China subsidy and discriminatory policy toward foreign companies was within WTO rules?

Unfortunately, the answer is mostly yes. There are two issues. One is the type of subsidy. Direct export subsidies are illegal under WTO rules. But indirect subsidies such as preferential finance, tax preferences, etc. are not covered. All of the miracle economies – Japan, Germany, Korea, Taiwan, Singapore – have used indirect subsidies, government guarantees, currency undervaluation, restriction of direct foreign investment, domestic cartels, and many other measures to promote domestic firms and exports at the expense of foreign business. Why are there virtually no foreign cars in Japan? It’s not an accident. Yet, Japan rightly argues that it did nothing against the WTO rules while promoting development of its auto industry.

A second point is that even when a Japan, or a Korea, or a China does infringe the rules, the U.S. and other countries tend not to complain which essentially legitimizes the behavior. The reason for lack of complaint is primarily that the economists of the leading western countries believe in unilateral free trade. They think it is protectionist to respond to the mercantilist policies of the export led economies. They don’t think that the structure of the economy or of an industry is important. If China subsidizes steel exports, their view is that the U.S. should switch from steel making to making something else. During the difficulties with the Japanese semiconductor industry of the 1980s, one of America’s leading economists made the comment: “potato chips, computer chips, what’s the difference? They’re all chips.”  He did not believe the U.S. government should take any steps to prevent the subsidy of Japan’s memory chip makers or the dumping of the chips in the U.S. market even though the Japanese were then destroying large parts of Silicon Valley.

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