adaptation of advanced technologies developed in richer countries, Japan acquired technology mainly through licensing agreements, while for China FDI has been a major channel for technology transfer.<sup>17</sup> Although industrial policy has played an important role in both Japan and China, the dominant role of Japan’s Ministry of International Trade and Industry (MITI) and Ministry of Finance (MOF) in the 1970s and 1980s has no close parallel in the China of today. Instead, much of China’s economic policy-making has been decentralized, with the direction of industrial development the result of input at many levels, from the national to the “village.”<sup>18</sup> In this respect China more closely resembles the United States or the European Union, where individual sub-national units enjoy considerable scope for setting priorities and implementing policies. Finally, although moving from a planned toward a market economy, China remains a communist state and has not made significant steps toward a democratic system of government at the national level. However, elections are routine at the village level and sometimes even mandatory. Japan’s national government is an elected parliament, and economic policy making remains relatively centralized.

These political and economic differences have direct implications for the resolution of trade disputes, whether through bilateral negotiations or through actions taken in the GATT/WTO system. Officials of China’s national government may enjoy more freedom of action than their Japanese counterparts since the government does not need to satisfy a representative electorate. However, Chinese officials believe that the country’s political stability is highly dependent on continued economic growth. Chinese policy makers were therefore aggressive in stimulating domestic demand as a means to offset the effects of the sharp drop in exports that China experienced in early 2009.

The trade policy options available to the United States and other trading partners in dealing with China may be more circumscribed than in the case of Japan because of China’s extensive links to these economies via FDI and vertical specialization.<sup>19</sup> In the WTO, enforcement of a successful complaint is accomplished entirely through limited authorized

> 16 Hufbauer, Wong, and Sheth (2006, p. 77).  Data for China include inward FDI from Hong Kong, of which some portion is due to round-tripping from the mainland.  With Hong Kong considered separately from China, in 2008 Hong Kong ranked #3 worldwide in terms of FDI stock, after the United States and the United Kingdom, while China ranked #6, after France and Germany.  Japan was #24 (CIA 2009).

> 17 In at least a few cases, firms in each country sought to acquire technology by acquiring foreign companies or by using subsidiaries as listening posts in the United States and other advanced countries. In both cases, industrial espionage was also alleged.

> 18 Perkins (2001), Bergsten et al. (2008), USITC (2007).  Bergsten et al. also note efforts in the early to mid-1990s to recentralize, particularly in the area of tax collection.

> 19  On the other hand, security concerns may have shaped U.S. policies toward Japan until 1975, given U.S. reliance on Japanese bases during the Vietnam War.

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