China eliminates foreign trade subsidies that violated its WTO commitments

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/17

The United States a year ago filed a dispute with the World Trade Organization that claimed China’s central and local administrations were subsidising export firms in 179 industrial branches through under-pricing of services and monetary incentives in violation of its WTO commitments. The claim included products ranging from agriculture and textiles to the pharmaceutical industry. In mid-April, China made a bilateral agreement with the US on elimination of these subsidies. The deal benefits China’s other trade partners as well, including the EU, which joined the US’s WTO dispute at a later stage.

The export subsidies mandated for elimination have relatively little economic significance and do nothing to ease China’s burning trade policy issues. The agreement highlights how vague and impractical China’s subsidy system is also from China’s own development viewpoint. Moreover, it suggests that efforts to clear China’s subsidy jungle would not proceed efficiently without outside pressure.

The China-US agreement on cutting export subsidies that violate WTO commitments supports China’s integration with the global economy and systemic adjustment. It is also important from China’s perspective to show that the country is ready to operate by market-economy rules. At the end of the year, the EU and US will decide on whether to grant China market-economy status. If granted, it would become more difficult for China’s trading partners to impose anti-dumping tariffs on products imported from China.

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