China and trade

I’m surprised that the article in the Washington Post suggesting that China may be losing its taste for foreign investment didn’t mention the complaint brought by the U. S. Trade Representative before the World Trade Organization:

WASHINGTON – U.S. makers of electronics, steel and paper products, who have long complained about China’s industrial subsidies, stand to benefit from a Bush administration complaint filed Friday with the World Trade Organization.

The U.S. Trade Representative’s complaint accuses China of providing unfair tax breaks and other subsidies that benefit Chinese exporters and discriminate against their foreign competitors.

“That means a range of domestically produced goods in the United States, from steel products to wood products to infotech, are denied an opportunity to compete fairly in the United States and in third country markets,” Susan Schwab, the U.S. Trade Representative, said.

This complaint has received remarkably little attention either in the media or in the blogosphere, remarkable because this is the broadest complaint by one WTO member against another in the history of the WTO. All countries, including the United States, subsidize some of their industries; complaints have been raised about subsidies for this industry or that industry including against the United States.

This complaint is different: China subsidizes practically all of its industry and particularly industries in which there is foreign investment. This produces distortion which encourages increased investment.

There’s no denying that China has opened its economy and experienced tremendous growth. Much of this, just as in Stalin’s Soviet Union, is a consequence of transferring relatively non-productive assets from agriculture to manufacturing. Unlike Stalin’s Soviet Union China appears to have experienced actual productivity increases in agriculture.

But China continues to have state-owned industries, an opaque financial sector, and an unreliable equities market with cronyism and corruption rampant at a level of which crony capitalists in the United States could only dream. In my view we should cheer China’s growth and modernization but maintain a critical view: there may be a lot less there than meets the eye.