Is a US-China Industrial Subsidy Battle the Answer?
January 17, 2011 1 Comment
As Chinese President Hu Jintao heads to Washington this week for talks with President Obama, they may both want to think whether the US and China really want to engage in an industrial battle fueled by government subsidies.
The New York Times in recent days reported that Evergreen Solar, America’s third largest maker of solar panels, is closing its main US factory and laying off 800 workers to relocate to the central China city of Wuhan where a Chinese joint-venture partner is offering a buffet of government subsidies that the US is unable to match. This is despite the fact that Evergreen has received some $43 million in assistance from the state of Massachusetts and the company possesses an innovative technology.
Meanwhile, the Financial Times and The Wall Street Journal reported that the Obama administration is beginning to fight back against Chinese industrial subsidies to support US exports and manufacturing jobs. The US Export-Import bank has agreed to offer a $437 million, 12-year loan so that GE can sell 150 train locomotives to Pakistan. The WSJ reported that Pakistan wanted the US locomotives, but that the Chinese models were 30% to 50% cheaper and came with favorable Chinese financing. With the locomotives to be manufactured in Erie, Pennsylvania, where the deal will support some 700 jobs, the Obama administration decided to beat the Chinese incentives and stretch the normal guidelines to do so.
If this progresses into a contest over who has the deeper pockets for subsidies, the US will be hard pressed to match China. American officials told the WSJ that Chinese export financing currently exceeds the total export financing of the Group of Seven industrialized nations combined.
A better solution may be the US, Europe and other developed nations working with China on a re-think of the outdated trade policies that allow these market distortions to be the centerpiece of international competition.
Excerpt from NYT on Evergreen:
Evergreen, in announcing its move to China, was unusually candid about its motives. Michael El-Hillow, the chief executive, said in a statement that his company had decided to close the Massachusetts factory in response to plunging prices for solar panels. World prices have fallen as much as two-thirds in the last three years — including a drop of 10 percent during last year’s fourth quarter alone.
Chinese manufacturers, Mr. El-Hillow said in the statement, have been able to push prices down sharply because they receive considerable help from the Chinese government and state-owned banks, and because manufacturing costs are generally lower in China.
“While the United States and other Western industrial economies are beneficiaries of rapidly declining installation costs of solar energy, we expect the United States will continue to be at a disadvantage from a manufacturing standpoint,” he said…
The closing of the Evergreen factory has prompted finger-pointing in Massachusetts.
Ian A. Bowles, the former energy and environment chief for Gov. Deval L. Patrick, a Democrat who pushed for the solar panel factory to be located in Massachusetts, said the federal government had not helped the American industry enough or done enough to challenge Chinese government subsidies for its industry. Evergreen has received no federal money.
“The federal government has brought a knife to a gun fight,” Mr. Bowles said. “Its support is completely out of proportion to the support displayed by China — and even to that in Europe.”…
… Other solar panel manufacturers are also struggling in the United States. Solyndra, a Silicon Valley business, received a visit from President Obama in May and a $535 million federal loan guarantee, only to say in November that it was shutting one of its two American plants and would delay expansion of the other.
Excerpt from WSJ on GE:
The Export-Import Bank of the U.S. is taking on China’s export machine, in a deal designed as a model for developed nations to challenge China in markets around the world. In a move crafted with White House involvement, the U.S. export-financing agency agreed for the first time to match China’s cheaper financing terms to get the Pakistan government to buy 150 General Electric Co. locomotives.
The financing terms for the $477 million deal required the U.S. to work with the Organization for Economic Cooperation and Development, a multilateral organization that monitors export-financing terms by developed countries—but not by China—to attempt to provide a level playing field. The move is one of several challenges the Obama administration has made to China, the world’s largest exporter, as its president, Hu Jintao, prepares to visit Washington next week.
“They’re winning deals in part because they’re not playing by the rules,” Ex-Im Bank Chairman Fred Hochberg said in an interview. “This says: We’re not going to sit idly by and let you buy business. We will compete and make sure you stand toe to toe with American companies and American workers.” …
… “Anytime the U.S. wins a trade case…it opens the door for other countries,” said Eswar Prasad, a professor of trade policy at Cornell University and former head of the International Monetary Fund’s China division. “It opens the floodgates for other countries and it emboldens other countries to act more forcefully against China.” But, he added, “how far you can push that strategy remains to be seen.”