Why Aren't The Chinese Ticked Off About Subsidizing American Consumers? And Why Aren't We Happy About It?

Ten years ago, we published an editorial from our Chinese sister publication Panda Blog.  Though some of the details of their government's financial actions have changed since then, the gist of it is still correct -- the Chinese government still engages in actions that they call "export promotion" and President Trump calls "currency manipulation".  So I think this editorial from the perspective of the Chinese consumer is still relevant:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

  • Limiting yuan convertibility, and keeping the yuan's value artificially low
  • Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
  • Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

  • mlhouse

    WHile I get the argument that these trade subsidies help American consumers, I am a free market person more than a free trade person. IF China subsidizes certain production with various manipulations, it means that production is being done in a time and place the free market would not allocate.

    The other question, which I never held until Trump ran for office, is while American consumers are certainly the "winners" in this situation, who are the losers? Middle class and up get cheaper textiles, electronics, toys, automobiles. But the people with working skills might not necessarily be the losers, but they arent the winners either. WHile there are reasons to condemn the Carrier deal made to keep air conditioner manufacturing in Indiana, but the $7 million cost of subsidy is about $1 per resident of the state.

  • Not Sure

    How much would it cost each resident of the state, if they had to pay $1 for every business in the state? I would guess the amount would not be insignificant.

  • GoneWithTheWind

    One man's subsidy is another man's unemployment.

  • The following is a theory; I am not an insider. It fits government behavior.

    It is difficult to understand why China is subsidizing the US by using its resources to deliver inexpensive goods to us, even less expensive then a free market in China would deliver. The first thought is that China must be attacking us in some way. Most politicians say this. In fact, China's government is effectively taxing its people, and we are getting a side benefit.

    The Chinese leadership has totalitarian control. They are arranging profits for themselves at the expense of their population. This is similar to US politicians and crony socialists benefitting at the expense of the US population.

    The Chinese government operates its entire export industry. The Chinese leadership can arrange a steady flow of exports by making them somewhat cheaper than they would otherwise be. They can skim value from this flow more easily than they can raise internal taxes. This skimming is hidden, while taxes are obvious. This skimming goes to individual export companies, probably each one controlled by an important individual or group.

    So, should US consumers hurt themselves and the Chinese by boycotting, banning, or imposing tariffs on Chinese goods? The practical argument is that this is very hard to do. These imports benefit consumers, after all.

    The moral argument is not clear. The Chinese people are getting an unfavorable deal, but a much better one than if they exported less. Their work is becoming more valuable to their leaders and to themselves, and this gives them more power in Chinese society.

    China's government is acting just like the US government. I think our US leadership subsidizes companies, taxes imports, and subsidizes exports because it can skim campaign contributions from the companies which benefit, although the general public suffers. Skimming also shows up in US government "investments" like Solyndra. Government wants to arrange a steady flow of "investment" into companies owned by cronies, despite the overall losses.

    Both the US and Chinese governments are intent on skimming value from their populations. It is an odd side effect that each government is willing to help other countries as needed to establish and maintain the skim.

  • marque2

    It does give the Chinese a competitive advantage when they destroy the industry in another country. It is easily provable that in the short term it can hurt the domestic industry of the receiving country for a net loss to that country. An example: Some company in the US produced hammers and sells them for $10 a pop. This is $10 in our economy. If this company outsources to China because they can sell it for $1 less, and closes the domestic plant, we have a gain of $1 per hammer because of the discount, but a loss of $10 in the domestic economy for a net loss of $9 per hammer. What conservative/libertarian economists have said about this, is that it frees up these people to do more productive things - like making nail guns. However, this only works if the domestic economy is growing at a good clip. The last 8 years we have had people lose their jobs and not find anything comparable or more productive. In the end the $40K a year hammer folks can be happy to be unemployed - but at least they can save a buck on a hammer. Do one of those Country A produces X and country B produces Y analysis we did in economics class and it is easy to see.

    I am all for free trade when all the partners are playing fairly, it encourages innovation, and increased productivity on both sides. Boo often economists look at our open markets, and foreign closed and contorted trade schemes and equate this all with "Free Market" when it is nothing of the sort.

  • Seekingfactsforsanity

    The Chinese are subsidizing their production machine and employment at the expense of the production machine and employment in other countries.

  • CC

    If a store sells a product at a loss in order to attract customers, which many do, some competitors may call this "unfair". However, they can't sell too many things at a loss for too long or they will go out of business.
    Similarly, a country can subsidize the products of it's companies so they can be sold at a lower price. Again, this is "unfair" is the short-term, but in the long term it takes money away from citizens in the form of taxes and can't go on forever. The US does this too, we just pretend we don't. For example, a big export for the US is movies. Many states have special tax breaks for filming in their state. This lowers the cost of making the movie just like what China does. On the other hand, the very high corp taxes in US are an anti-subsidy.
    The best kind of level playing field would be to eliminate all taxes on corporations. But people like taxes on corporations because 1) they don't see them and 2) it would be "unfair" not to tax them, even though taxing corp means less money is passed through to dividends and wages. Our concept of "fairness" doesn't always come to the right conclusion in complex economic systems. Another example is people think it is "unfair" for the owners of a company to make obscene profits while paying low wages, but there are very few such cases. Even Walmart has a tiny profit per dollar of sales.