China Yields

From the WSJ:

WASHINGTON -- China moved to address a flash point in economic relations with the U.S., agreeing to end trade-distorting subsidies to Chinese manufacturers, a senior Bush administration official said.

"This outcome represents a victory for U.S. manufacturers and their workers," U.S. Trade Representative Susan Schwab said in a statement Thursday. She added that the settlement "also demonstrates that two great trading nations can work together to settle disputes to their mutual benefit."

Quite right. But there has got to be some sort of quid pro quo for this. Perhaps, in exchange, the U.S. will lessen pressure on China to let the RMB appreciate. Or, perhaps the U.S. has agreed to lower agriculture subsidies (I doubt it). Perhaps China is just looking for some positive P.R., but I kind of doubt they'll get it. Perhaps China is looking for some leverage in future negotiations. I'm not sure, but something is coming out of it.

But no matter what it is, it's a good thing. China's manufacturing industry is pretty well established at this point. Continuing to distort the markets through subsidies doesn't make long-term political sense, nor does it make economic sense.