Thread by @Brad_Setser

The market's attention is all on deal or no deal.

But there should be no doubt that China maintains a host of discriminatory policies. I have long thought "buy Chinese" import substitution policies should be a bigger U.S. priority for example.

ft.com/content/b55fc6…

The U.S. export limits no doubt have accelerated China's efforts to displace imported components from its supply chain. But the push "to increase China’s reliance on home-made technologies" predates Trump's trade war (it is all over China 2025)

2/x

And it isn't clear if this new policy is actually a WTO violation -- at it seems "buy China" requirement isn't formally a law, but rather a directive from the Party.

3/x

That fits squarely into Mark Wu's argument about how China, Inc circumvents many of the the WTO's disciplines. "Party" guidance wasn't part of the negotiations.

harvardilj.org/wp-content/upl…

4/x

China's state backed fund to support import substituting advanced manufacturing likely poses a similar legal challenge. It is structured as a fund, not a subsidy - so think (not a lawyer) you need to prove the investment was made on non-market terms

wsj.com/articles/china…

"Investors" in the fund include the state tobacco monopoly (got to show the flag to keep the monopoly), the state railway company and a state auto company ...

but how can you prove they didn't just see a market opportunity?

the advanced manufacturing fund (and the latest national chip fund) are relatively clear cut cases. The new chip fund, incidentally, is also supported by the tobacco monopoly.

wsj.com/articles/china…

But there are less clear cut cases too. Huawei's efforts to displace imported chips from its supply chain (via HiSilicon) are long-standing. Natural effort to capture more of the profit from its phones and telco equip't, or doing its part to support China's industrial policy?

Obviously the U.S. designation (and the threat of designation) provided additional impetus for these efforts. But they started long ago ...

wsj.com/articles/huawe…

Big picture: China's imports have been growing more slowly than China's economy for the last 6 or 7 years. And it is pretty clear that this reflects Chinese policy, not just the natural evolution of the market.

But that import substituting policy has been conducted with a lot of "Chinese characteristics" so it hasn't naturally generated a clean-cut WTO case against the import displacing policies.

And any phase 1 deal won't change these policies either --

Particularly as the broader Sino-American rivalry has given them additional impetus.