China’s Subsidies Reconsidered: Implications of Lerner Symmetry and Ricardian Comparative Advantage

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 (not to mention tariff 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 of concern can be handled, as they have been in the past, through tools available under the WTO Agreement.

Keywords: China, subsidies, Lerner symmetry, comparative advantage

JEL Classification: F13