Economic Tidbits

China & WTO Imperfections

The rules governing world trade are the product of many years and multiple rounds of negotiations. Beginning in 1944 with negotiations to create the “Bretton Woods” institutions, the International Monetary Fund (IMF) and World Bank, to the discussions resulting in the General Agreement on Trade and Tariffs (GATT) in 1948, and finally, to the creation of the World Trade Organization (WTO) in 1995, the world has been marching towards greater trade liberalization.

The WTO and rules-based trading system were created by democracies with capitalistic economies and a clear separation between government and business. The rules didn’t foresee the growth and rise to economic power of a centrally managed system like China. The friction between the existing rules and the Chinese economic system are at the heart of many of the disputes between the U.S. and China today.

The Yeutter Institute at the University of Nebraska-Lincoln (UNL) recently hosted a webinar focused on the frictions between the U.S. and China, the role of subsidies in the Chinese economy, and the challenges of addressing trade-distorting effects of these subsidies through the WTO. It featured Stephen Olsen, a research fellow at the Hinrich Foundation in Hong Kong, and Kelly Ann Shaw, a former deputy assistant to President Trump for international economic affairs and can be seen at: www.youtube.com/watch?v=EhFZIoDqkgc&feature=youtu.be.

Olsen said the involvement of the Chinese government in all aspects of the Chinese economy is difficult to grasp or fathom. The government uses a variety of means to manage the economy including cash infusions, supplying low cost land/electricity/other inputs, providing concessionary loans, forcing technology transfers from non-Chinese firms, and operating state-owned enterprises. A speaker on a subsequent webinar sponsored by the Yeutter Institute suggested state-owned enterprises in China account for 35 percent of the country’s gross domestic product. Shaw noted the WTO is an imperfect means for dealing with these issues and their possible trade-distorting affects. She said it is incredibly difficult to build an evidentiary record to challenge the Chinese practices, plus the length of time it takes to resolve an issue often means any trade-distorting harm has already come and gone by the time a decision is rendered.

China is unlikely to change its system; neither are the U.S. or other free market economies. The question, then, is can the U.S., China, and other countries develop rules to govern trade given the underlying and fundamental differences between their economic systems? The Phase 1 agreement between the U.S. and China earlier this year did not tackle these complex issues. Shaw said the U.S., European Union, and Japan have embarked on trilateral discussions over industrial subsidies which could be expanded to include other countries. Or, rules could be developed through the WTO, but according to Olsen, that’s like trying to get 164 of your friends to agree on a restaurant for lunch.

Nebraska agriculture has a lot at stake on the outcome concerning the world’s relationship with China. China is typically one of the top three export markets for Nebraska agricultural goods. If a path forward cannot be found, a top Nebraska market could be at risk.

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