WTO strikes against China

The WTO has made a ruling that Chinese import surcharges on car parts violate WTO rules. This is the first time that the WTO has ruled against China since the country joined in 2001. China's intention with the policy was clearly to discourage imports of car parts and thereby encourage upstream production of inputs for its auto assembly industries.

So a clear victory for sound economics and the world trade regime? Well, read first the following from the distinguished economist John Sutton (hardly a rabid protectionist):

In the decade prior to WTO entry, both China and India used domestic content restrictions to stimulate development of the component industry, with a view to widening and deepening the benefits accruing from attracting international car-makers. The requirements were stringent, requiring about 70% domestic content within about 3 years, and this led to adverse comment from some of the car-makers who cast doubt on whether this target was feasible or sensible.
Policies of this kind are not always appropriate, or successful; but in the present cases the ‘infant industry’ has been successfully nurtured, and international car-makers show no inclination to turn away from local suppliers following WTO entry.

In other words, policies encouraging domestic content were successful--at least in these two important cases (Sutton speculates that they would have been less successful in smaller economies).

Perhaps such policies have outlived their usefulness and the WTO decision makes economic sense. Perhaps. But what is clear is that there is no room within the WTO procedures for the relevant economic arguments to have played a role. Domestic content preferences are illegal period, regardless of whether they help a country industrialize and grow. 

Comments

[David K]

I think it's premature to say the domestic content rules worked, local suppliers for a domestic auto industry would have been inevitable. If China supplies manufactured goods for every other country in the world, why not for its own industry?

[Per Kurowski]

Danni Rodrik “Domestic content preferences are illegal period, regardless of whether they help a country industrialize and grow.”

That reads like a somewhat biased phrasing of the issue since it is not the role of the WTO to help a country industrialize…but to help along that fair play gamesmanship that helps everyone to grow.

There are actually also poor consumers in not-industriazable countries that could benefit from the production being allocated to where it is most efficient. They are frequently forgotten in this supposedly global world but that still acts mostly locally within their small geographical backyards.

Can Professor Rodrik help individual countries to maximize their growth while at the same time do the same for the world?

When an ED at the World Bank I repeatedly found reasons to state that the one with really no representation of voice at all at the Bank…was the world or little planet earth itself.

[hari]

Under Unctad/Gatt trade regulations domestic value added content was strictly regulated, and OECD countries demanded(!) significant value added in order to qualify for trade preference of any type.

Not knowing the actual background of the Chinese case on spare parts for car manufacture ( it includes BMW and Mercedes!), initial reaction is that OECD argued as a bloc to undermine Chinese demand that they buy from local Chinese parts supplier.

Of course, this case can get complicated if and when the Chinese find out that western manufacturers are trying to stall the car industry platform which China is trying to domesticate.

The Indians had their case with Suzuki JV which, I suspect, was amicably settled by JV parties.

[derrida derider]

Pretty clearly there's a missing counterfactual here. Moving production, including components, to China and/or India was always going to be a nobrainer anyway, given the dual attractions of a rapidly expanding local market and low labour costs.

In other words, it's quite likely this all would have happened anyway and the actual effect of the restrictions was just to slow the growth of the domestic market a bit.

[Donald N]

Why is identifying the range of politically feasible alternatives beyond the purview of pure economics?

[DOR]

Which member is it that has the most WTO cases filed against it?

Oh, yeah.
USA.