Is a US-China Industrial Subsidy Battle the Answer?

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A better solution may be the US, Europe and other developed nations working with China on a re-think of the outdated trade policies that allow these market distortions to be the centerpiece of international competition.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.

Link: http://nyti.ms/gbTqEE

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.”

Link: http://on.wsj.com/dN6Dzu

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About James McGregor
James McGregor is an American author, journalist and businessman who has lived in China for more than 25 years. Currently, he is chairman of APCO Worldwide, Greater China. A professional speaker and commentator who specializes in China’s business, politics and society, he regularly appears in the media to discuss China-related topics. McGregor is the author of the books "No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism" (2012) and "One Billion Customers: Lessons from the Front Lines of Doing Business in China" (2005). He also wrote the 2010 report "China’s Drive for ‘Indigenous Innovation’ – A Web of Industrial Policies." From 1987 to 1990 McGregor served as The Wall Street Journal’s bureau chief in Taiwan, and from 1990 to 1994 as the paper’s bureau chief in Mainland China. From 1994 to 2000, he was chief executive of Dow Jones & Company in China. After leaving Dow Jones, he was China managing partner for GIV Venture Partners, a $140 million venture capital fund specializing in the Chinese Internet and technology outsourcing. In 1996, McGregor was elected as chairman of the American Chamber of Commerce in China. He also served for a decade as a governor of that organization. He is a member of the Atlantic Council, Council on Foreign Relations, National Committee on US-China Relations and International Council of the Asia Society. He serves on a variety of China-related advisory boards.

One Response to Is a US-China Industrial Subsidy Battle the Answer?

  1. Jiang Ni says:

    It’s quite interesting to see that the Chinese government is advocating Indigenous Innovation on one hand, and making every effort to attract foreign technologies or companies to root in China on the other hand. The reason why Chinese government seems “gain an upper hand” in this subsidy battle lies deeply in the economic and political system of China. The incentives that Chinese government could give foreign companies partially come from the increasing taxes of the laboring people. There is statistics supporting that the increase in GDP exceeds the actual increase in wages (and taxes). According to a report, the increase of taxes in Shenzhen doubled the GDP growth in 2010. I don’t know what is going to happen if the government does not locate the wealth to its people but to add its political achievements.

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