Why Rest Of The World Need To Stand Upto China – An Interesting View Point

The article presents an intersting view point about Chinese Buisiness Practices and advises serious review .
sent by Sh Sanjiv Kishor in public interest, visit Haravard Blogs


How Chinese Subsidies Changed the World

by Usha C.V. Haley and George T. Haley

Last week, LDK Solar, a struggling Chinese manufacturer of solar wafers and panels, announced that it had missed $24 million in bond payments. This news followed the bankruptcy in March of Wuxi Suntech, the main operating subsidiary of the world’s largest maker of solar panels, after it defaulted on a $541 million bond payment.

It is no coincidence that this upheaval in the Chinese solar industry is occurring at a time when the central government’s subsidies that had financed the industry’s explosive expansion have declined even as problems in the global solar-panel market have soared.

Since 2008, through government subsidies, the manufacturing capacity of China’s solar-panel industry grew tenfold, leading to a vast global oversupply. A surge in exports of Chinese panels depressed world prices by 75%. In 2012, China’s top six solar companies had debt ratios of over 80%. Our research showed that without subsidies, these companies would be bankrupt. If the Chinese government sticks to its decision to stop funding unprofitable solar-panel manufacturers and support a revamping of the industry, more bankruptcies and restructurings are sure to follow.

While it is encouraging to see the Chinese government rethinking its support of the solar-panel industry, it would be foolish to interpret this move as a reversal of its overarching policy of aggressively subsidizing targeted industries in order to dominate global markets.

A Rise Fueled by Subsidies

For the past five years, we have examined how China swiftly moved from being a global bit player and net importer to the world’s largest manufacturer and exporter in capital-intensive industries where it had no labor-cost advantage. We witnessed industrialized countries become exporters of commodities and scrap to China. In 2000, labor-intensive products constituted 37% of all Chinese exports; by 2010, this fell to 14%.

In parallel, from 2004 to 2011, U.S. imports of technologically-advanced products from China grew by 16.5% percent annually, while similar U.S. exports increased by only 11%. In 2011, the U.S. imported 560% more technologically-advanced products from China than it exported to that country. Meanwhile, the annual U.S. trade surplus with China in scrap and waste grew from $715 million in 2000 to $8.4 billion in 2010.

Government subsidies to produce technologically advanced products and undercut foreign manufacturers have buttressed China’s trade prowess. Since 2000, the value of Chinese exports more than quadrupled. In 2009, China surpassed Germany to become the world’s largest exporter. In 2010, it overtook Japan to become the second-largest manufacturer, and its foreign-exchange reserves became the largest in the world. Last year, China overtook the U.S. to become the biggest trading nation (as measured by the sum of goods exported and imported).

In the Chinese industries we studied — solar, steel, glass, paper, and auto parts — labor was between 2% and 7% of production costs, and imported raw materials and energy accounted for most costs. Production mostly came from small companies that possessed no scale economies. Yet, Chinese products routinely sold for 25% to 30% less than those from the U.S. or European Union.

We found that Chinese companies could do this only because of subsidies they received from China’s central and provincial governments. The subsidies took the form of free or low-cost loans; artificially cheap raw materials, components, energy, and land; and support for R&D and technology acquisitions.

Since 2001, when China joined the World Trade Organization, subsidies have annually financed over 20% of the expansion of the country’s manufacturing capacity. The state has willingly paid the price of economic inefficiency to accomplish political, social, economic, and diplomatic goals. Huge Chinese subsidies have led to massive excess global capacity, increased exports, and depressed worldwide prices, and have hollowed out other countries’ industrial bases.

Case Examples: Steel and Paper

Take steel. In 2000, China was a net importer of steel with 13% of world imports and 16% of global output. By 2007, it had become the world’s largest producer, consumer, and exporter of steel. Tellingly, energy subsidies to Chinese steel totaled $27 billion from 2000 to 2007. Today, China produces half the world’s steel. Even though its highly fragmented industry has no scale economies or technological edge, Chinese steel sells for 25% less than U.S. and European steel.

Similarly, $33 billion in subsidies from 2002 to 2009 helped China triple paper production and overtake the U.S. to become the world’s largest paper producer. This is despite the fact that its industry has no scale economies, is geographically fragmented, and the country has one of the smallest amounts of forest in the world per capita. Even though its industry has to import vast amounts of pulp and recycled paper (mostly from the U.S.), Chinese paper sells at a substantial discount to U.S. and European paper.

Other Nations Must Fight Back

Some have argued that Chinese subsidies help consumers by keeping prices low. Our research leads us to conclude that like other monopolies, Chinese companies will raise prices as international competition retreats.

Because of massive Chinese subsidies to several industries, no free trade exists and markets have failed. To survive, U.S. and European companies must seek government support to open Chinese markets and to protect themselves from subsidized products domestically. And national governments and trade blocs must heed these calls. If they don’t significantly increase pressure on Chinese governments and businesses, the devastation that Chinese subsidies have wreaked on other countries’ economies will continue.

More blog posts by Usha C.V. Haley and George T. Haley

More on: China, Competition, Economy

Usha C.V. Haley and George T. Haley

Usha C.V. Haley is a professor of management and the director of the Robbins Center for Global Business and Strategy at West Virginia University. George T. Haley is a professor of marketing and the director of the Center for International Industry Competitiveness at the University of New Haven. They are the authors of Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy.

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If only these industries in China can improve on their policy of economy of scale, this would give them an edge, therefore putting the US and EU on a constant battle for market dominance_ the consumers would just fold their hands, cross their legs, enjoy the fight and pay per view._ but like they say_ the Chinese government would soon prove that such subsidies are too good to be true and when all these competitors back off, d consumers would be on a long queue with a bullion van just to buy a roll of tissue paper.

Yesterday 06:29 PM


Ilouafi Youssef, Telecommunication Engineer , I worked in Telecommunication Market for 7 years ,Co-Founder of LED Displays start-up and Now I created a Company specialized in Strategy consultations.

Nice Article.
I think the main reason of the increased value of USA imports from china is due to the fact that more and more USA high technology companies are moving to China and serving USA market from China.
I usually use the interdependancy among the following three elements to understand the Economy choice : Water,Tomatoes,Tourists .
Thank You.
Ilouafi Youssef

(Edited by author 21 hours ago)

Yesterday 11:25 AM
1 Like


Usha Haley

>>I think the main reason of the increased value of USA imports from china is due to the fact that more and more USA high technology companies are moving to China and serving USA market from China.<<

This is true in many industries, such as auto parts, where China has a trade deficit with every major auto-producing country, except the USA. But it is also true that Chinese producers are moving up the value-added chain. For example, in auto parts, a system of government support (including subsidies), synnergies, and foreign partners have helped propel China visibly and in a relatively short time towards more higher-valued production.

Yesterday 12:35 PM
in reply to Ilouafi Youssef


Ilouafi Youssef, Telecommunication Engineer , I worked in Telecommunication Market for 7 years ,Co-Founder of LED Displays start-up and Now I created a Company specialized in Strategy consultations.

I quite agree with you too.
I have in mind the fact that China’s economy was build on a high consummation of local natural resources this short term advantage was encouraged by the no limitation in Carbon emission . It was the opposite model in comparison with JAPAN where natural resources are rare.
In the China’s process of aligning with the global market rules , I see struggling steps .A similar example of China is CHILIE where I see some positive signs.

Thank You.
Ilouafi Youssef

Today 06:19 AM
in reply to Usha Haley



The Chinese have continously managed to manipulate world markets . The numbers cited here clearly outline the fact that countries should hold China accountable for this kind of manipulation and hold them accountable at the WTO.

04/27/2013 11:07 AM
1 Like



The figures that you have quoted as subsidies in the field of Solar Energy,Steel,Paper are cold facts. I am surprised that concerned governments/industry have not taken up this issue with WTO.

04/27/2013 08:08 AM
1 Like


Usha Haley

Hi. Yes, the WTO has taken up these issues as have governments and companies in the US and EU. Last year, solar manufacturers won a landmark case in the US and this year it is being considered in Europe.

Yesterday 08:16 AM
in reply to V.Ramakrishnan



Your commentary is telling.Few countries in the world have woken up to the fact that the politico-military-industry model developed by China is gobbling up energy resources,manufacturing,competition and if the Chinese can maintain this for a couple of decades then they and not US will be the only SUPERPOWER nation in the world.


04/27/2013 03:30 AM
1 Like


Usha Haley


You may also like the article on the issue and the Chinese economy in the latest issue of the Economist:

Perverse Advantage


Yesterday 08:21 AM
in reply to Vishal



if the subsidy model is unsustainable, wouldn’t it collapse under its own weight, when China tries to rebalance its economy? The need for rebalancing is evident given the explosive growth in China’s shadow banking system as a result of financial supression and managed interest and exchange rates. The CCP is already becoming aware of the extent of bad loans in the provincial govt and the fact that the big 4 Chinese banks may effectively be broke and had tried to intervene.
I assume a similar fate will have to be met by the inefficient money sucking SOE’s. As far as the lack of a proper functioning market is concerned, I would think that opportune investors will rapidly fill the gap left by these failing SOE’s.

Yesterday 11:27 PM
in reply to Usha Haley


Usha Haley

Hi Nitin
Good question. We found that subsidies to Chinese industry have been growing in tandem with reforms and restructuring. This is in part because of the number of governmental branches (provincial as well as central) that administer them and in part because they are seen as an easy fix to social problems such as unrest and unemployment. Their demise does not seem on the horizon any time soon.

Today 06:47 AM
in reply to Nitin



I guess this explains why we’re able to print money like there’s no tomorrow and yet see very little in terms of inflation. Could be why so many governments choose to ignore this as a problem.

04/26/2013 10:28 AM


Sanjib k Chaudhuri

I agree that other countries should fight back But the question is why other countries didn’t take up for so many years.and next question is how long china will be able fianance all these loses

04/25/2013 09:40 AM



Because the companies that are on the receiving end of those subsidized goods are getting a free ride. The price we are paying is in jobs and long term stability.

04/26/2013 09:27 AM
in reply to Sanjib k Chaudhuri



I’m just glad that our President and other elected leaders constantly point to China’s solar industry as something we should be trying to emulate. It’s awfully comical.

04/25/2013 08:56 AM


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