Like the rest of you, I was beside myself with anticipation as I saw the headlines last week about the negotiated settlement between the US and China on subsidies. Wow, finally an exciting trade law story that we could talk about for a few days. I saved the story for the weekend so I could savor it with a glass of wine and some Vivaldi.

Well, actually I was too busy teaching late last week (8 hours in two days = a wee bit tired) to do my reading, so I had no choice but to catch up on the weekend. I’m still way behind on everything since I spent most of the weekend playing with my new PSP - excellent toy with no appreciable lead content - thank you, Sony.

I notice today that the only one writing about this in the greater China expat blog community, at least on my radar screen, is Rich. Is everyone too busy writing about fake tiger photos and the Miss World pageant?

So, here comes the New York Times version of the facts:

Bowing to American pressure on the eve of high-level talks to reduce economic tensions, China agreed Thursday to terminate a dozen different subsidies and tax rebates that promote its own exports and discourage imports of steel, wood products, information technology and other goods.

Well, not exactly a neutral observation, is it? Sounds like a U.S. government briefing talking point to me. Although I’m sure that American pressure contributed mightily to all of this, let’s keep in mind that we are talking about 1) export subsidies; and 2) import substitution subsidies, neither of which are allowed under WTO rules.

From everything I’ve read, it sounds as though the U.S. had a pretty good case here. Made sense for the PRC to fold on this one. Making the whole thing into a negotiated settlement makes everyone happy, although the Chinese government will not be happy when they see the NYT calling this move a cave-in to U.S. pressure.

The settlement says that China will end these programs by January 1, 2008. Same day that the new tax law comes into effect, isn’t it? So how much of this includes policy decisions that were already going into effect? Hmmm.

Here’s my favorite quote from Susan Schwab, the US Trade Rep. Note that while I like Schwab a lot and hear only positive things about her, you always have to remember that she is a political appointee.

This outcome shows that President Bush’s policy of serious dialogue and resolute enforcement is delivering real results.

OK, that’s quite an empty statement for a rather routine case. Here’s how it works: illegal subsidies provoke quiet complaints in different bilateral venues. After that, you issue formal complaints and let the media get in on the action. Still no progress, you ratchet up some rhetoric. No movement? You then threaten to take the case to WTO. Eventually you file a case and hope to settle at some point. That is ultimately what happened here. That’s sort of what every US administration would have done; it’s called cycling through your options. Even calling it a policy or strategy is rather embarrassing. I’m not sure how else you would do it.

Still not excited? Here’s a little tip regarding trade disputes. The only fun is in the politics and political economy angle. The basics, including the legal issues, are rarely interesting except to geeks like me.

So how should we look at this case? Who benefits, who loses, and who lobbies. There’s where the real excitement is. And which rhetoric is the lamest, of course.

1. Who benefits/lobbies: U.S. manufacturers, and their industry group the NAM. They’re happy, at least for the moment.

2. Who loses? Well, the USTR tells us that a significant percentage of firms that received these subsidies were foreign invested enterprises (FIEs), some of which were owned or partially owned by US investors.

So you have US companies making products here and exporting some of those products back home. Some of this is US-on-US competition, so why does the Bush Administration care about this? Well, for one thing, every product from China that comes into the US competes with a local US product, but only a fraction of those products originate from a US FIE. Remember that a lot of US FIEs are here to get access to the local market, and you also have Europeans and other folks with their own FIEs, not to mention round-tripping Chinese, exporting to the US. Hard to take seriously a Bush Administration official crowing about protecting the American worker, though. On the other hand, this is the same administration that brought us steel subsidies and an abortion of a farm bill - maybe they do care about protectionism after all.

You also have the import substitution side of this, giving incentives to local Chinese industry to compete against imports. That’s an easy one politically for the US. All the "open your markets" and "level the playing field" rhetoric is tailor made for that sort of policy.

I did find these comments by Schwab rather amusing, however:

The United States is also encouraged that the terms of the agreement reflect a conscious decision by China - for its own benefit - to reject the economic thinking that has relied on these kinds of distorting subsidies in the past.

I don’t know if USTR has noticed, but China has not given up on industrial policy, and is not likely to do so in the near future despite ending a few subsidy programs that were obviously not WTO compliant. Look at current economic reform and growth strategies that have been adopted, and you’ll see that picking winners and losers is quite fashionable with the policymakers in Beijing these days. Seeing this settlement as some sort of victory for laissez faire principles is empty rhetoric at best, naive wishful thinking at worst - and I don’t believe that these folks are in any way naive. Schwab has people like Tim Stratford working for her.

OK, I tried to make this as exciting as possible. If I failed, I blame it on the topic.