Wednesday, February 11, 2015

Exposing China's Export Subsidies

On Wednesday the U.S. lodged complaints to the World Trade Organization alleging that China is subsidizing export industries that create unfair advantages for their companies in the market. The industries relate to clothing, metals, chemicals, medical, and agriculture resulting in a billion dollars worth of supplier help that artificially boosted exports making it more difficult for American businesses to compete.

Export subsidies occur when government pays to produce and export products to other countries at a cheaper price than what would be possible if the natural market forces were at play. In subsidized industries the country can unfairly push cheaper manufactured products onto foreign markets creating a flooding effect. The price consumers pay is not accurate and creates unfair advantages that limits the revenue of competitors.

Countries may use this strategy for a number of reasons. One of those reasons include dumping excess products and then flooding another country's industry thereby potentially knocking them out of the market. When a large country floods American markets it could put companies out of business thereby damaging the future production capacity of the nation.

Countries like China can also use this strategy to protect their own industries until they become strong enough to compete on their own. We have seen China rise substantially over the past 20 years and American companies have had a hard time gaining full access to their markets. Those tariffs and pro-Chinese policies have created an unfair advantage for the nation.

Consider how providing tax incentives or direct government support for suppliers lowers the input costs of a broad range of manufacturers in a particular sector. These sectors are supported because the Chinese government seeks to develop these industries while also damaging the competitive stance of foreign industries. They are strategically funneling resources from one area of the economy into industries they want to grow.

Eventually the Chinese companies will also need to ween these industries off of direct support. Market forces have not forced these companies to change and develop in a way in where they are truly competitive. If successful in curbing these subsidies it is possible to leave them in a strong position to compete against international products.

When you walk into the store and find Chinese products at a much cheaper price than Americans can make it means that there may be some unnatural forces at play. It isn't always the case but it can be in situations where market forces are not forcing the prices to rise to their natural state. Pushing China to be on a level playing field helps American companies to compete effectively in the long run, beat out Chinese manufacturers and develop sustainable industries.

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