At a press briefing with Ambassador Tai on the announcement that the Biden administration would maintain the Section 301 tariffs on China and add tariffs on a few additional products, a reporter asked the following question regarding U.S. vs. Chinese electric vehicle subsidies:
The U.S. government is subsidizing the EV industry here pretty significantly. How is that different from what the Chinese government is doing?
Tai responded as follows:
So, if you take a look at the Chinese economic model, what you see is a system of state support that is built to dominate and take over entire industries. So, this is what I mean by, “We’ve seen the pattern” — steel and aluminum, solar panels, batteries, EVs.
Today, China’s production capacity in steel is 55 percent of world capacity — that’s in one country; aluminum, 60 percent; EVs, 60 percent; solar, 80 percent; and in certain critical minerals, 85 to 95 percent. So, those are subsidies with an aim to cornering the world market and achieving dominance and creating dependency.
The types of support that we’re talking about here are defensive in nature. They’re about creating the space to compete, the space to thrive, the space to survive the kind of onslaught that we are seeing across the board.
A lot of people have been trying to figure out how to distinguish good subsidies from bad subsidies. Is there something in what Tai said that can help provide the basis for doing so? Here are a couple possibilities:
- Maybe it's the intent that matters: Subsidies are a problem if they are "built to dominate and take over entire industries" or if they are provided "with an aim to cornering the world market and achieving dominance and creating dependency."
- Maybe it's the level of global capacity that is the problem (e.g. "steel is 55 percent of world capacity"): If it gets too high, that's a concern. On this point, here's something Jennifer Hillman and Chad Bown wrote a while back:
Because prohibited subsidies have both a clearer and faster remedy than merely actionable subsidies, expanding their list could add teeth to the ASCM. Currently, ASCM Article 3 limits prohibited subsidies to export subsidies or subsidies contingent on the use of domestic products over imports. If certain subsidies that are considered more trade distortive, such as those leading to substantial global overcapacity, could be defined and added to Article 3, it would strengthen the ASCM.
- Maybe if they are "defensive in nature" it's OK, i.e., if they are provided in response to other governments' subsidies.
Could these factors be used in evaluating whether subsidies are good or bad? I've also heard people suggest that the real problem is "pervasive" subsides, so maybe the amount of subsidies should be considered as well. It would be interesting to see WTO Members discuss all this.
At the same time, I would note that the existing SCM Agreement "adverse effects" rules -- along with the narrower prohibited subsidies rules of course -- might also be a good way to distinguish between good and bad subsidies. These rules provide a remedy based on the effect that subsidies have on foreign competitors. In a sense, the rules give Members a way to play defense when they are harmed by another government's subsidies.
If the goal here is to discipline subsidies, maybe it's worth using the WTO's adverse effects rules more. We can then see if there are still gaps that need to be filled in with additional rules.
It may take a while, but ultimately I think we will need to settle on some international rules in this area that everyone can live with. Otherwise the negative economic impact of unilateral trade retaliation and subsidy races is going to keep growing and become a serious problem.
