The United States-based Semiconductor Industry Association (SIA) on Wednesday criticised China for favouring domestic chip manufacturers through an allegedly discriminatory value-added tax (VAT) rebate policy, in a move that will increase the political pressure on the central government. The criticism coincided with US Commerce Secretary Don Evans' visit to Beijing, during which he warned Beijing of a 'rising sentiment of [US] protectionism' if it did not further open its economy. China's trade surplus with the US and the value of the yuan have become sensitive political issues on the eve of a presidential election year. The association, whose members account for 85 per cent of US-based chip production, said China's VAT rebate policy had led to more aggressive pitches by mainland factories for outsourcing business in the US, and worried that its continued implementation would distort American investment on the mainland. 'We have Chinese foundries coming to the US telling us how they can make things cheaper and avoid paying most of the VAT,' SIA vice-president Daryl Hatano said. 'We hope to see competition on merit, not on tariffs or VAT rebates.' A 17 per cent VAT has been imposed on the sale of imported and domestically produced products since June 2000. But mainland manufacturers receive up to a 14 per cent rebate, meaning they pay an effective VAT of just 3 per cent. China, the world's fastest growing chip market, ranked as the third-largest chip market in the world last year with about US$19 billion in sales, of which 85 per cent were imported. As the market expands, manufacturers such as Semiconductor Manufacturing International Corp (SMIC) and Grace Semiconductor Manufacturing Corp have used the cost advantage to buy fabrication plants and expand production capacity. Last week, SMIC took over Motorola's US$1 billion chipmaking plant in Tianjin by issuing more than 10 per cent of its new shares to the US mobile-phone maker. Taiwan, the world's largest producer of chips, had established 19 wafer fabrication plants in Shanghai, Songjiang, Beijing and Suzhou in an attempt to replicate its success in China, the association said. The growing number of factories in China is alarming US producers, which account for half the world's output of chips, because they do not enjoy equal footing in the mainland. The association, which represents 100 members - many of whom have manufacturing, design, assembly, test, packaging and sales operations in China - said the VAT policy effectively put pressure on foreign semiconductor makers to design and manufacture their products within China, or face a cost penalty. It also challenged whether the tax policy complied with agreements made for China's entry into the World Trade Organisation, which promised that imported products be treated no less favourably than domestic products for purposes of internal taxation. 'We are hopeful that China will change its VAT rebate policy and comply with the WTO, which will be good for China and its trading partners,' Mr Hatano said. The call for removal of the VAT rebate followed claims by the World Semiconductor Council that the China policy limited market access and distorted trade and investment. However, one analyst believed the semiconductor industry's assertion was too 'American', saying US manufacturers were trying to make up an excuse to curb expanding Chinese manufacturers. 'Their real worry is whether China can draw on all future investments, capital and resources, and VAT is an excuse, not the issue,' Gartner analyst Dorothy Lai said.