By former President Trump’s own metric, his trade war with China failed. He was obsessed with the trade deficit, which only grew during his tenure—which is no surprise to anyone who follows the data. As the U.S. economy revs up, our trade deficit typically widens as a healthy demand for imports tends to outpace export growth. Let us hope Biden’s trade team outright rejects such foolish targets.
In fact, Biden’s trade team can do something far better: open up a much-needed conversation on subsidies—and, save the World Trade Organization while they are at it.
In what may turn out to be an unexpected bright spot, Trump’s trade representative, Robert Lighthizer, left his successor at the Office of the U.S. Trade Representative with an opening for a badly needed conversation about subsidies. When China joined the WTO in 2001, members did not change the provisions about subsidies. The Washington consensus was that bringing China into the global trading system would encourage a more market-oriented economy. And most people (except notably Robert Lighthizer) thought existing antidumping and countervailing duty rules and safeguards would be sufficient.
But beyond raising prices for importers, those trade regulations have done little to change China’s behavior. Under President Xi, state control over China’s economy increased, and the number of Chinese state-owned enterprises (SOEs)—one particularly egregious form of subsidization—is roughly the same as it was when China joined the WTO. Out of the 109 Chinese corporations listed on the Fortune Global 500, only 15 percent are privately owned.
SOEs tend to be bulky and poor performers, and they are a problem worldwide. A recent report by the European Bank for Reconstruction and Development documents the rise of state-owned banks (SOBs) in economies of the former Soviet Union. Not only are SOBs poor performers, but they are also dangerously political, which further inhibits resources from finding their best use.
State-owned enterprises can bleed into the global economy with large distortive effects. Caroline Freund and Dario Sidhu did a deep dive on industrial competition in this regard. They note that the four largest construction firms in the world are Chinese SOEs. Engineering and construction have large spillover effects to trade.
Countries have made well-intentioned efforts to address these subsidies, but with little progress. Take steel. In 1978, the Organisation for Economic Cooperation and Development formed the OECD Steel Committee. This group has been meeting for over 40 years to discuss developments in the industry. Their usual topic for the past two decades has been excess capacity, or when supply outstrips demand, which is something that tends to happen with subsidies. It turns out it is hard to find a solution that creates the right incentives. Without new WTO rules, this is probably insoluble.
Subsidization and SOEs breed more subsidization. The market reaction to subsidies is to buy, buy, buy from the subsidizers. In absence of any reaction by governments, this would probably continue until the subsidizers got tired of wasting their money. But producers in importing countries don’t like competing with cheap imports, and when they are well-organized, they often win the sympathy of their governments. After all, it’s hard to argue with “we will compete with anyone, but we can’t outcompete the Chinese Communist Party.”
To reform, first you must measure. Thanks to Global Trade Alert (GTA), policymakers will soon have much better data and information on subsidies across countries and by sector. Global Trade Alert is a non-governmental organization that tracks trade restrictions better than anyone, and Director Simon Evenett recent told me that he and his team are working “full steam ahead” to deliver a major report on the issue, prior to the G20 Leaders’ Summit later this year.
China may be one of the worst offenders, but they are in good company. If we are going to talk about subsidies, then we all—Europe, United States, Japan, and others—need to look in the mirror and clean house. Industries around the globe, whether it is oil, gas, coal, rice, ethanol, agriculture, pulp and paper, and chemicals, among many others, are on the take.
Most governments have been propping up more firms than they usually would thanks to COVID. But once the pandemic subsides, WTO members should come to the table with an open mind and be willing to write a new subsidies chapter. We may not be able to save the WTO without it.
Trump-Lighthizer unilateralism was unsavory but did serve the unintended purpose of tearing the roof off the subsidy issue. For everyone. Biden’s trade team, with his pick of Katherine Tai for U.S. Trade Representative, will have a great opportunity to move this forward. Not all sectors will like it, but the U.S. economy, the world economy, and the world trading regime need it.
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