Panelists Argue Over Trade Elements of Industrial Subsidies

The government subsidies to industry in China only end up supporting jobs, not cornering the market to jack up prices, nor advancing technology, a Carnegie Mellon economy professor argued at an event at George Washington University on China's economy and U.S.-China relations.

However, his fellow panelists said Chinese market distortions are a real problem for the U.S. and allied economies, and they talked about what they see as effective policy responses.

Peterson Institute for International Economics' Chad Bown, a former senior economist in the Obama White House, said he thinks the Inflation Reduction Act's electric vehicle support is well-designed, since it has a price cap on vehicles, an income cap on buyers and is a consumer tax credit. But, he noted, the Biden administration's attempt to assuage allies' anger by creating a loophole for content requirements for all leased vehicles will undermine the goals of building up EV supply chains and manufacturing in the USMCA region.

He's more concerned about the planned spending to bring more semiconductor manufacturing back to the U.S. Bown believes the shortage of semiconductors that hobbled automobile manufacturing in 2021 and 2022 would have happened even if all production had been domestic, since it was a result of automakers canceling orders and chipmakers shifting that capacity to consumer electronics -- and then automakers wanting chips again.

He said he was heartened by government attempts to coordinate semiconductor subsidies with Japan and the EU, but asked, if there is a glut of legacy chips a few years from now, will countries impose antidumping or countervailing duties on each others' chips? He said that happened in the 1980s and 1990s.

Georgetown Trade Law professor Jennifer Hillman, who also spoke on the panel April 7, disagreed with Bown that the IRA was well-designed. Hillman, a former member of the World Trade Organization's appellate body, was highly critical of the elements of the IRA that are aimed to steer EV consumers toward cars and trucks built in North America and vehicles made with batteries with regional supply chains that do not include China. As in NAFTA and USMCA, automakers will have to follow rules of origin to get the option to sell their vehicles more cheaply. But Hillman said it's not the same thing at all. The IRA tax credits for EV purchases are "in blatant violation of our WTO obligations," she said. The fact that Canadian- and Mexican-built vehicles qualify, not just U.S. vehicles, does not make it fall under the free trade agreement exception to WTO rules about not discriminating against imports, she argued.

Hillman, who also served as an International Trade Commissioner and general counsel at the Office of the U.S. Trade Representative, did talk about how China's policies are damaging other countries' manufacturing sectors. She said that countervailing duty remedies aren't that effective, and that China has made a U-turn on market orientation since joining the WTO. She said that even at Chinese companies that are not state-owned -- even foreign-owned operations in China -- Communist Party members are required to serve on company boards. She said that if the board as a whole voted differently than the Party member, the company starts seeing permits denied and other discriminatory actions from the Chinese government.

She said she hears from the Biden administration that "if the WTO cannot fix our problems with China, then the WTO is worthless." Hillman disagrees.

"We need to revise our subsidy disciplines. They're clearly not working," she said. She said countries need better trade remedies, and that WTO members should agree to an overall cap on industrial subsidies, as they have with agriculture. She said that there should be an agreement on how to distinguish between good and bad subsidies.

In response to a question from International Trade Today, Hillman said she's not "optimistic we're going to get overall better WTO rules."

But she said a plurilateral carbon club could be possible.

Hillman said the global arrangement on steel and aluminum that the EU and U.S. are working on is muddied by efforts to block the products of non-economic overcapacity. She thinks it should stick to the question of carbon intensity.