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 Richmans' Trade and Taxes Blog

China to devote $1700 billion to new import-competition
Howard Richman, 11/21/2011

U.S. Secretary of Commerce John Bryson told reporters at the U.S.-China Joint Commission on Commerce and Trade (JCCT) earlier today (November 21) that China plans to expand its subsidies to what it considers to be the "strategic sectors" of its economy. At the same event, Chinese Vice-Premier Wang Qishan justified the expenditure. According to the Reuters story:

Chinese Vice-Premier Wang Qishan warned on Monday the global economy is in a grim state and the visiting U.S. commerce secretary said China would spend $1.7 trillion on strategic sectors as Beijing seeks to bolster waning growth.

Under WTO rules, developing countries are allowed to declare certain sectors of their economy to be "strategic sectors" and are allowed to charge high tariffs (about 25%) on imports into these sectors. Many developing countries have designated their auto industries as strategic sectors under WTO-rules, but China's definition of "strategic sectors" keeps expanding, as the Reuters article also notes:

Beijing has previously said these [strategic] sectors include alternative energy, biotechnology and advanced equipment manufacturing, underlining its aim to shift the growth engine of the world's No.2 economy to cleaner and high-tech sectors.

Some economists incorrectly claim that China is practicing export-led growth, but subsidies such as these are designed to reduce imports. In actuality, China is practicing mercantilism, the strategy of maximizing exports and minimizing imports.

Mercantilist countries restrict imports while at the same time buying foreign assets in order to run trade surpluses. According to the Asian Development Bank, China accumulated $453 billion in foreign exchange reserves in 2009 and $256 billion more in 2010.

The goal of mercantilism is to delay consumption in the present in order to get increased consumption and power in the future. They give their trading partners increased consumption in the present followed by reduced consumption and power in the future.

The United States experienced the height of its mercantilist-produced increased consumption from 1998 through 2006, when mercantilist loans financed a house price bubble. Since 2006, the U.S. has continued to go ever more deeply into debt to the mercantilist countries, even while experiencing the gradual decline in consumption and power that comes from tolerating mercantilism. So long as U.S. leaders continue to tolerate mercantilism, China will continue to grow in power by stealing American industries.

But the United States government does not need to trade away its country's future. WTO rules let any country that is experiencing imbalanced trade impose trade balancing tariffs or other import barriers. We discuss some of the alternatives that the United States could use in our article The Scaled Tariff: A Mechanism for Combating Mercantilism and Producing Balanced Trade, just published by the peer-reviewed Journal of International Law and Trade Policy.

Some economists think that tariffs result in counter-tariffs which reduce exports. But when trade is being kept imbalanced by mercantilist governments, measures that require balance actually increase exports at the same time that they reduce imports. The scaled tariff would force the mercantilist governments to accept our imports, else they would lose market share in their exporting industries.