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Former finance minister Lou Jiwei says the US is engaging in practices that it has accused China of, and both sides need to talk it out. Photo: Simon Song

US-China relations: ‘market distortion’ and ‘industrial subsidies’ must be defined in talks, Chinese ex-finance minister Lou Jiwei says

  • China’s outspoken former finance minister says the time has come to ‘set some ground rules’, as he accuses the US of adopting practices that it has accused China of
  • Former US treasury secretary Henry Paulson says it’s ‘going to be difficult’ for the two countries to make progress on trade

China and the United States must come to terms on how to define “market distortion” and “industrial subsidies”, because the US also appears to have adopted such practices, according to outspoken former Chinese finance minister Lou Jiwei.

The subsidy issue recently took centre stage in the ongoing series of disputes between the world’s two largest economies, as they reached a “stalemate” in trade talks after their phase-one trade deal expired at the end of last year.

The massive amount of money granted to certain sectors and corporations has long been a controversial component of China’s economic model, with other nations saying it gives China an unfair advantage in global trade at their expense.

Lou conceded that Beijing used to be in an unfavourable position in its dealings with Washington about a decade ago, as China allocated considerable funds to its industrial development. But he says the tables have since turned, with the US administrations of both Donald Trump and now Joe Biden trying to use industrial subsidies to keep manufacturing stateside, especially in the semiconductor industry.


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“The US has [distorted the market] as well, and it does that through legislation,” he said during a closed-door virtual dialogue on January 15 with the US’ former treasury secretary, Henry Paulson. The video was made public on Friday, nearly four weeks after the Global Asset Management Forum – Shanghai Suhewan Summit.

“The two sides can sit down together to talk about what is meant by ‘market distortion’ and ‘industrial subsidies’, and set some ground rules. It is time to do so,” said Lou, who is now director of the Foreign Affairs Committee of the Chinese People’s Political Consultative Conference (CPPCC), the country’s top political advisory body.

On February 4, the US House of Representatives passed the America Competes Act of 2022, authorising almost US$300 billion for research and development, including US$52 billion to subsidise semiconductor manufacturing and research into the key components that are used in automobiles and computers.

The bill was seen as a move to bolster American competitiveness with China amid the fierce and protracted tech rivalry between the two countries.

However, the US has recently doubled down its criticism of China’s subsidies while ratcheting up pressure on Beijing for failing to meet the purchasing commitments it agreed to under the two-year phase-one trade deal.
Deputy US Trade Representative Sarah Bianchi said last week that China’s state aid to domestic companies and its non-market economic policies and practices were a “serious threat to American economic interests”.

China’s commerce ministry hit back by saying the accusation “does not accord with the facts”, adding that China had completely abolished prohibitive subsidies, and that its subsidies complied with World Trade Organization rules.

“There is a view that the success of China’s economy mainly depends on government intervention. We object to such a view,” Ministry of Commerce spokesman Gao Feng said at a press conference on Thursday.

He attributed China’s economic growth over the past 40 years to its reform and opening-up policies, as well as successfully combining the market mechanism with government involvement.

Lou added that China and the US “should not compete with each other on [industrial subsidies and tariffs]”.

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“The US will suffer from doing these things,” he said, noting that the additional tariffs on Chinese goods were hurting American consumers and importers.

Lou also said he believes that competition between China and the US will span more than a decade, but he advised against Washington embracing a cold war mentality.

For his part, Paulson said that China and the US need a framework to define where and how the two powers are going to compete, where they are going to cooperate, and how to manage conflicts.

“I’d like to see us do more in the trade area. I think that’s going to be difficult, but at least I would like to see us complete phase one of the trade deal, extend it, and do something together on trade,” Paulson said.

And he expressed hope that Beijing and Washington will come together for a security dialogue and cooperate in areas concerning climate change, macroeconomics, financial access and financial flows.