In a World Trade Organization (WTO) submission filed on January 28, the United States once again took issue with the substance of China’s subsidy notifications to the WTO.  The WTO’s  Agreement on Subsidies and Countervailing Measures (SCM Agreement) requires WTO Members to provide annual notifications of any subsidy programs in a manner that is “sufficiently specific to enable other Members to evaluate the trade effects and understand the operation of notified subsidy programs.”

China’s failure to submit any subsidies notifications after 2006 forced the U.S. Trade Representative (USTR) to file a series of “counter-notifications” between 2011 and 2015 to identify subsidy programs that China should have reported.  In October 2015, China finally provided an updated notification covering 2009-2014, but according to USTR, China’s submission remains deficient in certain key respects.

First, USTR noted that the SCM Agreement requires WTO Members to notify subsidy programs implemented at both the central and sub-central levels of government, but that “China has never notified a sub-central program.”  Because China’s industrial policy objectives are generally drawn out in broad strokes by central authorities and then implemented by provincial and local governments, this is a major deficiency in China’s reporting and raises serious questions regarding the country’s willingness to abide by transparency rules.

Second, USTR pointed out that “up to one quarter of the programs contained in China’s third subsidy notification are reported on [a] questionable basis.”  Specifically, USTR raised concerns that China “over-reported” subsidy programs that fall outside the scope of the SCM Agreement (for example, the “Special Fiscal Fund to Alleviate Poverty”) in order to create the appearance of transparency without subjecting actual industrial subsidies to global scrutiny.  USTR explained that China has failed to report industrial policy programs that appear to call for subsidies to the steel, non-ferrous metals, renewable energy, semiconductors, and other industries.

With regard to the steel, aluminum, and solar energy industries in particular, these policies have created massive Chinese overcapacity, leading to global oversupply and falling prices that have battered global producers for years.  While the Chinese government has asserted since at least 2003 that it is implementing reforms to address overcapacity, the problem has only intensified as state support for these industries has continued.