People in glass houses (subsidies edition)

By Phil Levy

The Obama Administration last week launched a new World Trade Organization case against China. The United States complained that China has limited exports of industrial materials like bauxite and coke. These limits drive down prices for Chinese producers and raise prices for foreign users. The effect is to subsidize Chinese firms at the expense of foreign firms. We are officially shocked — shocked! — that any nation would do such a thing.

This case raises questions of both legal and economic principle. The legal question of whether China’s specific measures contravene WTO agreements is best left to the lawyers. The economic question is whether such subsidies are just. U.S. Trade Representative Ron Kirk argued emphatically last week that they were not. He said the policies created "unfair preferences" and "skew the playing field against American workers and businesses." The answer? "Now, more than ever, we must fight against this kind of domestic favoritism," Kirk said.

To be sure, there are commendable aspects of last week’s WTO complaint against China. From an economic standpoint, the Chinese measures do constitute a subsidy, and if the United States is to attack them, it is best to do so at the WTO. What’s more, it is nothing new for the United States to object to foreign subsidies. The United States is still pursuing a WTO case against Europe for its financial backing of Airbus. In that case, the United States argues that Europe’s provision of funds for aircraft design, retooling of manufacturing sites, and debt forgiveness all gave the European aircraft consortium an unfair advantage over its American rival, Boeing.

These cases show that the United States is opposed to other countries distorting markets in favor of their own domestic producers. And yet, consider three headlines of recent months:

1. The Obama administration has provided tens of billions of dollars in support for Chrysler and General Motors. This money, which no private investor would provide, is intended to finance the companies’ emergence from bankruptcy and allow them to create new automobile designs. Further, the U.S. Department of Energy last week began to disburse $25 billion in low-interest loans to let domestic auto factories retool their manufacturing sites to produce more environmentally friendly cars. There certainly seem to be conceptual parallels to the Airbus complaint.

2. President Obama signed into law the "Buy America" provisions of the stimulus bill, which are intended to direct business toward domestic producers of goods like steel. After an outcry over an early draft, these provisions were scaled back so they would only hit countries like China, which is not a signatory to WTO government procurement rules. In practice, though, uncertainties over implementation rules have meant that trading partners like Canada and the UK have been hurt as well. This is clear domestic favoritism.

3. The president strongly embraced legislation limiting carbon dioxide emissions, the Waxman-Markey "cap and trade" bill, that passed the House on Friday. Among other things, that legislation aims to raise the domestic price of emissions, but it distributes significant batches of permits free of charge to favored industries. The effect is to subsidize the producers.

Each of these three measures has been contentious; taken together they present a very murky picture of the U.S. stance on subsidies. But who really needs consistency, anyway? There are all kinds of intricate rules at the WTO, and we have good lawyers. Why not just throw everything at dispute settlement panels and see what we can get away with?

There are a couple reasons why not. First, the WTO is not well-equipped to fill in the blanks on contentious and complicated issues like a government’s power to subsidize. Those questions are best resolved through negotiation, not litigation. Second, in order to flourish, the global trading system must be perceived as fair. This is unlikely if its principal member is simultaneously subsidizing its own industries while attacking other countries’ efforts to do the same. The United States needs to provide principled leadership — and practice what it preaches.  

Ambassador Kirk is absolutely correct that we should reject arguments for domestic favoritism. But he may also want to raise that point at the next Cabinet meeting.