The subject of subsidies is a vast one. I hope to point out a few highlights in order to make sense of the issue. Phase 2 between China and the USA is surely going to tackle subsidies in some way. The West is putting the squeeze on China regarding subsidies. 

The WTO and international law allows for China both to subsidize and to share technology. Europe, Japan and the USA don't want China to have that advantage. So, of course, they want to change international rules, showing a lack of good faith in a workable trade plan. Now that both political parties in the USA have set the citizenry against the current system, it will be a long and ongoing fight between the west and China until a recession hits hard. We can only hope at that point that China will bail out the US and the West like they did in the Great Recession. 

Subsidies have been a sticking point in trade negotiations. Phase 1 of the trade deal signed on January 15 skirted the issue entirely. The history of trade says that trade is good over the long run because trade allows nations to focus on what they are good at producing. In my opinion we cannot lose sight of that Ricardian goal. Fairness is in the eye of the beholder. Let people trade.

So, for most of us, subsidies are difficult to assess, and for good reason. And for nations subsidies are difficult to assess as well. It appears that it is okay for the US to apply subsidies but no one else. We apparently do not like China beating us at our own game.

Subsidies are seen as being anti-free trade by the OECD and others who gather stats on the subject, but they don't have to be. The complexity of trying to level the playing field may not be possible. There are so many variables that it is not just a question of China being the bad guy. Europe uses subsidies. The US subsidizes oil, and controls oil with a massive military budget.

Is that military budget, by far the largest in the world, part of subsidies? If so we subsidize oil and gas to the tune of billions, maybe even trillions of dollars over time. Does purchasing power parity influence subsidies? China is the most powerful economic engine in the world using purchasing power parity.

Assessing Subsidies

I have a feeling that the USA would attempt to simplify the assessment of subsidies in order to get our way by focusing on one industry. I see China focusing on the total picture. But if we cannot simplify the tax code how are we ever going to factor in variables to subsidy assessment. Here are five points regarding them. There are likely many other factors regarding them:

First, subsidies may help companies, but in some cases they really help labor too. The United States subsidizes agriculture, oil and gas, big finance and utilities. Some of this could be in the national interest. Some is misplaced as big companies make bank while the middle class is losing ground. Subsidies make sense if a nation is to utilize a massive labor pool. They make shoes, while the USA makes computers. However, just to make shoes, as the Heckscher -Ohlin Model suggests, will doom the nation with the abundance of labor to lifestyle that middling and not high end. 

Second, subsidies are difficult to measure because nations hide them. Numbers are all over the place. The Trump team is up in arms about 22 billion in subsidies China gives to manufacturing. Yet the US subsidizes oil and gas, agriculture, etc., and it is difficult to know the extent of it but it is likely in the multi-billions of dollars.

Third, subsidies in the form of easy money in the US are far larger than in China, where interest rates are higher. Add to this that easy money is going to prop up the US stock market. Certainly stock appreciation and bubble is subsidized by the government and by the Federal Reserve Bank. However, state enterprises in China may get subsidies in the form of below market loans and forgiven loans. But we cannot forget the massive bailouts of our banks in the Great Recession that angered the middle class for good reason. Loans to banks were forgiven left and right while they gobbled up middle class real estate.

Fourth, subsidies include currency manipulation, although at this time, Trump and company have backed off labeling China a manipulator. But does the US manipulate currency, too? 

Fifth, subsidies are made more or less effective by tariffs. Tariffs complicate the assessment of subsidies a whole lot.

So, my view is that subsidies, looking at the whole picture, are incredibly complex to base a trade war on. There are 900 US businesses in China who are wanting the tariff wars to stop, who are competing with companies based in China and are happy to be there. 

US Agriculture Subsidies a Potential Sticking Point

The US subsidizes agriculture and that is an automated agriculture. When we hear of China subsidizing agriculture, it is a small farm system. The trading bully appears to be the USA because subsidizing that which is already technically advanced seems to be grossly unfair. 

Two percent of Americans are engaged in agriculture while 1/3rd of Chinese are engaged. Cities have been hollowed out in the Midwest and elsewhere due to the automation of farming. And yet, as the trade war rolls on we see Donald Trump giving aid to the wealthiest farmers with consolidation continuing to take place. Trump is potentially making things worse for the farm belt. 

The Chinese do appear to be assisting jobs with subsidies while the USA appears to be assisting automation when subsidies are applied. This goes to the apparent value China places on work. That value may not be shared by the US government. Labor in the USA should be concerned. Manufacturing is languishing and the government does not appear to be concerned. 

There are examples in the past of the US not placing value on work.

Ag subsidies for automated technology makes one wonder if the technology is really that efficient. After all, surely tech could compete with subsidized small farms.

And besides, China has indicated that Ag subsidies have to be on the table if manufacturing subsidies are to be called out by Trump. 

Failure to Come to an Agreement Over Subsidies

It is interesting that China wants to hold off on negotiations on Phase 2 while Trump thinks he has the advantage and wants to quickly begin negotiations, hoping for a second victory since China gained little from Phase 1. The US is still putting screws to Huawei, even in the face of documents showing HSBC knew of Huawei's involvement in Iran years before Meng pitched her deal to the bank.

There are lots of reasons that the next trade result will be failure. First, China may not buy what is required of them in the first trade deal. Second, China will not be willing to negotiate over simplistic subsidy efforts by the USA. 

One thing to watch will be if China does buy a lot of agricultural products from the USA. That could squeeze Europe. Europe is the weakest link when it comes to worldwide trade deals. Its banks are weak. So, watch for a squeeze against Europe by China in order to break their bond with the US and Japan over subsidies. Of course, the US could squeeze Europe as well. Auto subsidies could be very damaging to no-growth Germany. 

Europe would do well to get money into the periphery nations so that the entire continent could prosper, not just Germany and the north. The concern for me going forward is that nations wanting to increase exports are not trying hard enough to put their own people first. If anything, China tries harder than either the US or the Eurozone. Trump is all talk when he said nations should put their people first. The USA clearly does not. Donald Trump is just all hat and no cattle. Anytime you want to reintroduce Russian asbestos, it exposes what you really care about.

Anyway, the world will have to decide, either prosper their people through enhanced trade, or get money into the hands of their own people somehow. Even a combination would be better than trade wars and subsidy arguments which lead to more tariffs and a slowdown of world prosperity.