Initial U.S.-China trade deal has major hole: Beijing’s massive business subsidies
By David J. Lynch
Dec. 30, 2019 at 5:00 p.m. EST
President Trump’s trade deal with Beijing leaves untouched the marriage of business and government known as China Inc. that American executives for nearly two decades have said tilted global markets against them.
Trump insisted for months that he wanted to resolve all outstanding trade issues with China in a single, comprehensive accord that would refashion the Chinese state’s economic role. As late as September, he rejected talk of a partial agreement, saying instead that he wanted “the big deal.”
The two sides discussed industrial subsidies in the early rounds of negotiations over an agreement that exceeded 150 pages. But Chinese officials resisted making structural changes, and by the time officials settled this month on an 86-page partial accord, any commitments to reduce subsidies had been excised.
Chinese steel mills, solar panel manufacturers, electric battery developers, shipbuilders and oil producers all benefit from a vast web of government support. Officials in Beijing arm Chinese companies against their foreign rivals with discounted loans from state banks, cheap land, low-cost electric power, and cash infusions from officially approved investment funds.
“The Chinese effort is dogged, long-term and very well-funded,” said John Neuffer, chief executive of the Semiconductor Industry Association. “That’s why the subsidy issue is such a big one for us.”
Even as the U.S. and China agree to trade truce, they are edging toward partial economic divorce
Under Chinese President Xi Jinping, who lacks his predecessors’ enthusiasm for the free market, the state spigot has gushed aid. China now devotes more than 3 percent of its annual output to direct and indirect business subsidies — a share of the economy that is roughly equivalent to what the United States spends on defense, according to economist Nicholas Lardy of the Peterson Institute for International Economics, a nonpartisan research group.
Some of that aid is similar to programs in the United States and other advanced nations, encouraging companies to retrain workers, use less energy or otherwise support government goals. But much of it is divorced from any consideration of profit and loss. So it fuels excess production of goods like steel, which spill into global markets, depressing prices and making it hard for American companies to compete.
Trump last year imposed tariffs on steel after the Commerce Department warned that the U.S. share of global production had fallen by nearly two-thirds since 2000, under pressure from heavily subsidized Chinese mills. At the same time, signs that China was lavishing state aid on efforts to supplant the United States as the global leader in advanced technology triggered Trump’s decision to launch his trade war with Beijing.
Subsidies are marbled throughout China’s state-led economy. For Chinese leaders, they are a principal tool of economic management, allowing them to steer credit, land, energy and other resources to favored state-owned enterprises as well as private companies that Beijing sees as strategic.
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