China has agreed to terminate subsidies that the U.S. alleged were illegal under World Trade Organization (WTO) rules, says U.S. Trade Representative Susan C. Schwab.

The Memorandum of Understanding (MOU) is designed to settle a WTO case the U.S. and Mexico initiated in February. The U.S. had alleged that China was maintaining several subsidy programs prohibited under WTO rules and that these programs were providing significant benefits across the spectrum of industrial sectors in China. Mexico also filed as a co-complainant.

Most of the challenged subsidies were tied to exports, giving an unfair competitive advantage to Chinese products and denying U.S. manufacturers the chance to compete fairly with them in the U.S. and in third country markets. The remaining subsidies, known as “import substitution” subsidies, encouraged companies in China to purchase Chinese-made goods instead of imports.

Under the MOU, China has committed to complete a series of steps by Jan. 1, 2008, to ensure that the WTO-prohibited subsidies cited in the U.S. complaint have been permanently eliminated, and that they will not be re-introduced in the future.