China is to abolish the tax system that penalises foreign semiconductor chips.
All semiconductors sold in China pay 17% VAT. However, Chinese semiconductor firms get rebates that effectively reduce the rate of VAT to around 3%, according to a complaint made by the US to the World Trade Organization in March.
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From this week, China has agreed to stop certifying products and manufacturers for rebate eligibility, and no more VAT refunds will be made by next April.
"The agreement will ensure that our high-tech firms have full access to one of our fastest-growing markets," said US trade representative Robert Zoellick.
China is the world's third-largest market for semiconductors, and the country is investing heavily in technology. The Chinese semiconductor market is worth about $19bn (£10bn), with US semiconductor firms taking around $2bn in 2003.
"The elimination of the discriminatory features of China's VAT regime will assure a level playing field for all competitors," said George Scalise, president of US group the Semiconductor Industry Association.
The US and China previously tangled over a Chinese proposal for a wireless internet security standard that differed from the one used in the IEEE's 802.11 standard. Known as WAPI (wireless Lan authentication and privacy infrastructure), the Chinese standard would have required suppliers outside China to make their wireless networking chips adhere to a proprietary security standard. China dropped its proposal in April after pressure from the US and industry groups.
Tom Krazit writes for IDG News Service