Monday, March 26, 2012

Clyde Prestowitz gives a clear answer on how to balance free trade vs. targeted industrial policy

Clyde Prestowitz uses the example of Chinese support for solar panels and solar cells to discus how government policies can skew rational free market trade offs.  In this case, the Chinese intervention has driven 13 US companies (engaged in next gen research) out of business.
Further, he presents a great, simple solution!

The root of the trouble here is that the fundamental assumption of private enterprise driven free markets and comparative advantage-driven free trade is wrong. When governments have five-year plans that target certain industries for development aided by a plethora of incentives, the assumptions of free trade are out the window. This is even more true when those governments have powerful bureaucracies with broad discretionary powers to administer "guidance." It is even more true when the governments are authoritarian, and it is even more true when state owned enterprises are involved. When this combination of forces is present, you can be sure that the outcome is not going to be determined by unfettered market forces. So we shouldn't act like we think it will be.
Rather than pretend a free trade situation exists when it doesn't, we should define a targeted industry category of trade and establish a special set of rules to govern it separately from standard WTO-style trade. This could be done within the WTO or bi-laterally with particular countries, but in either case it would allow immediate imposition of offsets to market distorting subsidies and protections based on the presence of industry targeting policies. There might be a system of the issuance of warnings and consultation and a scaling of the offsets. But there would be no long delays and also no bitter exchanges of insulting pejoratives about cheating and unfairness between the parties. It would all just be business.
"Ah, I see that you, government X, are targeting industry Y. That is certainly your privilege. I can understand that you think it an important industry for you to have in the future. We think it's important too and while we are not especially targeting it we are invoking clause Z of the WTO to offset any negative impact on our industry of your policies. I'm sure you understand. Of course, we always stand ready to discuss the situation with you and to make appropriate adjustments. Many thanks for your understanding and cooperation."
Simple, polite, no lawyers, no expenses, no damages. Just business. That's how it could be if we scrap the free trade charade.  


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