WASHINGTON — The Bush administration announced Thursday that it had settled a major trade dispute with an agreement in which the Chinese government has pledged to end several trade-distorting tax subsidies.

WASHINGTON — The Bush administration announced Thursday that it had settled a major trade dispute with an agreement in which the Chinese government has pledged to end several trade-distorting tax subsidies.

The deal represents a breakthrough in tense economic relations between the countries by resolving one of four cases the United States has brought before the World Trade Organization attacking Chinese trade practices.

U.S. Trade Representative Susan Schwab said China had agreed to eliminate WTO-illegal tax breaks that supported Chinese exports to the United States and other countries. China also agreed to scrap tax breaks that had penalized the United States and other foreign countries in trying to sell their goods in China.

Schwab said the economic boost for U.S. companies would be "very substantial" because the tax breaks have been so pervasive. While she did not provide any concrete estimates on the value of the subsidies, she said a whole range of U.S. industries from steel to wood products to information technology would benefit.

"This outcome represents a victory for U.S. manufacturers and their workers," she told reporters. "The agreement also demonstrates that two great trading nations can work together to settle disputes to their mutual benefit."

However, administration critics said President Bush will have to produce much bigger results to have an impact on America's record trade deficit with China, which hit $233 billion last year and will be even larger this year.

They singled out a range of areas where they contend that unfair Chinese practices are driving the deficit higher and have contributed to the loss of 3 million U.S. manufacturing jobs since 2000.

"China's currency doesn't float freely, certain U.S. industries with competitive advantages can't operate freely in China's economy, and some of the products it exports are faulty and dangerous," said Sen. Charles Schumer, D-N.Y. "It seems that China has taken a small step on the long road toward playing more fairly in global trade, but only time will tell."

The agreement was well-timed for the administration, coming less than two weeks before Treasury Secretary Henry Paulson and other Cabinet-level officials go to China for the third round of high-level economic talks. Paulson launched the talks, called the Strategic Economic Dialogue, a year ago, but so far they have produced little results.

"This will strengthen the administration's hand in saying that diplomacy works and will allow them to counter the argument of critics that the new dialogue is just a big talk fest," said Gary Hufbauer, a trade expert at the Peterson Institute, a Washington think tank.

Various business groups, including the National Association of Manufacturers, endorsed the new agreement. But AFL-CIO President John Sweeney was critical, saying the administration needs to show equal diligence in combatting such Chinese practices as "worker rights violations, import safety and currency manipulation — all of which contribute to the enormously lopsided trade imbalance between the United States and China."

Alan Tonelson, a research fellow at the U.S. Business and Industry Council, said his group, which represents 1,500 small and medium-sized manufacturing companies, would keep pressing for passage of legislation that would allow the U.S. government to impose retaliatory tariffs on Chinese goods as punishment for China's currency practices.

The administration opposes this approach, saying it would invite the start of a full-blown trade war between the two nations. Schwab said the agreement to eliminate Chinese subsidies "clearly shows the wisdom of this approach over some legislative approaches that would simply impose retaliatory tariffs."

The subsidy case is one of four WTO cases the administration has filed against China in the past two years as it has sought to show Congress it is taking a harder line in economic dealings with the Beijing government. The other three cases contend China is failing to crack down on rampant copyright piracy of U.S. products, accuse China of hampering the sale of American movies, music and books, and contend that China is maintaining a WTO-illegal tax system to block imports of foreign-made auto parts.

Schwab said the U.S. would continue to push forward with the other WTO cases, but she made no predictions that there would be other breakthroughs before the upcoming U.S.-China trade talks.

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U.S. Trade Representative: http:www.ustr.gov