China has agreed to eliminate various subsidies it provides to export companies after the United States filed a complaint with the World Trade Organization (WTO). The two governments reached a bilateral agreement to end a dispute that lasted more than a year.
U.S. Trade Representative Michael Froman announced the deal on Thursday, calling it “a win for Americans employed in seven different industries, from agriculture to textiles.”
The United States launched an attack on China in February 2015, targeting the incentives provided by China to its export companies in seven industries. These industries are: textiles, apparel and footwear; advanced materials and metals; light industry; specialty chemicals; medical products; hardware and building materials; and agriculture.
The European Union, Japan and Brazil later joined the complaint against China’s so-called “demonstration bases” – industrial clusters that receive government subsidies to meet export targets. U.S. officials have listed 179 such industry clusters after uncovering what they called illegal subsidies in a WTO case surrounding auto parts. To dig deeper into the details, U.S. investigators pored over more than 5,000 pages of Chinese government documents translated from Chinese.
Although China is trying to shift from relying on exports to focusing more on domestic consumption, export companies still enjoy a series of preferences that the United States considers to be prohibited under WTO rules. They include cash grants and free or discounted services to designated businesses.
Trade with China became an important topic in the 2016 U.S. presidential election, with Republican presidential front-runner Donald Trump frequently blasting Beijing for unfairly taking advantage of U.S. companies. Last year the U.S. trade deficit reached $366 billion. The U.S. trade deficit so far this year is more than 10% higher than the same period last year.
Gary Hufbauer, a trade expert at the Peterson Institute for International Economics in Washington, said the agreement will do nothing to reshape trade flows. “It’s not going to make any big changes,” he said. He added that it might only reduce the rising U.S. trade deficit by $5 billion.
China’s concession comes as the United States and Europe threaten not to recognize China’s “market economy status,” which would allow Chinese products to be judged at China’s prevailing prices in anti-dumping cases. Without this status, Chinese companies accused of dumping may be compared with prices in third countries, and the result will almost certainly be higher prices in third countries. According to the terms of China’s accession to the WTO, China should be granted market economy status 15 years after joining (that is, in December this year).
The agreement to end subsidies comes as Beijing also acknowledges that China has developed significant overcapacity over the past 15 years in metals, coal, consumer products and other industries. China’s planners now worry that a slew of factories built with subsidies and bank loans are destroying profit margins and making it harder to deal with a mountain of debt that is weighing on economic performance.
