Over the past two years, Washington has unilaterally and repeatedly imposed tariffs and otherwise pressured China based on a fundamental accusation — that China practices “state capitalism,” or statism.”
The 2016 report to Congress by the U.S.-China Economic and Security Review Commission said that China had been pursuing a series of industrial policies to help its domestic companies gain an unfair advantage over their foreign competitors in the overseas market.
Dennis Shea, the U.S. ambassador to the World Trade Organization, said in 2018 that China’s economic model is “trade disruptive.” Other Washington élites blame China for “mercantilism.” Some assert that the Chinese government controls all its key economic entities through public ownership.
The accusations are not based on hard facts but on interpretations or fabrication. Such misinterpretations of the Chinese economic system are extremely misleading and destructive.
Private sector accounts for 60 percent of Chinese economy
The Chinese Constitution stipulates that the country’s economic system is owned by all the people, but private enterprises exist as well. In fact, private ownership accounts for the largest share of GDP — 60 percent. That’s considerably higher than the state-owned sector’s 34 percent. China depends on the private sector for 50 percent of total tax revenue, 65 percent of new patents, 75 percent of technology innovation, 80 percent of new products and 90 percent of job creation. One can only imagine what a catastrophe it would be for the whole economy if the government exercised exclusive control over leconomic entities through public ownership. Supporting the state-owned enterprises to the exclusion of the private sector would mean that China could lose major tax revenues, most of its new technology and new jobs.
In fact, the private sector has been consistently supported by the government. During the eight years from 2010 to 2018, the industrial asset value of SOEs increased by 77.6 percent, while that of the private sector increased by 104.8 percent. Guangdong, Zhejiang and Jiangsu provinces have experienced much faster economic growth than Northeast China precisely because of the robust private sector.
Nor can subsidies to SOEs drive Chinese export growth. In 2018, SOEs accounted for only 10.3 percent of Chinese exports of goods, while 48.7 percent came from the private sector and 41.7 percent came from foreign invested enterprises. If the government were to subsidize SOEs alone to help 10 percent of the country’s exports, it would, beyond any doubt, create an unfair competitive advantage over the other 90 percent of exporters. If true, such a policy — helping the 10 percent at the expense of the 90 percent — must be hidden from public knowledge somehow.
No, that’s not how it works. The state-owned economy is does not equate to estate capitalism. Rather, it is a logical part of the overall national economy in many countries. The World Bank reports that the share of the state-owned is 72 percent in Norway, 68 percent in Sweden, 56 percent in Finland, 54 percent in Luxembourg and 52 percent in Iceland — all far higher than in China.
Among the leading Western economies, France has a state-owned economy representing 31 percent of its total, only slightly lower than China. The key entities in France’s nuclear energy, high-speed railway and electricity industries are all state-owned. The US Postal Service is also state-owned. So the question is not ownership, but the rule of law. In other words, enterprises, whatever their ownership, must operate and compete on a strict basis of equal compliance with the law. As such, they receive equal protection.
Core principle behind industrial policy is non-discrimination
The Washington elites make a big fuss about China’s industrial policy and government support for enterprises, as a fatal problem in China’s economic system. In fact, it is a common practice in many countries, including the U.S.
The United States was among the pioneers in industrial policy and has implemented many more industrial policies than what has been announced officially. Those policies include support of technology innovation, government procurement, tax credits, tariff rebates, interest rate subsidies and other things.
In August 2011, President Barak Obama signed into law the U.S. Manufacturing Advancement Act, which provides preferential tax rates for business (to under 25 percent), with a total volume of tax cuts of up to $4.6 billion. It also provides tax credits for research and development institutions, increases in federal government spending in R&D, export credit supports and import tariff cuts on relevant materials and intermediate goods.
In June, the White House Science and Technology Office announced the Strategic Plan of Artificial Intelligence Research and Development in the United States, envisioning billions of dollars of support through federal agencies.
The website of the U.S. Department of Energy announced in early January $20 million in appropriations for development of materials for use in extreme environment related to power generation. It also announced $25 million for 16 projects to improve natural gas operations, $20 million to develop feedback monitoring and carbon storage technology and $55 million for electric aviation technology programs.
The World Investment Report 2018 by the UN’s Conference on Trade and Development shows that over the past 10 years, at least 101 economies representing 90 percent of total global GDP have announced official industrial development strategies to cope with the opportunities and challenges of the new industrial revolution.
In conclusion, it is a common international practice that national governments make and implement industrial policies to support new technologies. Necessary government support reflects responsibility and does not violate WTO rules. The core principle found in the WTO rules system is non-discrimination. That is, all government support policies and measures should be transparent and equally applicable to both domestic and foreign companies; the support should be directed to basic research and technology development; and overseas sales should be carried out equal footing with the host country’s own companies.
No need for China to pursue mercantilism
Mercantilism is a recurring label Washington uses in describing China’s approach. The elites are quite sure that China is threatening American industries and jobs with an export-led strategy and heavy subsidies. Again, this is unfounded.
The core of mercantilism is the description of precious metals or ores as the only real wealth. If unable to acquire adequate wealth at home, a country must get it from abroad through trade surpluses. This makes no sense for China. But home products and services, not just precious metals or ores, also represent real wealth. China has no need to obtain wealth through trade surpluses.
The assertion that China is an “export-led economy” seems valid at first glance, but in fact it’s an incorrect conclusion. According to the World Bank, China’s GDP share of goods and services exported was 19.5 percent in 2018, much lower than the world average of 30.1 percent and far below Germany’s 47.4 percent, Canada’s 32.1 percent, France’s 31.3 percent and the United Kingdom’s 30.1 percent. No one would think of India as an “export-led economy.” But its share was 19.7 percent, only slightly higher than China.
In fact, goods exports represents a small share of China’s total output. In 2018, Chinese exports of goods amounted to $ 2.5 trillion, or 18.3 percent of GDP. This ratio is highly misleading, taken generally as the part of GDP that is exported. In fact, it is a parameter, not a share. Export volume measures the gross value of goods, while GDP measures added value.
Let’s assume that all Chinese goods exports are industrial goods. In 2018, the added value of industrial production was 30.52 trillion yuan ($4.4 trillion). Converting to gross output value, it was 127.88 trillion yuan (a ratio of 1-to-4.19 in Shanghai, as a reference for the country). Total export delivery in that year was 12.39 trillion yuan, or only 9.7 percent of total gross industrial output.
Another key supposition about China by Washington is that it boosts exports by artificially depreciating the yuan. However, empirical study leads to a different conclusion. Over the past few years, exchange rate changes have had little linkage to Chinese export performance. In 2015, the yuan fell by 1.1 percent against the dollar. Chinese exports that year fell by 2.9 percent. In 2016, the yuan’s fall against the dollar accelerated to 5.9 percent. This did not help Chinese exports, which fell even more sharply at 7.7 percent. Hence, the fall of the yuan failed to boost export.
In 2018, the scenario played out in reverse. The yuan rose by 2.6 percent to the dollar, and Chinese exports increased even faster, by 9.9 percent. Therefore, the rise of the yuan did not check the export increase. Based on actual performance, there is apparently no need for Chinese government to “artificially depreciate” the yuan.
Without doubt, the Chinese economic system has its imperfections and thus needs further reforms to ensure the open, transparent and equal treatment of all businesses, be they SOEs or private or foreign companies, while upholding the multilateral trading system with the WTO at the core. The Chinese government is working in this direction, with the new foreign investment law having taken effect on Jan. 1.
For years, China has been open to constructive help from the governmental, business and academic sectors of the United States. However, the irresponsible, subjective misinterpretation of the Chinese economic system will only lead to wrongheaded policy and harm bilateral trade relations.