As a member of the World Trade Organization, China is supposed to abide by WTO rules regarding subsidies to its domestic producers selling in international markets.
The United States claims China routinely flouts those rules. According to a New York Times report: “The United States wants China to enshrine limits on subsidies in its national laws. China says it will not let a foreign country tell it how to change its laws.” This is a major sticking point to a U.S.-China trade deal, and perhaps the main reason the dangerous trade war between the countries is escalating.
All this effort to prevent China from subsidizing its industries is misguided. Almost all market-based nations, the U.S. included, shower favors on some of their home industries to help them compete in international markets. Sure, the Chinese are not very forthcoming or transparent as to the extent of their subsidies. But we have little to fear from Chinese subsidies. The record of state-directed attempts to “pick the economic winners” is not impressive. Consider similar attempts by Japan to state-subsidize and direct industry in the 1950s, as reported by economist David Henderson.
In the early ’50s, a small Japanese manufacturing company asked the Japanese Ministry of International Trade and Industry for access to enough foreign exchange to buy the manufacturing rights for transistors from Western Electric. The company was refused. The ministry saw no future for the transistor industry in Japan. A few years later, the bureaucrats at the ministry were persuaded to reverse their earlier decision. The firm got the funds and Sony Corp. went on to international prominence.
A few years after that, the ministry tried to combine all the country’s car manufacturing firms into one mega-firm with the idea it would produce a single model meant for domestic consumers. The ministry failed to pull this off, and an out-of-official-favor and unsubsidized Japanese auto industry went on to dominate world markets.
As economists in a college of business, we certainly sympathize with any American firm having to compete with a subsidized Chinese firm. However, we doubt that Beijing bureaucrats of the 2020s are going to be any better than their Tokyo counterparts were in the 1950s in “picking the winners.”
It seems foolish for the USA to risk a worldwide economic downturn via a trade war in an attempt to persuade China to retreat from a foolish policy that harms mainly the Chinese.•
Bohanon and Curott are professors of economics at Ball State University. Send comments to firstname.lastname@example.org.