The Trade Policy Collision of Our Times: China’s Subsidies Encounter Abba Lerner and David Ricardo

Abstract

This note takes a contrarian position on the significance of China’s subsidies, which are generally viewed as intractable and damaging to the rules-based system. It considers the implications of Lerner Symmetry for the aggregate effect of China’s subsidies and the implications of comparative advantage for the differential effects across industries, in a context where the effective differential tax burdens are unknown, as indeed is also the case with differential effects of tax and subsidy regimes in the rest of the world. It concludes that the net effect of China’s subsidies is much less than commonly supposed and that differential effects that may be damaging can be handled, as they have been in the past, through tools available under the WTO Agreement.