The Hidden Advantage of Chinese Subsidies

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

How did China move so swiftly in capital-intense industries without labour-cost or scale advantage from bit player to the largest manufacturer and exporter in the world? Below, Usha and George Haley argue that subsidies contributed significantly to China’s success.

China provided “easy access to capital,” Michael McCarthy, Director at Evergreen Solar told us on a wintry February morning as the company started moving all production of solar panels from Massachusetts to a joint venture in Wuhan, China. Earlier, in January 2011, Evergreen Solar had closed its main U.S. factory and laid off 800 workers. In the previous three years, with the Massachusetts government’s loans and tax credits and its proprietary technology, Evergreen had become the United States’ third-largest solar-panel manufacturer. The company cited plunging solar-panel prices worldwide, coupled with much higher Chinese government subsidies (financial transfers from the government that provided benefits) as reasons for its move. Evergreen’s CEO El-Hillow told The New York Times that the Chinese governments’ and state-owned banks’ considerable subsidies had helped Chinese manufacturers to keep costs very low; the Chinese were now offering him similar massive subsidies that would keep Evergreen competitive. These subsidies, rather than low Chinese labour costs, influenced his move, he elaborated, as labour formed just a tiny part of his manufacturing costs. “Therein lies the hidden advantage of being in China,” El-Hillow said.

Our book, Subsidies to Chinese Industry: State Capitalism Business Strategy and Trade Policy, five years in the writing and excerpted in this article, provides a theoretical basis and empirical analyses for understanding the hidden advantage of Chinese production subsidies. Rather than aberrations, in China subsidies form central parts of what sociologist Neil Fligstein called “conceptions of control,” important ways in which Chinese businesses and governments produce, stabilise and create common understanding of their markets. Flows of subsidies reflect interactions and struggles between critical Chinese actors such as central and provincial governments and state-owned enterprises with different resources, interests, and visions of markets. As we describe in our book, Evergreen’s story has resurfaced across other industries including steel, glass, paper and auto-parts. In all these capital-intensive industries where labour costs play minor roles, and in the space of approximately five years, China rose from a net importer to among the largest producers and exporters in the world.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.