China resolves key trade dispute with U.S.

WASHINGTON (Reuters) - China has agreed to eliminate a dozen tax breaks and other subsidies the United States challenged this year at the World Trade Organization, resolving one of the series of trade spats between the countries.

"This outcome represents a victory for U.S. manufacturers and their workers," U.S. Trade Representative Susan Schwab said on Thursday.

"The agreement also demonstrates that two great trading nations can work together to settle disputes to their mutual benefit," she added.

China's decision will abolish tax breaks and other subsidies that benefit the broad spectrum of Chinese industries, including steel, wood products and information technology, Schwab said.

To help reduce China's trade surplus and ease friction with its trade partners, Beijing has cut tax rebates on a number of export products this year including steel, paper and plastics, and has said it may raise export taxes on some steel products.

Most of the programs targeted in the case were designed to boost China's exports, which have grown from about $150 billion in 1996 to $970 billion last year.

The rest curbed imports by encouraging companies in China to buy local goods. Even so, China's imports also have risen rapidly over the past 10 years to $792 billion in 2006.

The United States had filed the case in February and was later joined by Mexico.

"The three sides finally reached understanding on the dispute through continued discussions," Chinese state media, Xinhua, said on Friday.

U.S. lawmakers welcomed the agreement but said more steps were needed to ensure China follows global trade rules.

"We need a comprehensive trade policy toward China, requiring action on piracy, import safety, dumping and currency manipulation," said House of Representatives Ways and Means Trade Subcommittee Chairman Sander Levin, a Michigan Democrat.

The U.S. trade deficit with China hit a record $234 billion in 2006 and is on pace to surpass that this year, fueling complaints in Congress about China's trade practices.

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Thursday's announcement came just a few weeks before the United States and China are scheduled to hold high-level trade and economic talks in Beijing.

Schwab, the top U.S. trade official, said the timing was not influenced by the upcoming meeting and added she did not expect a breakthrough in three other pending WTO complaints against China.

Under the agreement signed on Thursday in Geneva, China will eliminate the 12 subsidy programs by January 1, although one targeted regulation will remain until January 2009, Schwab said.

The United States will suspend its WTO case for now and formally withdraw it once the subsidy programs are ended. The agreement only eliminates China's subsidies that are specifically prohibited under WTO rules.

U.S. officials were unable to say how much the subsidy programs have boosted Chinese exports and discouraged imports.

"We do know the benefits were likely to be very substantial because these subsidies are so pervasive," Schwab said.

The National Association of Manufacturers called the agreement "great news," which would help level the playing field with China and also showed the WTO system could work.

Many U.S. lawmakers and manufacturers believe China's biggest export subsidy stems from its currency, which they contend is sharply undervalued against the dollar.

The yuan has appreciated by nearly 10 percent against the dollar since the Chinese currency was revalued by 2.1 percent in July 2005.

The Bush administration, despite pressure from Congress, has refused to challenge China's exchange rate regime at the WTO and Schwab indicated no change in that policy on Thursday.

The United States has launched WTO litigation over China's policies on car parts, tax subsidies, copyright and piracy, and the sale of films, music and books. China is also pursuing a WTO case against the United States over U.S. anti-dumping measures affecting imports of Chinese paper.

(Additional reporting by Lisa Lambert, and Simon Rabinovitch in Beijing, editing by Stuart Grudgings and Ken Wills)