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1/ "Tackling Chinese Subsidies" is an increasingly common call to arms, and so here's my attempt at an explainer thread.
Note: I wanted to keep away from personalities and Brexit with this one, so I'll be focusing on China and trade, not @trussliz. https://www.thesun.co.uk/news/14089864/uk-eu-trade-alliance-us-china-truss/
Note: I wanted to keep away from personalities and Brexit with this one, so I'll be focusing on China and trade, not @trussliz. https://www.thesun.co.uk/news/14089864/uk-eu-trade-alliance-us-china-truss/
2/ "So what's this all about?"
For years, some other countries have accused China of using government authority, influence and money give Chinese firms advantages that businesses in other countries don't get.
For years, some other countries have accused China of using government authority, influence and money give Chinese firms advantages that businesses in other countries don't get.
3/ "So what, it's the government of China, of course it supports Chinese firms?"
The problem is the global trading system is kind of built on a trade-off (sorry).
Governments agreed to lower tariffs in exchange for also agreeing not to subsidize too much.
The problem is the global trading system is kind of built on a trade-off (sorry).
Governments agreed to lower tariffs in exchange for also agreeing not to subsidize too much.
4/ If your firms are allowed to compete in my market on an equal footing (no or low tariffs) then subsidies might give them an unfair advantage.
That leaves me with the choice of entering into a subsidies arms race, enduring the lost jobs, or breaking my tariff commitments. Bad.
That leaves me with the choice of entering into a subsidies arms race, enduring the lost jobs, or breaking my tariff commitments. Bad.
5/ Similarly, if your subsidies are high then your lower tariffs are worthless to me because my exporters can't compete with your subsidized domestic producers.
That leaves me in a position where I'm offering you access to my market, in exchange for nothing in return.
That leaves me in a position where I'm offering you access to my market, in exchange for nothing in return.
5/ That's why the WTO Agreements, and many Free Trade Agreements have provisions limiting subsidies, state aid and positive discrimination for state enterprises.
These are basically governments giving one another promises they won't use state patronage to exploit low tariffs.
These are basically governments giving one another promises they won't use state patronage to exploit low tariffs.
6/ "So is China breaking the rules then?"
Probably, but the bigger issue seems to be that the way China supports its firms may not be very well covered by the rules as written.
The Chinese system is so complex much of what they're doing falls in grey areas between the rules.
Probably, but the bigger issue seems to be that the way China supports its firms may not be very well covered by the rules as written.
The Chinese system is so complex much of what they're doing falls in grey areas between the rules.
7/ For example, the definition for "state-trading-enterprises" relies on formally identifiable ownership, advantage, or monopoly.
As any China watcher will tell you, trying to pin down that kind of black and white causality in the Middle Kingdom is like nailing jelly to a wall.
As any China watcher will tell you, trying to pin down that kind of black and white causality in the Middle Kingdom is like nailing jelly to a wall.
8/ There are some mechanisms within the WTO rules that allow governments that feel their firms are being harmed by foreign subsidies to defend them through limited, targeted tariffs.
However, these laws too aren't necessarily fit for purpose.
However, these laws too aren't necessarily fit for purpose.
9/ Eg. If a Chinese widgets are being subsidized & hurting Australian widget makers in the Australian market, then Australia can raise tariffs on Chinese widgets.
... But that does nothing for Australian widgets losing out to Chinese competition in China or Malaysia.
... But that does nothing for Australian widgets losing out to Chinese competition in China or Malaysia.
10/ So what are countries calling for when (as in the article) they suggest a global alliance to tackle Chinese subsidies?
Really, they could mean any of three things, none of them easy or uncomplicated:
Really, they could mean any of three things, none of them easy or uncomplicated:
11/ 
Use WTO dispute settlement to push for Chinese compliance with existing rules.
China has a decent record of complying with WTO rulings, so the theory goes that if you successfully take disputes against it, it may change some of the ways it does things.
Use WTO dispute settlement to push for Chinese compliance with existing rules.China has a decent record of complying with WTO rulings, so the theory goes that if you successfully take disputes against it, it may change some of the ways it does things.
12/ The challenge with this approach are:
- The WTO Appellate Body currently has 0 "judges" on it due to a US blockade;
- Cases can take a very long time;
- As mentioned above, the rules as written may mean what China is doing isn't always "illegal";
- China may not comply.
- The WTO Appellate Body currently has 0 "judges" on it due to a US blockade;
- Cases can take a very long time;
- As mentioned above, the rules as written may mean what China is doing isn't always "illegal";
- China may not comply.
13/ 
Push to tighten rules in the WTO.
This falls under the banner of so-called "WTO Reform" and envisages tightening WTO agreements, adding new rules, and closing some of the loopholes Chinese subsidies may be currently falling through.
There's a glaring problem with this.
Push to tighten rules in the WTO. This falls under the banner of so-called "WTO Reform" and envisages tightening WTO agreements, adding new rules, and closing some of the loopholes Chinese subsidies may be currently falling through.
There's a glaring problem with this.
14/ Any change would require Chinese consent.
The WTO is a consensus based organization and can't simply tighten the rules in a way that restricts China, without China approving such rules.
You'd have to convince China to approve rules that bind it. That's a tough sell.
The WTO is a consensus based organization and can't simply tighten the rules in a way that restricts China, without China approving such rules.
You'd have to convince China to approve rules that bind it. That's a tough sell.
15/ 
Use tools outside the WTO to make China change.
This envisages a combination of diplomatic and economic pressure, the creation of plurilateral agreements like TPP to 'zone out' China, decoupling from reliance on Chinese manufacturing etc.
Use tools outside the WTO to make China change. This envisages a combination of diplomatic and economic pressure, the creation of plurilateral agreements like TPP to 'zone out' China, decoupling from reliance on Chinese manufacturing etc.
16/ The problem with this approach is that it requires a lot of actors, across a lot of sectors, in a lot of countries, to sacrifice short term economic gains.
There is a tonne of money to be made in China, and a tonne of Chinese investment capital to play for. They know it.
There is a tonne of money to be made in China, and a tonne of Chinese investment capital to play for. They know it.
17/ If all this sounds kind of hopeless, then I'm sorry to be a Debbie Downer.
Making a multi-trillion dollar global superpower change an economic system its one-party ruling state is actually kind of fond of is really easy to call for in principle but hard to execute. /end
Making a multi-trillion dollar global superpower change an economic system its one-party ruling state is actually kind of fond of is really easy to call for in principle but hard to execute. /end
18/ Note: The above is my attempt to shortly summarize a ludicrously complex set of issues.
I have definitely oversimplified a lot in the interest of comparative brevity.
I have definitely oversimplified a lot in the interest of comparative brevity.
