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China¶s WTO Compliance:

Industrial Subsidies and theImpact on US and World Markets

Gregory C Chow

Princeton University April 4, 2006, 12:30-2pm



1. Process by which each Five

Year Plan is established

� Each Five-Year Plan is proposed by the

State Council to the National People¶s

Congress for enactment as law. The

preparation of the proposed Plan is the

responsibility of the Commission for

Economic Development and Reform in theState Council.



2. Which established benchmarks

of the 9th and 10th Five-Year Plans

were met and which not?

� Targets for growth of national output,

urban and rural income and rate of inflation have been met because they

were conservative.

� Plans to solve social problems such as

rural poverty, income disparity and

establish a social welfare system

progressed more slowly than intended.



3a. Components of 11th Five-Year

Plan� Establish main targets of economic and social

development

� Build a new socialist countryside

� Adjust and upgrade industrial structure ± maincomponent dealing with subsidies

� Speed up service industry development

� Promote balanced regional development

� Build a resource-efficient and environment-friendly society

� Promote science and education



Components - continued

� Deepen system reform

� Implement mutually beneficial open-door policy

� Build a harmonious socialist society� Construct socialist democracy and politics

� Strengthening construction of socialist culture

� Strengthening construction of national defenseand the military

� Establishing and improving implementationmechanism



3b How goals are to be

accomplished� GDP growth and inflation targets are set

conservatively; economic forces will

accomplish them with little governmenteffort.

� Other goals are less specific and individual

ministries in the State Council have

responsibility to accomplish them.



4a.In which industries do subsidies

exist?� High tech, agriculture production, clean

energy production and foreign invested

industries.� For a more complete list one can consult

the document for the 11th Five-Year Plan

itself which is several hundred pages long.



4b. lack of transparencies and use

of subsidies to implement the 11th

Five- Year Plan

� Essentially no lack of transparencies to

prevent evaluation of subsidies.� Most targets of the Five-Year Plan do not

require industrial subsidies to implement.

Subsidies are only a very small part of theFive-Year Plan.



Quotes from Chow, Knowing China

on US-China economic competition� ³Since China has high-quality and low-cost labor, many manufacturing firms from the United States and other developed economies have moved, and are moving, toChina. This decreases the demand for the services from

similar workers in the United States and would tend tolower their wages and reduce the employment of suchworkers in the United States. This tendency isunavoidable. The solution, to be achieved by market forces, is for the United States to shift its production from

such manufacturing industries to some selected high-tech industries or service industries that the United States is better suited to develop than China.



Quotes from Knowing China -

continued � Other things being equal, moving one factory from the

United States to take advantage of the low-cost labor in

China will lead to a higher national income for the United

States as a whole but a lower employment and lower

wage for the workers. When physical capital is moved

with the factory to China, there will be less capital and

hence reduced total output in United States. But the

capital that is moved will earn more in China to

compensate for the loss of output in the United States,otherwise the move will not be made. This leads to a net

increase in the US national income.



Quotes from Knowing China -

continued � ³China¶s economic expansion has several favorableeffects for the United States. First, China providesinvestment opportunities for US investors. UScorporations setting up factories in China can increasetheir profits which are good for their stockholders and for raising total national income. Second, China provides alarge market for goods produced in the United Statesand helps to increase employment in the industriesproducing such goods. Third, China produces a largenumber of inexpensive and high-quality consumer goods

being exported to the United States to benefit the American consumers. Economic cooperation with Chinais therefore beneficial to the United States and to Chinaas well.´



Conclusion

� US interests can better be served by promotingeconomic cooperation with China in the course of economic globalization rather than finding faults inChina¶s compliance with the terms of the WTO in order

to justify imposing higher tariffs on Chinese products.The latter action will not be effective in reducingcompetition from China, the strength of which is basedon economic fundamentals like high-quality andinexpensive labor rather than artificial industrial

subsidies; it will do economic harm to the US in stiflinginnovation and in preventing the natural healthydevelopment of the US economy in taking its rightfulplace in the world economic community.



Quotes from Editorial of the N ew

York Times March 27� ³The Schumer-Graham bill is based on afundamental misunderstanding of the root causeof America¶s economic problems. No question,the United States trade deficit and the loss of

American manufacturing jobs are very serious.But most of the imbalance with China is causedby Americans¶ insatiable appetite for Chineseimports for which there are few domesticsubstitutes. While it is unfortunate that the textileindustry has all but faded away in this country,the fact is that few American factories makethings like low priced apparel any longer.´

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