US trade officials challenging China over aircraft tax policy

U.S. trade officials announced Tuesday they are challenging tax breaks that China is providing for domestically produced aircraft.

U.S. Trade Representative (USTR) Michael Froman said that the United States has started dispute settlement consultations at the World Trade Organization (WTO) with Beijing over its differing tax treatment of foreign-built commercial aircraft versus planes built in China. 

{mosads}“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,” Froman said.

“We’re also especially concerned that China attempted to hide this discriminatory tax policy,” he added.

“Transparency of laws and regulations impacting trade is a core WTO commitment that China must uphold, just as it expects other countries to do.”

The United States is arguing that China is exempting its own aircraft from a value-added tax (VAT) while imposing those taxes on imported aircraft, which trade officials argue breaks WTO rules prohibiting discriminatory tax treatment based on where the product is made.

China imposes a 17 percent VAT on imported aircraft — generally those under 25 metric tons by weight — including general aviation and regional aircraft, while exempting planes made in China from the tax. 

In addition, China has failed to publish its tax exemptions for domestically produced aircraft, USTR said. 

“The Chinese government is undermining fair competition and playing by their own set of rules,” said Rep. Pat Tiberi (R-Ohio), former chairman of the House Ways and Means Committee Trade Subcommittee.

The International Association of Machinists and Aerospace Workers (IAM) said there has been deep concern in recent years about growth of China’s aerospace industry.

“China utilizes every tool available to establish a strong aerospace industry, including other market distorting mechanisms like demanding that U.S. companies transfer production and technology in return for sales,” said Tom Buffenbarger, IAM’s international president.

“The action today is a step in the right direction to leveling the playing field among the world’s aerospace companies and their workers. We hope this paves the way for more aerospace exports produced by U.S. workers,” Buffenbarger said. 

The case is the first against China’s aircraft sector, which is one of the fastest growing in the world, USTR said.

United Steelworkers International President Leo Gerard said that “tens of thousands of USW members working in the aluminum, steel, glass and tire sectors produce and supply materials and parts used in the domestic aerospace industry.”

“The USTR’s actions are a critical part of a strategy to maintain U.S. leadership in this vital sector,” Gerard said.

The Obama administration has ramped up its trade enforcement cases — this is the 20th action brought since 2009 — as part of its pivot to the Asia-Pacific. 

The White House has argued that trade agreements like the 12-nation Trans-Pacific Partnership puts the United States in the driver’s seat for writing global trade rules, not China. 

Consultations are the first step in the dispute process. If the United States and China are not able to reach a solution, the United States may ask the WTO to establish a dispute settlement panel to look into the challenge.