Working Paper: CEPR ID: DP14076
Authors: Chad P. Bown; Jennifer Hillman
Abstract: The United States, European Union, and Japan have begun a trilateral process to confront the Chinese economic model, including its use of industrial subsidies and deployment of state-owned enterprises. This paper seeks to identify the main areas of tension and to assess the legal-economic challenges to constructing new rules to address the underlying conflict. It begins by providing a brief history of subsidy disciplines in the GATT and WTO predating any concerns introduced by China. It then describes contemporary economic problems with China’s approach to subsidies, their impact, and the apparent ineffectiveness of the WTO’s ASCM to address them. Finally, it calls for increased efforts to measure and pinpoint the source of the problems—in a manner analogous to how the OECD took on agricultural subsidies in the 1980s—before providing a legal-economic assessment of proposals for reforms to notifications, evidence, remedies, enforcement, and the definition of a subsidy.
Keywords: WTO; subsidy; state-owned enterprise; dispute settlement
JEL Codes: F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| narrow definition of subsidies (H20) | non-transparent means of subsidy provision (H23) |
| non-transparent means of subsidy provision (H23) | undermining fair competition in international markets (L49) |
| narrow definition of subsidies (H20) | trade distortions and overcapacity in industries (steel and aluminum) (F14) |
| high evidentiary burden (K41) | inability to challenge subsidy practices (L49) |
| inability to challenge subsidy practices (L49) | reliance on tariffs (F14) |
| reliance on tariffs (F14) | exacerbation of tensions in international trade relations (F69) |
| exacerbation of tensions in international trade relations (F69) | retaliatory measures (D74) |
| inadequate remedies under WTO (F13) | failure to dismantle underlying capacity built through subsidization (F35) |
| failure to measure economic impact of subsidies (H29) | inability to negotiate and enforce new rules (D74) |
| inability to negotiate and enforce new rules (D74) | perpetuation of trade disputes and retaliatory tariffs (F13) |