E Trump, China And Phase 2 Negotiations

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.

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Disclosure: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment ...

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Gary Anderson 5 months ago Author's comment

Update 1: The Phase 2 talks are in jeopardy as both China and Trump have indicated displeasure with Phase 1. The Pandemic has given both nation confidence that they have the other in a weakened condition. Not a good situation.

Kirk Sheffield 5 months ago Member's comment

Both China and the US are in a weakened position. But I'd say the US even more so. Trump's constant threats against China and is claims that China artificially engineered the virus and then covered it up, is make the situation far worse. Instead of fighting the pandemic and pooling resources and intelligence with other countries, he's exerting all of his efforts at blaming China.

Gary Anderson 5 months ago Author's comment

I agree with you that we are weaker than China especially if we continue to wall off China.

Kirk Sheffield 5 months ago Member's comment

Don't get me wrong - I did see value in the tradewar... if we won. But I see no benefit at all to blaming China for the pandemic. Did they intentionally create the virus? No, that's absurd and disproven by scientists. Did they downplay the danger? Sure but so did Trump. What is there to gain by alienating China by attacking them? Will attacking them help cure the pandemic faster, or save lives? No.

Jack F. Dawson 8 months ago Member's comment

How does the #coronvirus affect the trade situation between the US and China?

Gary Anderson 8 months ago Author's comment

I hope the virus would make Trump put his trade war on hold for longer. The world economy needs China's contribution. I could see the world economy crashing because of this virus, but I hope it doesn't. Trump never should have initiated his trade war at all. It weakened China somewhat, making this virus even more dangerous to the world economy. Scientists warn of ominous effects while politicians and bankers play the crisis down. For once I hope the bankers are right.

Norman Mogil 9 months ago Contributor's comment

Gary an excellent overview of the biggest non tariff barrier to trade that is used by every country

You are right China is not going to give up the commanding heights derived from subsidies

And US farmers cannot exist without farm aid. Both conditions are indemnic in their respective nations.

Barry Hochhauser 9 months ago Member's comment

"...China is not going to give up the commanding heights derived from subsidies

And US farmers cannot exist without farm aid. Both conditions are endemic in their respective nations."

Exactly right!

Gary Anderson 8 months ago Author's comment

Well, Barry, now with the virus spreading, China will be able to put phase 1 on hold. That will most likely put off phase two until after the election, when the real trade war starts, although I hope I am wrong.

Gary Anderson 9 months ago Author's comment

I appreciate your assessment, Prof!