The People's Republic of China has agreed to end dozens of controversial subsidies under its World Top Brand, Famous Export Brand and China Name Brand programs that the United States claimed were supporting Chinese exports of a variety of goods, ranging from electronic appliances to apparel and agricultural products.

The agreement reached between China and the United States was announced on 18 December by U.S. Trade Representative Ron Kirk and appears to put an end to one of several disputes between the two countries at the World Trade Organization (WTO).

The U.S. initiated the dispute (WTO Dispute DS387) in December of 2008 when it asked for consultations with China over the programs, the first step in the WTO's dispute resolution process.

In its letter to China and the WTO's Dispute Settlement Body (DSB), the U.S. cited the three central ‘famous brand' initiatives, and over a 100 instruments which implemented them, established at other levels of government, as appearing to "provide grants, loans, and other incentives to enterprises in China on the condition that those enterprises meet certain export performance criteria."

According to the United States these measures appeared inconsistent with Article 3 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement), which prohibits the use of subsidies contingent on export performance.

Export subsidies are considered among the most trade distorting because they lower the costs for businesses to export their goods overseas, allowing them to unfairly undercut local or third country products in export markets. Along with subsidies dependant on the use of domestic over imported products (‘import substitution subsidies'), they are the only subsidies prohibited outright by the SCM Agreement.

At the centre of the DS387 Dispute were a series of measures which set out criteria for Chinese enterprises to receive a designation as a Famous Export Brand, China World Top Brand or China Name Brand Product. "Enterprises with these designations were entitled to various government preferences, including, it appeared, financial support tied to exports," said the U.S. State Department.

The United States argued that the Chinese government support was promoting increased worldwide recognition and sales of the designated brands of Chinese merchandise, "giving an unfair competitive advantage to Chinese products and denying U.S. manufacturers the chance to compete fairly with them in the United States and in third country markets."

In announcing the agreement between the United States and China, Ambassador Kirk said that the termination of the subsidies "will level the playing field for American workers in a wide range of manufacturing and export sectors, including household electronic appliances, textiles and apparel, light manufacturing industries, agricultural and food products, metal and chemical products, medicines, and health products."

Subsidy Watch spoke to London School of Economics lecturer Dr. Stephanie J. Rickard who said that the agreement marked a significant development in U.S-China trade relations. "More importantly, however, this is an important development in China's engagement with and participation in the multilateral trading institution. By terminating these subsidies, China has demonstrated their willingness to abide by WTO rules," she added.

Dr. Rickard suggests two key reasons why China may have decided to reverse course on these subsidies. First, it is likely that China would have lost the dispute. "The WTO Agreement on Subsidies and Countervailing Measures is quite clear and WTO Panels have consistently ruled against countries' export subsidies," she said.

China is also coming under increasing pressure to revalue its currency. "As these pressures mount, China may be more willing to ‘give in' on other issues, such as subsidies," argues Dr. Rickard. Doing this allows China to focus their political efforts on defending their currency while pointing to the termination of these subsidies as evidence of their willingness to level the playing field in global trade, she concludes.

Among the other WTO violations cited in the U.S. request for consultations, were alleged violations of export subsidy provisions in the WTO Agreement on Agriculture (AoA). Agricultural products covered by the AoA are exempt from the normal subsidy rules under the SCM Agreement.

Under the AoA, export subsidies to agricultural products are prohibited beyond those set out by each member in the WTO Member's agricultural schedule. According to the U.S. State Department, China's agricultural schedule does not permit any export subsidies.

Canada, the European Communities, Mexico, Turkey and Australia were also involved in the dispute, having requested to join the consultations as third parties.
 
The United States and China are currently the principal opposing parties in 12 other disputes at the WTO.