Dani Rodrik notes that the WTO has just ruled 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...
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.
The decision is up for appeal, the final ruling gets made in 2009. If memory serves, the effect of China losing this case against the U.S. would be that if China doesn’t drop the program, the U.S. can place proportionate measures against China that also violate WTO rules. In one fairly extraordinary case against the U.S. these measures would be be to allow violation of intellectual property rules proportionate to the impact of variable U.S. rules on online gambling.
Anyways, I think this is actually an area where the WTO could helpfully evolve. I mean, it’s all well and good for China to pursue policies that help its economy but why shouldn’t that then allow other countries to pursue proportionate policies (or perhaps proportionate environmental or labor protections). Perhaps distinctions could be made between policies that accomplish demonstrable good for the country and policies, like corn ethanol subsidies, that just represent state capture by a powerful interest group. Good policies could be countered only by other good policies. Also countries could give aid, and be acknowledged as giving such, by waiving retaliation in such cases.
Unfortunately, the obvious economic problem is how to determine what’s a good policy. I don’t think there’s consistent ways of knowing in advance. So maybe you’d just have to set benchmarks and give something a couple years to play out, if it meets the benchmark, by saying increasing upstream production, than it qualifies as good. If it doesn’t, than the WTO becomes a helpful kill mechanism for failed policies.