Forum: Subsidies - a grey area in global trade

The question of subsidies is a notorious grey area in international trade negotiations (EU presses China on trade vow, warns over new HK law, June 24).

The World Trade Organisation defines a subsidy as any financial contribution from a government that provides a benefit to business entities.

This is problematic in two ways.

First, when applied to different economic systems, it becomes difficult to meaningfully distinguish between "industrial subsidy" and legitimate expenditure.

In private enterprise, government grants for research and development are usually considered legitimate. In China, however, the government provides direct investment for the same kinds of activities.

Second, the fixation with subsidies leads many to forget a more fundamental reality in economics, that of comparative advantage. It is only natural that a smartphone made and sold in China would cost far less than a Western equivalent due to lower labour and material costs, stemming more from the country's factor endowments than from government interference.

Until an equilibrium is found between the developed and developing worlds, it is unfair to judge subsidies in sweeping terms.

When it comes to trade matters, cooperation rather than confrontation is the key to mutual benefit.

Paul Chan Poh Hoi

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