# Presentation: 234220

## China’s WTO Compliance: Industrial Subsidies and the Impact on US and World Markets

- Gregory C Chow
- Princeton University
- April 4, 2006, 12:30-2pm

## 1. Process by which each Five Year Plan is established

- Each Five-Year Plan is proposed by the State Council to the National People’s Congress for enactment as law. The preparation of the proposed Plan is the responsibility of the Commission for Economic Development and Reform in the State Council.

## 2. Which established benchmarks of the 9th and 10th Five-Year Plans were met and which not?

- Targets for growth of national output, urban and rural income and rate of inflation have been met because they were conservative.
- Plans to solve social problems such as rural poverty, income disparity and establish a social welfare system progressed more slowly than intended.

## 3a. Components of 11th Five-Year Plan

- Establish main targets of economic and social development
- Build a new socialist countryside
- Adjust and upgrade industrial structure – main component dealing with subsidies
- Speed up service industry development
- Promote balanced regional development
- Build a resource-efficient and environment-friendly society
- Promote science and education

## Components - continued

- Deepen system reform
- Implement mutually beneficial open-door policy
- Build a harmonious socialist society
- Construct socialist democracy and politics
- Strengthening construction of socialist culture
- Strengthening construction of national defense and the military
- Establishing and improving implementation mechanism

## 3b How goals are to be accomplished

- GDP growth and inflation targets are set conservatively; economic forces will accomplish them with little government effort.
- Other goals are less specific and individual ministries in the State Council have responsibility to accomplish them.

## 4a.In which industries do subsidies exist?

- High tech, agriculture production, clean energy production and foreign invested industries.
- For a more complete list one can consult the document for the 11th Five-Year Plan itself which is several hundred pages long.

## 4b. lack of transparencies and use of subsidies to implement the 11th Five- Year Plan

- Essentially no lack of transparencies to prevent evaluation of subsidies.
- Most targets of the Five-Year Plan do not require industrial subsidies to implement. Subsidies are only a very small part of the Five-Year Plan.

## Quotes from Chow, Knowing China on US-China economic competition  

*“**Since China has high-quality and low-cost labor, many manufacturing firms from the United States and other developed economies have moved, and are moving, to China. This decreases the demand for the services from similar workers in the United States and would tend to lower their wages and reduce the employment of such workers in the United States. This tendency is unavoidable. The solution, to be achieved by market forces, is for the United States to shift its production from such manufacturing industries to some selected high-tech industries or service industries that the United States is better suited to develop than China.*

## Quotes from Knowing China - continued

- Other things being equal, moving one factory from the United States to take advantage of the low-cost labor in China will lead to a higher national income for the United States as a whole but a lower employment and lower wage for the workers. When physical capital is moved with the factory to China, there will be less capital and hence reduced total output in United States. But the capital that is moved will earn more in China to compensate for the loss of output in the United States, otherwise the move will not be made. This leads to a net increase in the US national income.

## Quotes from Knowing China - continued

- “China’s economic expansion has several favorable effects for the United States. First, China provides investment opportunities for US investors. US corporations setting up factories in China can increase their profits which are good for their stockholders and for raising total national income. Second, China provides a large market for goods produced in the United States and helps to increase employment in the industries producing such goods. Third, China produces a large number of inexpensive and high-quality consumer goods being exported to the United States to benefit the American consumers. Economic cooperation with China is therefore beneficial to the United States and to China as well.”

## Conclusion

- US interests can better be served by promoting economic cooperation with China in the course of economic globalization rather than finding faults in China’s compliance with the terms of the WTO in order to justify imposing higher tariffs on Chinese products. The latter action will not be effective in reducing competition from China, the strength of which is based on economic fundamentals like high-quality and inexpensive labor rather than artificial industrial subsidies; it will do economic harm to the US in stifling innovation and in preventing the natural healthy development of the US economy in taking its rightful place in the world economic community.

## Quotes from Editorial of the New York Times March 27 

- “The Schumer-Graham bill is based on a fundamental misunderstanding of the root cause of America’s economic problems. No question, the United States trade deficit and the loss of American manufacturing jobs are very serious. But most of the imbalance with China is caused by Americans’ insatiable appetite for Chinese imports for which there are few domestic substitutes. While it is unfortunate that the textile industry has all but faded away in this country, the fact is that few American factories make things like low priced apparel any longer.”