Nov. 29 (Bloomberg) -- China agreed today to abolish subsidies that the U.S. had challenged at the World Trade Organization.

Officials from the two nations signed an agreement in Geneva in which China said it would eliminate a series of tax rebates on exports by the end of this year, the U.S. trade office said today. Another subsidy will end by the end of next year. In the meantime, the U.S. will suspend its WTO complaint.

``The agreement demonstrates the two great trading nations can work together to settle disputes to their mutual benefit,'' U.S. Trade Representative Susan Schwab said at a press conference in Washington.

The breakthrough bolsters the Bush administration as it tries to pry open the Chinese market to more U.S. products and head off legislation in Congress aimed at punishing China for what many lawmakers says are unfair policies.

Treasury Secretary Henry Paulson, Schwab and other Cabinet officials will go to China early next month for a summit on issues ranging from easing caps on U.S. bank investments to clamping down on piracy of U.S. movies, music and software.

The resolution of this complaint demonstrates that ``real results'' can come from engagement with China, Schwab said in an interview. ``The U.S. has a broad range of tools available that China knows we will use,'' she said.

Trade Gap

China ran a record $187.6 billion trade surplus with the U.S. in the first nine months of this year, putting it on course to exceed last year's $232.5 billion trade gap and prompting complaints among lawmakers, union officials and small manufacturers.

About 60 percent of Chinese exports are made by foreign- owned firms that have benefited from rebates, the U.S. said.

In February, the U.S. lodged its complaint over the tax breaks against China at the WTO, the largest one to date against the world's fastest growing major economy. The U.S. argued that the Asian nation violated global trade rules and unfairly subsidizes producers of steel, wood products, information technology and other products.

This is the second time a U.S. complaint at the WTO has caused China to reverse course and withdraw provisions that the Bush administration argued violated global trade rules.

Rebate Scrapped

China scrapped a rebate on a value-added tax on semi- conductors after the U.S. filed a case in 2005. A dispute over anti-dumping duties on kraft linerboard, a type of heavy-duty paper used in cardboard boxes and other shipping applications, was settled the day the U.S. was to file its complaint.

Three other WTO cases are still pending: one on auto parts and two others concerning protections for intellectual property rights.

U.S. industry groups praised the settlement today, arguing that it is one step in boosting U.S. exports to China and other nations.

``There will be less of an ability'' for Chinese producers ``to lower prices,'' said Frank Vargo, vice president of the National Association of Manufacturers. ``But we believe there are a lot more subsidies out there.''

Tougher Action

Critics say the resolution of this case shows that the U.S. must take tougher action against China to get it to remove barriers to exports, raise the value of its currency and clamp down on dangerous products, such as toys coated with lead paint.

For years, Democrats in Congress have presented to the U.S. Trade Representative's office a list of WTO cases the U.S. should bring. They are also mulling legislation that would make it easier for U.S. producers to get tariffs on Chinese imports to compensate for the effect of government subsidies or a weak Chinese currency.

``This is an overdue yet welcomed step toward holding China accountable for its trading violations,'' Representative Sander Levin, a Michigan Democrat and chairman of the House Ways and Means trade subcommittee, said in a statement.

Levin said his committee would still push for new measures aimed at China. ``We need a comprehensive trade policy toward China, requiring action on piracy, import safety, dumping and currency manipulation,'' he said.

Others argued that the agreement today is nothing more than a continuation of a trend of China's moving against foreign investors in favor of domestically owned producers. For the past two decades China has offered incentives to lure foreign investment into the formerly closed economy.

After building up one of the world's largest economies, it doesn't need those incentives anymore, said Alan Tonelson, chief economist at the U.S. Business & Industry Council, which represents small, U.S.-based manufacturers.

``China has agreed to do nothing that they have not already decided to do for their own internal reasons,'' Tonelson said.

To contact the reporter on this story: Mark Drajem in Washington at mdrajem@bloomberg.net

Last Updated: November 29, 2007 16:55 EST