Following up on Dani Rodrik's FT op-ed from the other day, economist Robert Wade adds the following in a letter to the FT:
[Rodrik] says that “when the US and Europe complain that China is infringing ‘global norms and rules’, they forget their own economic history. China’s policies are not so different from those that they too embraced while catching up with technological leaders of the time.”
This is true. What it misses is that the US and many European countries today use aggressive industrial policy to foster frontier industries and companies, much of it below the radar of public scrutiny. The US network of public laboratories and agencies (the Defense Advanced Research Projects Agency), and Germany’s giant development bank, KfW, are cases in point.
Western states have crafted World Trade Organization rules to enable them to use industrial policy instruments appropriate for frontier industries and to prohibit or make actionable instruments appropriate for developing country industries and companies well within the frontier (such as local content requirements).
Of course, developed countries use domestic content requirements too, so I am not sure why he connects these only to developing countries. But putting that aside, I've never understood the fascination with domestic content requirements as a tool for development or for industrial policy more generally. I'm not a fan of any industrial policy, but assuming we are going to use it, why would we choose domestic content requirements? Do people think they are somehow more effective than subsidies or tariffs at achieving their goals? I've never seen any evidence of that.
The most significant characteristic I see with domestic content requirements is that they are hard for your trading partners to detect. They can be slipped into laws and regulations at the federal and local levels, and unless you are following all of these laws and regulations carefully, you could easily miss them. Non-transparency is therefore a key feature. Tariffs, by contrast, are easy to monitor. They are only at the federal level, there is a centralized publication, and they are pretty easy to understand. (And developing country tariff commitments are often quite minimal, so there is plenty of flexibility to use them.) Subsidies are harder, but they are subject to more domestic debate, so they get a little more attention.
Also, if domestic content requirements are allowed, how much are the tariff commitments worth? If you can just replace tariff protection with domestic content requirement protection, the trade agreement becomes much less valuable.
As for DARPA and KfW, there are WTO rules on subsidies, but if there is a concern that these rules are somehow skewed towards allowing developed countries to do what developing countries cannot, it's certainly worth taking another look at the rules.
