China is considering removing or reducing value-added tax (VAT) rebates on some steel products, government sources said on Monday, apparently accelerating the timetable for changes following a US complaint to the WTO over the country's export subsidies.

In a case filed February 2nd with the World Trade Organization, Washington took aim at what it said were China's market-distorting subsidies such as export incentives, including rebates, reductions and exemptions from tax for many industries, among them steel.

"Right now cutting the trade surplus is a big priority for all the ministries," a source at a ministry said.

"Last year, steel products exports were too much and attracted criticism from overseas."

Luo Bingsheng, Vice Chairman of the China Iron and Steel Association (CISA) told the official Xinhua agency that China had been in discussions with major steel importers the United States, the European Union and South Korea, but also was ready to go to court.

"China has been talking to these countries since last year," Luo was quoted saying. "We have made legal preparations in case of an anti-dumping move aimed at China."

Under the new regime, an 8% VAT rebate would be reduced to zero for many low-end steel products, while rebates on other products, currently at 13%, would be cut to 5%, two sources with government ministries involved in the policy said on Monday.

A total of 136 customs categories, including steel plate and steel rods, would be affected by the changes.

A decision to cut or remove the rebates is likely before the Lunar New Year, which falls on Feb. 18. A draft is circulating among several ministries and would have to be approved by the State Council, the sources at the ministries said.

There would be no grace period before the changes took effect, unlike some previous tariff adjustments, they added.

Beijing has been tweaking tariffs, credit policies and environmental rules to try and discourage rapid expansion by its steel industry for almost two years. It reduced or removed VAT rebates on many metals products in a series of directives issued from September to December last year.

In December, Luo said China would have to monitor the impact of the tariff changes in the first quarter of 2007 before making further adjustments.

The US action appears to have accelerated the timetable.

Beijing could adjust tariffs on other products after moving on steel, the ministry sources said.

China's steel product exports soared 110% in 2006, to 43 million tons. Its steel product imports fell 28% to 18.5 million tons last year.

'UNEVEN PLAYING FIELD'

"Several of the subsidy programs at issue appear to grant export subsidies, which provide incentives for foreign investors in China and their Chinese partners to export to the United States and other markets," according to Friday's announcement by US Trade Representative Susan Schwab.

"These subsidies offer significant benefits and are available for all products made in China, including, for example, steel, wood, paper, and other manufactured products."

In Brussels, a European Commission spokesman said the European Union was not planning to bring a case against Beijing at the WTO at this stage but would join the WTO consultations called by the United States as a third party.

Spokesman Peter Power said the EU executive, who has acted jointly with Washington against China on auto parts, was still looking into the WTO-compatibility of certain subsidies granted by the Chinese authorities.

"We will not bring a case to the WTO at this stage," he said.

China prohibits foreign firms from buying controlling stakes in its 'major' steel mills, and only one company, Arcelor Mittal , has successfully purchased a direct stake in any of China's top 20 steel firms.

Foreign steel firms including Arcelor Mittal, Nippon Steel Corp. , Posco and ThyssenKrupp A.G. have joint ventures in China, primarily making higher-value products that used to be imported such as stainless steel or automotive steel.

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