[SCMP Column] In praise of subsidies

January 12, 2019

Before you set out to demonise an opponent, you must first create a straw man – a crude stereotype with enough snippets of truth to make the unreasonableness of the opponent seem plausible.

So it is that Trump’s international trade team have set out to demonise China’s distinct and – over the past 30 years – strikingly successful economic model.

The characteristics of this particular straw man are built around autocratic, centralized political control by the Communist Party, state-owned enterprises and mass exploitation of subsidies to subvert the market-driven efforts of international competitors.

They are embellished with manipulation and theft of intellectual property, industrial espionage on a mass scale, and insurmountable barriers for foreign companies to compete effectively in the China market.

As with any straw man, there are threads of truth here. But the complaints are not as clear cut as the stereotype suggests. Nor are China’s transgressions unique or distinctive. Every economy – clearly including the US – has large numbers of local companies with “special” influence on government decision-making, preferential access to huge procurement business, and privileged control of local monopolies or oligopolies.

Industrial espionage and IP theft are as old as the hills, and China’s transgressions are only visible because of the very large numbers in the west who are well-coached in the craft. These are an ugly and widespread reality rather than sins uniquely committed by Chinese.

As for industrial policies, the UNCTAD Transnationals Institute in Geneva says at least 86 countries worldwide have such policies – including the US. China’s is based firmly on Germany’s “Industry 4.0” policy, and is distinctive not because it has an industrial policy as such, but because it seems to have been unusually successful in delivering results.

And every government uses subsidies, often on a massive scale, to shove economic development in a particular direction, and to support those industrial policies. Ask any US car maker how many billions of dollars they have received from federal and state governments as inducements to open a plant in a particular city – or to agree not to close a plant – and the number will be larger than you think.

This of course does not mean that Beijing’s extensive use of subsidies is fully justifiable. I’m sure they are just as able to waste taxpayers’ money as any other team of government bureaucrats. But they are not unique or distinctive in the way many US officials claim.

On the contrary, the way China has developed and implemented its Made in China 2025 strategy seems quite savvy, carefully focused on escaping from the miserable unskilled low-end manufacturing roles assigned in globalized production chains, and building a middle class with the skills and earning power needed to underpin basic consumer comforts.

Scour through the 10 key high tech manufacturing sectors in which state-owned enterprises and leading “private” companies have been urged to become more self-reliant and set minimum market share targets of between 60 and 90 per cent, and it is easy to see great sense in the priorities set, and significant progress in the way these priorities have been implemented.

I have no qualms with the billions poured into supporting the development of wind and solar power, for example. While other economies have talked, China’s engineers have used China’s power to “scale” production across its huge economy to develop bigger and more efficient turbines which have reduced its reliance on hugely polluting coal power plants, and in turn transformed the potential of renewable energy worldwide.

More recently, the subsidies focused on developing the electric vehicle industry (estimated by the US-based Center for Strategic and International Studies at US$58.8bn over the past decade) have made China the world leader in this field. As a result, around half of all battery and plug-in hybrid vehicles due to be sold this year will be sold in China. Shenzhen’s taxis and buses are now all battery powered.

Total numbers of electric vehicles on the road are still small in global terms – about 668,000 in 2017 out a world total of 82m cars sold, according to JATO Dynamics, the London-based automotive intelligence group. But Beijing targets 2m electric vehicles by 2020 with numbers almost doubling annually after that. While others talk, this subsidy policy has already begun to make a difference in terms of street-level pollution, and in global CO2 emissions.

Contradicting the straw man mythology, subsidies have not been reserved for a small number of monolithic state-owned enterprises, nor only for Chinese companies. There are today over 100 electric vehicle manufacturers competing fiercely with each other across the Mainland. Thirty alone are making electric buses.

Underpinning these, over 60 companies are competing to supply lithium-ion car batteries, including foreign companies, often partnering with local companies. Just in case these companies disappoint, Beijing has also thrown billions in subsidies into solid-state batteries, and over US$12bn on hydrogen fuel-cell technology.

Rather than relying on state-owned monoliths, Beijing has consciously spawned fierce competition across the entire sector with the clear assumption that over the coming decade there will be significant consolidation. Requirements to qualify for subsidies are being progressively tightened. Subsidies for lithium-ion batteries are expected to be phased out by 2020, and for hydrogen fuel cells by 2025.

This massive use of taxpayer funds may feel hard to justify in the US or Europe where deeply-entrenched car manufacturers have migrated away from the internal combustion engine only reluctantly, but if China’s subsidies and industry policy can wean the world’s vehicle markets away from fossil fuels then we will all have a lot to be thankful for: transport accounts for around 28 per cent of greenhouse gas emissions, and with around 35bn tonnes of CO2 currently being pumped up into the atmosphere every year, converting even half of all vehicles to batteries or hydrogen would slash emissions by around 5bn tonnes a year.

Trump’s trade team claim China’s distinct model constitutes an existential challenge to the liberal market economy painstakingly built over the past century. What I see from here in Hong Kong is much more tooth-and-claw competition than Trump’s men admit, and an industrial policy that is different only because it is being effectively implemented. Forget the straw man, and there is something to learn from that.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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