Looking under All That Paper: The Paper Flap
Push is coming to shove over the Chinese-American paper flap. In the wings are other American companies. Some will makes claims of similar subsidies; others will use the opportunity to complain that China is not liberalizing fast enough in other areas.
As numerous articles point out, since 1983 the U.S. has granted China a free subsidy pass because it was an NME, a nonmarket economy. Accession to WTO status presumably started the switch to a market driven economy.
What is an NME? In short, a centrally controlled economy, one in which the government seeks to determine economic activity largely through central planning. Movement from an NME to a full-market economy is a complex and dynamic one. The Department of Commerce can act if it determines that a country is indeed subsidizing an industry. Such a country is not acting in accordance with free market principles. In fact, because the transition to a full-fledge market driven economy is dynamic, the DoC can move the goalposts, change the rules, as it were. As an economy liberalizes, more forceful definitions can be employed. See
The Economics of the Non-Market Economy Issue: Vietnam Catfish Case Study
for an examination of an NME controversy, as well as to some insights into the WTO and its principles.
The WTO requires that all free-market countries treat each other equally, that all strive to become market-driven, not centrally planned economies. There are three points I wish to make here:
The first is that the Department of Commerce may be correct that China is not allowing free market forces to determine the behavior its paper industry, that it is, in fact, distorting or subsidizing this industry. The question is—and it is a critical one:
Is China in this case abandoning “free market principles”? If it has, then those who are decrying the latest DoC move are not defending their own principles.
The second point is more general one. Maybe it is more of a question than anything else. Is China still a command economy? I would say it is. But I will address my peculiar reason for saying at the end of this post.
The third point is an observation and again a question. China has denied Carlyle’s offer to buy 85% of Xugong Construction Machinery. Carlyle has to be content with a 45% ownership. Has China resisted opening its markets to sales and acquisitions in a manner that violates the spirit of WTO membership?
There are a number of powerful forces moving silently behind the paper flap. Some of them are U.S. companies decrying unfair subsidies and currency manipulation. Others are large MNC’s who want a larger and larger share of the Chinese pie. Another is American labor that feels that it has been left out to dry as American companies have sought to profit from cheap Asian labor.
On this last score, I would like to offer my own peculiar thoughts, especially as to what a command economy is. Controlling and subsidizing prices is certainly one aspect of a command economy. Governmental control or ownership of companies is another. A centrally controlled economy, if it seeks to control the costs of production, is yet another. Into that cost of production, I would add labor. A free market economy uses governmental regulations to ensure that the true costs production are fairly determined by the market place. Without adequate rules to ensure fair competition within its labor force, China is in effect subsidizing the costs of production.
Whether you agree with my last point or not, there is a lot bubbling to the surface over some pieces of paper.