Feb. 2 (Bloomberg) -- The U.S. lodged the largest trade complaint against China yet at the World Trade Organization alleging that the Asian nation unfairly subsidizes its steel, wood products, information technology and other industries.

``China uses its basic tax laws and other tools to encourage exports and to discriminate against imports of a variety of American manufactured goods,'' U.S. Trade Representative Susan Schwab said in describing the complaint today in Washington. China's industrial subsidies are prohibited by its 2001 agreement to join the WTO, she said.

Today's action is the first step in what may be a lengthy process to determine whether China's subsidies violate WTO rules. First, the two countries must try to negotiate a solution. If those talks fail, the U.S. may ask the Geneva-based WTO to arbitrate. If the WTO ruled for the U.S., China would have to remove the subsidies or face U.S. penalties on its exports. If China wins, it could keep the subsidies.

``Given China's growing trade surplus with both Europe and the U.S., this is a serious step to seek greater balance in the relationship,'' said Alan Wolff, head of international trade at the law firm Dewey Ballantine in Washington and a former deputy U.S. trade representative.

``The Chinese have taken very seriously their WTO obligations, and there have been instances where their reaction has been immediate'' to such complaints, Wolff said.

Rebate Scrapped

China scrapped a rebate on a value-added tax on semi- conductors after the U.S. took a similar legal step 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 to the WTO.

The U.S. and the European Union filed a WTO complaint against China in March alleging that China uses unfair tariffs to block imports of U.S.-made auto parts. That case is being litigated in Geneva.

Chu Maoming, a spokesman at the Chinese Embassy in Washington, had no immediate comment on the filing.

Nicholas Lardy, senior fellow at the Institute for International Economics in Washington, said he expected the Chinese reaction to be ``very low key'' even though 55 percent of Chinese exports might be affected by the case.

The U.S. complaint was well received in Congress, where lawmakers have been urging the administration to pressure China on trade.

Baucus Comments

``The U.S. government needs to stand up for American workers and companies when our trading partners are bending, or breaking, the rules,'' said Senator Max Baucus of Montana, the Democratic chairman of the Senate Finance Committee.

``The administration is under great pressure from the new Democratic-controlled Congress,'' said Claude Barfield, resident scholar at the American Enterprise Institute. ``The trade deficit with China has gone through the roof. We haven't been able to show a great deal of progress on the currency.''

In the first 11 months of 2006, the U.S. trade deficit with China surged to $213.5 billion, representing almost 30 percent of the total U.S. shortfall, from $185.3 billion in the same period a year earlier.

``The export subsidies give an unfair competitive advantage to Chinese products when they are exported,'' Schwab said. ``That means a range of domestically produced goods in the United States, from steel to paper to computers, are denied an opportunity to compete fairly in the United States and in third country markets where they are up against subsidized imports from China.''

Many Industries Involved

``The subsidies at issue are offered across the spectrum of industry sectors in China -- whether in steel, wood products, information technology, or others,'' Schwab said.

U.S. steelmakers called for further steps to enforce trade laws against what they consider to be unfair steel subsidies.

``This filing, while significant, only touches the tip of the iceberg of the full range of subsidies being provided to steel and other manufacturing industries in China,'' said Nancy Gravatt, a spokeswoman for the American Iron and Steel Institute in Washington.

Dan DiMicco, chief executive of Nucor Corp., the second- largest U.S. steel producer behind U.S. Steel Corp., said that in addition to the WTO complaint, the U.S. Commerce Department should bring a complaint against China's trade practices in the U.S. International Trade Commission.

China now has 60 days to respond to the complaint before the U.S. can request a panel of WTO trade ministers to hear evidence and reach conclusions in the case. The whole process may take a year and half.

Paulsen Delegation

The Bush administration signaled it was preparing to bring the case against China at the WTO last December when Treasury Secretary Henry Paulson led a delegation of government officials and business executives to Beijing for economic talks.

Paulson, a former Goldman Sachs Group Inc. chief executive, said in an interview in Washington yesterday that China had ``embraced currency reform,'' while U.S. and Chinese officials disagree on how quickly China should let its currency, the yuan, appreciate. The yuan is also known as the renmimbi.

Paulson found himself forced to defend his approach to China when he appeared before U.S. lawmakers at the Senate Banking Committee on Jan. 31. Paulson argued that the twice- yearly dialogue group he formed last year is the ``best chance of making progress.''

Senators told Paulson they were impatient for more progress. Democratic Senator Christopher Dodd of Connecticut, who chairs the committee, said, constituents back home ``are livid.'' Paulson acknowledged the growing ``sentiment'' among Americans that ``trade benefits'' aren't even.

Tim Adams, the U.S. Treasury's point man on China and currency markets, said today he will leave the administration. The resignation comes as Paulson prepares for next week's meeting of Group of Seven finance ministers and central bankers in Essen, Germany.

To contact the reporter on this story: William Roberts in Washington at wroberts@bloomberg.net

Last Updated: February 2, 2007 17:31 EST