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The Right Way to Fight a Trade War

by Michael Levi
January 11, 2011

Keith Bradsher reports in yesterday’s New York Times that Congress is forcing the Defense Department to forego purchases of Chinese solar panels. My initial instinct was to scream “Protectionism!” – but there’s actually a strong case for what Congress is doing.

The situation is pretty straightforward. China hasn’t signed the WTO agreement on government procurement. That means that Chinese government purchases are exempt from China’s free trade obligations. But the state is a massive piece of the Chinese economy. In practice, then, Beijing uses that loophole to mandate domestic content for a huge amount of its economic activity. The United States, whose government is a much smaller part of the economy, can’t behave similarly. The result is a perfectly legal Chinese policy that is in practice unfair.

The response that Congress has forced on the Pentagon responds by using WTO law in a tit-for-tat fashion. The United States has signed the agreement on government procurement. That allows it to limit government contracts to other states that have signed the agreement too. That’s what Congress has told the Defense Department to do – and, since China hasn’t signed the agreement, it will be left out.

This seems reasonable to me. It’s perfectly legal. It will help mollify some of the forces that are calling for much more draconian (and counterproductive) protectionist measures from the United States. It isn’t economically damaging to the United States in the way that broader trade barriers might be – sure, the Pentagon will spend a bit more on solar panels, but not much. And it’s inherently limited: since the government is a limited part of the U.S. economy, there’s isn’t a huge danger of descending down a slippery slope.

But, for the same reason, I also wouldn’t expect it to yield much. The U.S. government procurement market is tiny compared to the size of the market that China is currently shielding from free trade rules. Beijing isn’t going to open up massive swathes of its economy just to sell a few solar panels to the Pentagon. The huge structural asymmetries between the U.S. and Chinese economies mean that WTO law provides only a limited guide to how best to approach the market access problem. More creative solutions – and quite possibly more contentious ones – will ultimately be required.

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