Rampant Chinese Subsidies Fueling ‘Unfair’ Foreign Purchases

Rampant Chinese Subsidies Fueling ‘Unfair’ Foreign Purchases
By twicepix (http://www.flickr.com/photos/twicepix/3295459278) [CC BY-SA 2.0], via Wikimedia Commons

The Chinese government has come under pressure in recent years regarding policies that policymakers from other countries regard as giving Chinese companies unfair competitive advantages. These advantages include a currency that many analysts believe is under-valued, cheap land sales, loan rebates, tax breaks, subsidies, and cash hand outs. Now, with Chinese companies enjoying an overseas purchasing binge, many people are beginning to question whether these amount to unfair competitive advantages which are fueling Chinese purchasing behavior.

Rampant Chinese Subsidies Fueling 'Unfair' Foreign Purchases

In 2012 government subsidies in China rose approximately 23 percent to 13.83 billion dollars. Some of these subsidies include cash for research and development, and environmental reform, both of which are also heavily subsidized in the United States. These subsidies do not include advantages gained from a devalued yuan, which some believe could be devalued by as much as 25 percent. If true, this would amount to effectively a 25 percent rebate on all exports, and also a 25 percent tax on all imports.

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Harvard Business School Report Points to Subsidies

These subsidies are having profound effects on the global economy. A recent report published by the Harvard Business School found that Chinese companies enjoyed only small advantages with their labor costs, since such costs make up less than 7 percent of total costs. Further, Chinese companies must contend with the same high raw material energy costs as everyone else. So what then is giving China such a huge leg up on foreign competitors?

The authors found that massive government subsidies have been allowing Chinese companies to sell at prices far below their competitors. For example, China has raised its total share of steel output from 16 percent to more than 50 percent since 2000. This growth was supported by more than 27 billion dollars in subsidies. The authors contend that as a result, Chinese companies are able to sell their steel at 25 percent less than competitors in the European Union and United States.

Further, Chinese firms may gain unfair competitive advantages when supplying goods for public infrastructure projects around the world. Subsidized steel makes purchasing steel bridges from China far cheaper than purchasing them from American or European counterparts. In 2011, the California state government infamously purchased replacement sections for the San Francisco Bay bridge from China. Eschewing federal funds that would have required the bridge to be made in America, California was able to save an estimated 400 million dollars on the project.  Although the concrete deck will be poured in California and the bridge assembled by Americans, the steel structural parts were all made in China.

Are Subsidies Making Foreign Purchases Easier for the Chinese?

It’s fair to now wonder if these subsidies are allowing Chinese companies to purchase overseas competitors. Facing almost no competition at home from foreign firms, and having profits subsidized, if not directly handed out, by the government, many Chinese companies are finding themselves with extremely healthy balance sheets. As such, making foreign purchases will be far easier for Chinese firms that have been able to accrue years of subsidized profits and enjoyed subsidized sales.

Still, if this savings is generated primarily because of questionable subsidies, it’s fair to wonder if the costs of market distortions will outweigh the short-term savings. While some have argued that subsidies actually help consumers by lowering prices, it’s worth noting that these subsidies can also cause lost jobs and destroy industries more quickly than they are naturally replaced.

Now, many governments around the world are beginning to pressure China to ease off on subsidies. The European Union has taken strong action against Chinese solar panels, while pressure continues to build in the United States to force China to liberalize its currency controls. And as Chinese companies continue to move forward with overseas purchases, they may come under increasing scrutiny regarding any subsidies or support they have received from the Chinese government.

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