One of the longstanding U.S. demands in the stalled Sino-U.S. trade talks is that Beijing end the massive government subsidies granted to Chinese companies, which U.S. firms say make it difficult for them to compete in the Chinese market on a level playing field.
However, recently introduced Chinese semiconductor policies reveal that Beijing isn’t making progress on U.S. demands.
According to Japanese media Nikkei, it was precisely disagreements regarding Chinese subsidies that led to the trade talks falling apart earlier this month. It culminated with President Donald Trump announcing a tariff increase to 25 percent from 10 percent on $200 billion of Chinese goods on May 5. Beijing soon retaliated by raising tariffs on roughly $60 billion of U.S. goods.
“The U.S. and China had agreed on over 90 percent of the trade pact,” an unnamed official at an American economic group told Nikkei in a May 8 report. “But they were ultimately unable to bridge their rift on Chinese subsidies.”
China has, in fact, continued to provide subsidies and other financial support—particularly to its domestic semiconductor industry, which Beijing has propped up through its industrial policy of “Made in China 2025.” Owing to its lagging technological developments and thus, heavy reliance on foreign-made chips, the Chinese regime has made it a national priority to advance its own chipmaking industry.
State-Led Approach
The Shanghai government recently announced that it will offer tax incentives and funding to support local companies within three sectors—artificial intelligence, biotechnology, and IC—according to a May 21 report by South China Morning Post. Chinese authorities didn’t provide further details about the tax incentives and funding at the time of writing.
And on May 17, China’s Ministry of Finance and the State Taxation Administration jointly announced an extension to a 2012 corporate tax cut policy aimed at supporting qualified companies in the integrated circuit (IC) and software sectors. One of the qualifying requirements is that the company’s IC sales revenue must be no less than 60 percent of the overall corporate revenue.
The 2012 policy stated that newly-founded IC and software companies, as well as existing IC companies whose IC products are less than 0.8 microns in size, would be exempt from paying any corporate income tax for the first and second fiscal years. From the third until fifth fiscal years, they can enjoy paying only half of the legally required 25 percent corporate tax. The tax reduction policy applies to all corporate earnings prior to Dec. 31, 2017, and lasts for five years.
Qualifying companies that already paid taxes prior to 2012 are eligible to get tax returns.
The extension announced on May 17 pushed forward the cut-off date to Dec. 31, 2018, so that more companies could potentially qualify.
Regional governments have also announced similar measures to boost their local tech industries in the past month.
On May 15, the district government in Xiangzhou, which is located in the southern Chinese city of Zhuhai, announced about a dozen different subsidy programs to boost local IC companies. For example, companies that have spent money on buying up intellectual property rights are entitled to a maximum of 2 million yuan (about $289,000) in annual subsidies.
Additionally, companies in Xiangzhou that reach annual revenues topping 100 million yuan (about $14 million), 500 million yuan (about $72 million), and 1 billion yuan (about $144 million), would be entitled to a one-time subsidy of 100,000 yuan (about $14,400), 500,000 yuan (about $72,200), and 1 million yuan (about $144,500), respectively.
And earlier on May 9, Chinese authorities in Haicang District in the southern Chinese city of Xiamen, announced that local companies that have 10 percent or more ownership by Haicang or Xiamen authorities, would be entitled to a maximum annual research subsidy of 5 million yuan (about $722,600), for a maximum of three years.
Concerns
In a January joint report to the U.S. Trade Representative (USTR)’s office, the U.S Chamber of Commerce and the American Chamber of Commerce in China urged Washington to push Beijing to end its subsidies policies.
“The distortionary impacts of China’s industrial policies and subsidies that underpin them are harming U.S. companies, workers, consumers, and competitiveness,” the report stated. Other discriminatory policies include biased bidding processes for Chinese projects and forced technology transfer.
A February report published by the Washington-based think tank Center for Strategic and International Studies (CSIS) estimated that China’s semiconductor industry is currently supported by over $58 billion “in different kinds of central government semiconductor investment funds and buttressed by pledges of another $60 billion in 30 additional semiconductor funds created by local governments.” The subsidy programs announced this month would add to these figures.
On May 22, U.S. Treasury Secretary Steven Mnuchin, while on his way to attend a hearing before the House Financial Services Committee, told reporters that U.S. officials were “not currently scheduled to go to Beijing for the next round of negotiation,” according to CNBC.
Regarding Trump’s proposal of 25 percent tariffs on roughly $300 billion worth of Chinese goods, Mnuchin said during the hearing that next steps would be determined in “another 30 to 45 days,” according to Reuters.
