Wait, How Much Money Does China Spend on its Industrial Policy?

By Matthew McMullan
May 24 2022 |
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Spoiler: It spends a lot.

The Wall Street Journal ran an editorial this weekend dumping on everyone involved in the fight over the Commerce Department investigation of solar panel imports from four countries in Southeast Asia. The investigation is exploring an allegation that these imports are in fact Chinese-made and are being rerouted to avoid U.S. anti-dumping duties, which is called “circumvention” in trade law.

Now, yes, I know, the Wall Street Journal editorial board taking a dim view of both trade enforcement and clean energy is not exactly a shocker! Still, it reminded me of a years-old outtake from Late Night with Conan O’Brien in which a dude dressed as Spock appears outside a theater and flips off all the fans queued up for the premiere of a Star Wars movie.  

He had to do it to ’em

I’ve always remembered that guy; his showing up unannounced to insult rival nerds was pretty funny, even if he didn’t have anything useful to add. This editorial isn’t funny, of course, but it’s kinda like that: dismissive and unhelpful. And it does trot out a common argument against industrial policy that’s illustrative in just how wrong it is.

That argument, to paraphrase, is American companies have no leg to stand on when they complain about foreign competition benefiting from subsidies.

Here’s what the editorial says:

It’s hard to feel sympathy for U.S. solar companies, which benefit enormously from government mandates and subsidies, including a 26% federal tax credit.

O.K., so what’s being said here is that solar companies benefit from the sizeable tax cut consumers get when they purchase solar equipment and install it on their homes, which makes it easier for the companies that sold it to them to turn a profit. But that certainly isn’t specific to domestic solar manufacturing. While the federal government is trying to create demand for this product by offering a decent tax cut for their purchase and installation, there is no tax cut meant to encourage domestic solar manufacturers. One has been proposed in Congress but it’s just a proposal. There is no lightened tax burden for solar manufacturing activity in the U.S.

This editorial isn’t interested in that distinction, of course. It wants you to conflate that decent solar consumer tax cut with the billions of dollars that are showered on Chinese solar manufacturers by the Chinese state, call it even, and conclude that it’s all market-distorting industrial policy, because that’s what the Journal’s editorial board thinks.

But it’s not. It’s really not. One’s a tax break, and the other is an enormous program of government subsidization. And there’s a new study out this week that makes that very clear.

The Center for Strategic and International Studies, a D.C. think tank, released a paper that tries to quantify how much China spends on its favored industries, and the short answer is it spends an absolute friggin’ ton on them. The paper found the Chinese government spent 1.73% of its annual GDP on industrial policy in 2019, which was “equivalent to more than $248 billion at nominal exchange rates and $407 billion at purchasing power parity exchange rates” and more than it spent on its military.

That’s an incredible amount of money spent year after year to boost the industries the Chinese government wants to dominate.

By comparison, “as a share of GDP, China spends over twice as much as South Korea, which is the second-largest relative spender in the sample. In dollar terms, China spends more than twice as much as the United States.”

And the Journal’s own write-up of the report’s release noted this kind of spending is only increasing:

The study points out that Beijing’s industrial initiatives have become more ambitious in recent years, with their focus shifting from “catching up” to the West technologically to targeting industries at the frontier of innovation, such as electric vehicles and artificial intelligence.

Year after year, the Chinese government literally spends twice as much as Washington to promote its domestic industries. Please keep this in mind when you catch a talking head or an editorial casually assert that American industries are the beneficiaries of world-leading largesse.

And in the meantime: Tell your lawmakers to make sure our trade enforcement rules are properly updated when they attempt to pass industrial policy legislation of their own.