I've blogged about Dani Rodrik and policy space before. He is now making similar points related to the specific case of China, arguing that China's currency undervaluation is a substitute for the protectionist policies it can no longer undertake as a result of joining the WTO:
Before it joined the World Trade Organization in 2001, China had a wider range of policy instruments for achieving this end. It could promote its industries through high tariffs, explicit subsidies, domestic content requirements on foreign firms, investment incentives, and many other forms of industrial policy. But WTO membership has made it difficult, if not impossible, to resort to these traditional forms of industrial support. China’s tariffs declined precipitously in the late 1990’s, and many of the other inducements were also phased out. Currency undervaluation has become a substitute
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So we are left, it seems, with two equally unappetizing options. China can maintain its currency practices, but at the risk of large global macroeconomic imbalances and a major political backlash in the US and elsewhere. Or it can let its currency appreciate, at the risk of inducing a growth slowdown and political and social unrest at home. It is not clear that advocates of this option have fully comprehended its potentially severe adverse consequences.
There is, of course, a third path, but it would require re-writing the WTO’s rules. If China were allowed a free hand with industrial policies, it could promote manufactures directly while allowing the renminbi to appreciate. This way the increased demand for its industrial output would come from domestic rather than foreign consumers.
Let's put aside the question of whether industrial policy is the best path for economic development. Assuming it is, how much does the WTO constrain this? My understanding has always been that the GATT/WTO allows a certain amount of protection, but simply tries to shift as much protection as possible to transparent methods such as tariffs, and away from harder to detect internal measures. So how high are China's tariffs? I'm sure there is a more precise answer than this, but here's what I see in the press release related to China's accession in 2001:
After implementing all the commitments made, China's average bound tariff level will decrease to 15% for agricultural products. The range is from 0 to 65%, with the higher rates applied to cereals. For industrial goods the average bound tariff level will go down to 8.9% with a range from 0 to 47%, with the highest rates applied to photographic film and automobiles and related products.
It seems to me that, in its WTO accession terms, China was able to maintain fairly high tariffs on the products it considered important (a high of 65% for agricultural products and 47% for industrial products). Aren't these high enough for it to undertake an effective industrial policy?
