Policy-making relies on narratives, and narratives often come from data. Or claim that they do. One story often told by economists—by everyone from Dani Rodrik to Erik Brynjolfsson and Andrew McAfee to James Kynge to Laurence Summers—is that China’s manufacturing sector has been shedding workers since the mid-1990s. This story leads us to believe that something like this is happening:
This argument ends up as a morality tale with serious policy implications: if even China, manufacturing powerhouse with wages developed countries cannot hope to compete with, is losing manufacturing jobs, then surely manufacturing jobs are obsolete and the U.S. is foolish to try to maintain them—let alone get them back.
Unfortunately, this story is based on a gross misreading of inaccurate evidence. There are three major problems. First, even based on a simplistic look at the data, it’s flat out wrong. Take a look at this chart that shows the actual manufacturing employment in China. (You may note that this chart only goes back to 1998, and that the peak of employment underlying most claims was in 1996—more on that in a bit.)
Strangely enough this graph looks nothing
Free trade is only successful if all sides are operating on a relatively level, market-based playing field. Unfortunately, in the last few years many nations, particularly developing ones, have dramatically ramped up their mercantilist policies designed to unfairly gain advantages in global trade. The use of these mercantilist policies hurts not only the aggrieved nations, but also, in certain cases, the aggressor. One tool in the mercantilist tool box is “dumping”: the practice of selling exports below the cost of production, often by relying on steep government subsidies. However, to date the system of addressing dumping claims has not been as effective as it should be. All too often by the time cases are brought to and adjudicated by the World Trade Organization (WTO) the damage has been done and many domestic firms put out of business.
We see this with the current conflict between the European Union (EU) and the United States with China over unfair Chinese trade policies in the solar industry. The chief issue for U.S. and EU policymakers concerns China’s use of mercantilist practices, especially selling below cost through large government subsidies, to promote Chinese solar
Last month, the United States International Trade Commission voted to uphold tariffs on solar panels imported from China. The Commerce Department had imposed the tariffs earlier this year in response to China’s heavy subsidization of domestic solar PV manufacturers. However, while the move is welcome, it is important to recognize that is not a magic fix and the fight against Chinese green mercantilism continues.
To be sure, the tariffs are well-justified, as they can simultaneously help level the playing field, discourage China from employing unfair trade practices, and encourage clean energy innovation. But they may be too little, too late. Since the tariffs apply solely to panels made of Chinese-produced solar cells, Chinese companies can avoid them by assembling panels with cells produced elsewhere. ITIF Senior Analyst Matthew Stepp details the result at Forbes:
By shifting its way through loopholes in the tariff ruling, China is rerouting its manufacturing … Read the rest
LDK Solar, the world’s second-largest solar wafer maker, is now a Chinese state-owned enterprise. ITIF previously noted that the company had $80 million in debt paid back by Xinyu, a city in the eastern Jiangxi province which is also home to LDK’s main headquarters. But LDK Solar reached a new milestone last week with the news that it is selling a 20 percent stake in the company to the state-run Hen Rui Xin Energy for roughly $23 million. While the United States has raised tariffs on Chinese solar imports this year in an effort to discourage the country’s green mercantilism, the LDK Solar move suggests that China is doubling down on such policies.
The Xinyu-debt repayment and Hen Rui Xin Energy-equity acquisition are two recent instances in a string of notable government actions to shore up the struggling LDK Solar. Two months before the Xinyu announcement, MorningWhistle reported that the Jiangxi provincial government “pressur[ed] state-owned banks into approving a loan package worth 2 billion yuan” (more than $320 million USD) for the company, interest rate unknown. And just three days after the announcement of the Hen Rui Xin Energy news,
Yesterday, the New York Times described a “looming financial disaster” for China’s clean energy industry: “Though worldwide demand for solar panels and wind turbines has grown rapidly over the last five years, China’s manufacturing capacity has soared even faster, creating enormous oversupply and a ferocious price war.” This development offers three important lessons for U.S. clean energy advocates.
1. Green Mercantilism is not a long-term sustainable clean energy strategy. China’s clean energy policies can best be described as brute force – they “employ nearly all types of mercantilist policies to artificially drive down the price of clean energy technologies” through the use of illegal subsidies, content requirements, export dumping and the like. In other words, China wants to become global leaders in exporting today’s clean energy technologies by any means necessary. As ITIF discusses in two recent reports, Green Mercantilism: Threat to the Clean Energy Economy and Enough is Enough: Confronting Chinese Innovation Mercantilism, this strategy isn’t sustainable in the long-term. Clean energy is more expensive than fossil fuels, so the only way to increase exports in the near-term is by buying down the cost difference. But as the
Noah Smith wrote an opinion piece this week at The Atlantic entitled “The End of Global Warming: How to Save the Earth in 2 Easy Steps” that starts by accurately laying out some hard truths for climate policy advocates, but then wildly veers off course.
The piece begins strongly by highlighting the difficulties of implementing an effective global carbon tax. A key condition carbon pricing must meet for it to be an effective global climate policy is that all countries must implement the policy, not just a select few. If not, industries (and their emissions) will simply move to countries that don’t have similar carbon pricing policies. And as industries and their emissions move around, countries with a carbon price lose economic competitiveness, jobs, and economic growth. It’s easy to foresee a situation where a country that implements a carbon tax must either rescind the tax, make it less stringent, or exempt industry from the tax to reduce economic harm. In all cases, the carbon tax fails to drastically reduce emissions as much as needed, if at all.
Smith also recognizes the importance of government support for clean energy innovation.
This week, it was reported that struggling Chinese company LDK Solar will have at least part of its debts paid by the city – Xinyu in eastern Jiangxi province – in which it is based. The company is the world’s second largest maker of solar wafers, but has been hit hard by an ongoing solar technology supply glut that is ironically being exacerbated by China. As a result, LDK owed $79.4 million in loan debt to Huarong International Trust Co. at the end of 2011. Yet while Xinyu’s decision to help repay LDK’s loans may be good news for the company, it is very troubling news for opponents of China’s mercantilist policies.
ITIF has taken a close look at China’s mercantilist policies in general and its green mercantilism in particular. The country already “employs nearly all types of mercantilist policies to artificially drive down the price of clean energy technologies,” a previous blog post notes: … Read the rest
On May 21, 2012, the Senate Committee on Armed Services released a disturbing report on the extent to which counterfeit electronic parts had infiltrated the U.S. defense supply chain. The report, which looked at just one part of the defense supply chain from 2009 to 2010, documented 1,800 cases of suspected counterfeit electronic parts being deployed on a wide range of weapons systems, including anti-submarine aircraft and helicopters, cargo planes, and missile defense systems such as the Terminal High-Altitude Missile Defense (THAAD) system. Regarding THAAD—a short- to intermediate-range missile defense system designed to shoot down ballistic missiles (think SCUDs in the Gulf War)—the investigation found that the mission computers that controlled the missiles contained suspected counterfeit memory devices, which if they failed while deployed would have comprised the entire missile defense system, placing the lives of U.S. service members (or even U.S. or foreign citizens) at risk.
The Senate’s report found that the overwhelming majority—at least 70 percent—of the suspected counterfeit parts originated in China. This conclusion was not surprising. While the Senate’s report was limited to assessing counterfeit electronic parts in the defense supply chain, a broader report by
The Department of Commerce (DOC) has released a preliminary ruling to impose a 31 percent “anti-dumping” tariff on 62 Chinese solar PV manufacturers (and a 250 percent tariff on all other Chinese solar manufacturers) in addition to the 2.9 to 4.73 percent tariff imposed in March for illegal subsidies. The reaction to the preliminary ruling has been varied, as the tariff would impact the solar supply-chain differently depending on whether you’re a U.S. installer, intermediate components supplier, or final manufacturer. But one thing is certain: the DOC ruling is a positive step towards boosting solar industry innovation.
From 2000 to 2011, China increased its global solar PV export market share from 2 percent to 54 percent, or a compound annual growth rate of 115 percent. This remarkable export growth, in addition to significant deployment subsidies in the United States, has helped solar PV costs decrease 75 percent in the last 10 years. But what’s the character of that cost decline? According to a recent McKinsey study a share of the decline is economies of scale – i.e. greater solar PV production reduces unit costs – which in reality is a
Until the mid-2000s, China actively encouraged foreign direct investment through a vast array of incentives, many of them mercantilist and unfair in nature. While the consequences of China’s mercantilist policies might not have always been good for the U.S. economy, and especially for many production workers in traded sectors, U.S. multinational corporations benefited from access to a low-cost production platform. The United States doesn’t need to close its borders to be a vibrant competitor. It must, however, require that other nations like China to play by the rules. And Americans in their role as consumers benefited from lower-cost goods. While China occasionally engaged in policies that brought complaints from U.S. industry, by and large the United States was satisfied with the relationship.
In 2006, that began to change. China made the strategic decision to shift to a “China Inc.” development model, based on successful Japanese and Korean examples, that focused on helping Chinese firms grow by moving up the value chain and gaining global market share, often at the expense of foreign firms.
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