How China Pulled So Far Ahead on Industrial Policy
The United States and Europe are trying to catch up to a rival skilled in using all the levers of government and banking to dominate global manufacturing.
By Patricia Cohen, Keith Bradsher and Jim Tankersley, The New York Times, May 27, 2024
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China’s industrial dominance is underpinned by decades of experience using the power of a one-party state to pull all the levers of government and banking, while encouraging frenetic competition among private companies.
China’s unrivaled production of solar panels and electric vehicles is built on an earlier cultivation of the chemical, steel, battery and electronics industries, as well as large investments in rail lines, ports and highways.
From 2017 to 2019, it spent an extraordinary 1.7 percent of its gross domestic product on industrial support, more than twice the percentage of any other country.
That spending included low-cost loans from state-controlled banks and cheap land from provincial governments, with little expectation that the companies they were aiding would turn immediate profits… When the investments resulted in overcapacity, suppressing the profitability of China’s companies, Beijing was willing to ride out the losses. …[end quote]
This is a very good article with a focus on clean energy manufacturing (EVs, solar panels, etc.). In 2022, Beijing accounted for 85 percent of all clean-energy manufacturing investment in the world, according to the International Energy Agency.
Many aspects of Chinese economic strategy contrast strongly with western free-market, free-trade capitalist strategy. Shareholders (and managers) often have a short-term focus and are not willing to ride out losses. Overcapacity leads to suppressed prices that undermine profitability. (The semiconductor industry is a prime example of this.) The U.S. government will not step in to support unprofitable companies until they become profitable.
Chinese economic strategy has had a Macro impact on the U.S. economy with the loss of millions of manufacturing jobs after 2000.
Companies in the sectors that are targeted by Chinese strategy are likely to be stressed.
The U.S. government has shifted strategy to protectionism (encouraging our allies to do the same) but that is inflationary and there’s no guarantee that U.S. companies will maintain profitability.
China is playing the long game in a way that the U.S. market isn’t able to handle. The heart of the Center for Strategic International Studies report is the careful calculation of total industrial policy spending by China and the other economies, combining estimates from multiple tools, among them direct subsidies, tax breaks, below-market credit, and state investment funds. China’s industrial policy spending is enormous, higher than their defense spending. In dollar terms, China spends more than twice as much as the United States.
There are many historic instances of the U.S. government financing and/or providing special benefits to companies (@Goofyhoofy has written about this many times) but in the vast majority of cases U.S. companies compete in the free market without significant government support.
In 2019, manufacturing was only 11% of U.S. GDP while it was 27% of China’s GDP. Given the overwhelming importance of the services sector in the U.S. it’s likely that our government is more likely to use protectionism than spend a lot of money supporting manufacturing.
Wendy