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Massive Subsidies and the Great Protectionist Walls of China

  • Under state control, many Chinese state-owned manufacturers are operating with the benefit of state-sponsored subsidies, including: rent, utilities, raw materials, transportation, and telecommunications services. That is not how we define a level playing field.

    —U.S. Department of Commerce Secretary Donald Evans22

  • China’s state-run banks have routinely extended loans to state-owned-enterprises that are not expected to be repaid. And right now, the big four state banks in China are, for all practical purposes, insolvent.

    —U.S.-China Economic and Security Review Commission23

As part of its broader mercantilist trade strategy, China has constructed a “Great Wall of Protectionism” around both its agricultural and industrial sectors. One of its two-pronged protectionist strategy involves a complex web of direct and indirect subsidies, particularly to promote key “pillar industries.” The second involves an equally complex set of trade barriers that provide shelter to some of China’s most vulnerable domestic industries and agricultural sectors.

In this regard, both energy and water are heavily subsidized, and cheap electricity is a significant cost advantage for China’s steel plants and heavy industry. At the same time, its state-owned enterprises, which still control key sectors of the economy such as oil and steel, benefit from free land; other enterprises are given preferential access to land by local and regional governments.

In addition, China’s state-run banks provide heavily subsidized capital and credit to Chinese enterprises. These banks currently and collectively have on their books tens of billions of dollars in loans without any expectation of repayment—essentially free money! Finally, on the subsidy side, many industries in both high-tech sectors such as biotech, electronics, and computers and middle-tech sectors such as autos and aircraft receive direct and substantial R&D support from the government.

It is not enough that China’s government seeks to provide its export industries with every possible advantage. Its government seeks to protect many of its domestic sectors. Such protectionism is achieved through a labyrinthine set of tariff and nontariff barriers.

For example, on the agricultural side, China has imposed so-called tariff-rate quotas on a wide variety of bulk commodities such as wheat, corn, cotton, and vegetable oil. Such tariff-rate quotas involve tariffs that rise with the level of imports.

On the industrial side, China has similarly used unjustifiable and idiosyncratic technology standards to build walls around its software, mobile phone, DVD, wireless networking, and other industries. In addition, it has used preferential tax treatment to promote and protect key industries such as semiconductors, limited access to domestic market channels, and imposed excessive capitalization requirements on foreign financial services.

Of course, in the wake of China’s entry into the World Trade Organization in 2001, these subsidies and protectionist measures were supposed to melt away. However, China’s compliance with both the letter and spirit of the WTO has turned out to be as big a farce and fiction as much of what appears in the heavily censored and, for the most part, state-controlled Chinese press. China is the reigning emperor of antidumping complaints against its industries, while China’s Great Wall of Protectionism provides significant cost advantages to numerous Chinese industries.

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