what constitutes an enterprise for the 
purposes of China's Enterprise Income Tax Law.   
 
b. Recognizing that Article 86 of China's Enterprise Income Tax Law is new, what do 
you project the value of the enterprise income tax exemption to be in 2008, by 
category of agricultural enterprises listed in  the Enterprise Income Tax law?  Please 
provide any information that is available for this year if full year projections are not available.   
 
c. Similarly, what do you project the value of the enterprise income tax exemption to be 
in 2008 by commodity listed within the first category (e.g., grains, oilseeds, sugar, 
fruit and vegetables, cotton, etc.) and within the fifth category (e.g., pork, poultry, 
dairy, beef, etc.)?  What percentage of agricultural production, by applicable 
categories in Article 86 of the Enterprise Income Tax Law, do you expect to be 
produced by enterprises instead of individual farmers or farmers' cooperatives?   G/SCM/Q2/CHN/41 
Page 4  
 
   
d. Under the seventh category, what constitu tes "preliminary processing" of agricultural 
products?  Please describe the scope of eligibility for agricultural processing companies in relationship to the commodities listed in the first or fifth category and any other commodities not specifically listed in those sections.  What do you project 
the value of the enterprise income tax ex emption to be in 2008 within the seventh 
category? 
 
Discriminatory VAT exemptions 
 
9. In connection with last year's transitional review before the Committee on Agriculture (COA), 
the United States explained its understanding that many agricultural products are exempted from 
China's 13 per cent value-added tax (VAT) normally applicable to agricultural products.  For 
example, it appears that sales of agricultural co mmodities produced and sold by farmers in China, 
such as wheat, cotton and corn, are exempted from the VAT.  In addition, it appears that sales of 
agricultural inputs produced and sold in China, such as seed, pesticide, herbicide, agricultural 
machinery and certain fertilizers, are exempted from the VAT.  However, when these same products 
are imported, it appears that they are assessed the VAT at the rate of 13 per cent.  In response to US 
questions at the 2007 transitional review at the COA, China stated that the is sue would be dealt with 
more appropriately in this Committee.    
(a) In its statement during last year's transi tional review at the COA, China appeared to 
confirm that sales of agricultural comm odities produced and sold by farmers in 
China, such as wheat, cotton a nd corn, are exempted from the VAT, while imports of 
these same products are assessed the VAT at 13 per cent.  China appeared to argue 
that this practice is consistent with Ar ticle III of the General Agreement on Tariffs 
and Trade 1994 (GATT 1994) because downstream entities in China must pay the 
VAT in connection with transactions taking place after the initial transaction 
involving the farmer.  However, China did not address how it justifies the more favorable VAT treatment accorded to the pr oducts in question when they are sold by 
a farmer in China versus the treatment  accorded to imported products, which are 
always assessed the VAT.  Please explain how  China justifies this discriminatory 
treatment.   
 
(b) In its statement during last year's transi tional review at the COA, China also did not 
explain how it justifies the VAT exemption for farmers in China under Article 3 of 
the Subsidies Agreement, which prohibits s ubsidies that are contingent on the use of 
domestic over imported goods.  Please provi de China's justification.   
 
(c) In its statement during last year's transitional review at the COA, China did not 
respond to questions posed by the United States regarding sales of agricultural inputs produced and sold in China, such as seed, p esticide, herbicide, agricultural machinery 
and certain fertilizers.  The United States would ask that China respond to the 
following questions:  Can China confirm th at these agricultural inputs are exempted 
from the VAT, while imports of these same  products are assessed the VAT at 13 per 
cent?  If so, please identify the applicable measures.  Please also explain how China 
justifies these VAT exemptions under its WTO obligations, including Article III of 
the GATT 1994 and Article 3 of the Subsidies Agreement.   
  G/SCM/Q2/CHN/41 
 Page 5 
 
 
  Export VAT rebates  
 
10. In connection with last year's transitional re view before the COA, the United States explained 
its understanding that a VAT rebate is availabl e upon the export of some agricultural products, 
including ones for which payment of the VAT was imput ed rather than actually paid at a prior stage 
because of an exemption (as explained in question 8 above).  In its statement during last year's 
transitional review at the COA, China referenced the " Interim Regulation of the P.R.C. on VAT ", but 
did not respond to the United States' question seek ing an explanation regarding how China ensures 
that the export rebate is not excessive.    
(a) Please provide a citation to the " Interim Regulation of the P.R.C. on VAT ".   
 
(b) Please identify and provide citation to any other measures that govern how China 
calculates the export rebate in this situati on, including any measures that specifically 
address agricultural commodities such as wheat , cotton and corn or agricultural inputs 
such as seed, pesticide, herbic ide, agricultural machinery and certain fertilizers.   
 
(c) Please explain how China ensures that the export rebate is not excessive.   
 11. Please explain how China applies the VAT to  agricultural and food pr oducts imported into 
China for processing and then re-exported.  Is th e VAT charged on the imported agricultural or food 
product?  Is the exported processed pr oduct eligible for a VAT rebate?   
 
Other Issues  
 
12. In connection with last year's transitional review before this Committee and the Council for 
Trade in Goods, the United States requested inform ation from China regarding important issues in a 
number of areas, including SOEs, the Northeast Revitalization Program and price controls (see questions 13-24 in G/SCM/Q2/CHN/33 and questio ns 6.1-6.8 and 7.1 in G/C/W/587), but received 
incomplete responses or, in some cases, no response at all.  These issues are of continued importance 
to the United States.  The United States asks that  China provide responses and engage in a full and 
constructive discussion of these issues during this year 's transitional review before this Committee.   
 
 
__________