Cutting the Subsidies: Good or Bad?

On April 14, China stopped the subsidies to small exports firms in seven industries. This action is a response to the challenges from U.S. at the beginning of 2015. The cancellation of the subsidies could be a disaster for some companies but possibly brings new opportunities to both countries.

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A shoes manufactory in Zhejiang      Lang Lang/Reuters

In February 2015, U.S. government submitted a trade case to WTO blaming that China supports domestic exporters with huge amounts of illegal subsidies in forms of “demonstration bases”. The exporters have received billions of money and different discount or free policy in nearly 200 demonstration bases these three years, which has violated the subsidy prohibitions from WTO. Besides, Just 16 out of 40 identified bases that produce textiles combined to export $33.3bn of goods in 2012 alone. That same year, six bases that produce seafood exported $3.6bn — 20 per cent of China’s total seafood exports. “In doing so, it injures American workers, farmers, ranchers, and businesses — really anyone who plays by the rules and wants to compete fairly, on the merits of their hard work and the quality of their products.” U.S. Trade Representative Michael Froman said.

The terminal of subsidies involves seven industries: textiles, apparel and footwear; advanced materials and metals (including specialty steel, titanium and aluminum products); light industry; specialty chemicals; medical products; hardware and building materials; and agriculture. Meanwhile, the Chinese government amended or expired 175 legal instruments used to support exports. Although many Americans think it a win to U.S. producers, the real effects could be more complex.

Agriculture industry

world_food_price_indices_food_price_index_meat_price_index_dairy_price_index_cereals_price_index_oils_price_index_sugar_price_index_chartbuilder

The FAO Food Price Index shows that the world food price continues the downtrend from 2011 reaching to 151.0 points in March 2016, almost 12.0 percent below its March 2015 level. The farm income in U.S. also decreases dramatically since 2013. A study from Iowa shows that U.S. farmers lost almost $653 million per year due to China’s excessive wheat subsidies. Some people blame that the subsidies of China and other developing countries cause this situation. In wheat alone, China provides at least $15.4 billion supports, which makes up 36% of the production revenue, while the limit rate set by WTO should be 8.5%.

farm-income-01

Termination of agriculture subsidies could make American farmers happy and help the food price reverse. As to China, the competitiveness of food exports would decrease to some degree and farmers in China might meet a huge challenge. In the short term, the government could face the loss around $10 billion in crop stock alone. On the other side, the stop of subsidies will narrow down the huge stockpile and promote the transition of the agriculture industry.

Steel Industry

Similar to the agriculture industry, the steel market also experiences a declining price. Since the domestic demand of steel reduces these years, the overcapacity problem is getting severe, and more steel companies in China are relying on the exports. In 2015, China is still the largest steel exporter with 92.9 million tons per year. Subsidies of steel industry could be a reason for the excess supply and also the lower export price. In February 2016, U.S. government was seeking the anti-dumping measures to relief the pressure on the domestic steel companies. 13,500 steelworkers have received layoff notices because of the competition from China.

“Today we have signed an agreement with China to eliminate export subsidies that the United States challenged because they are prohibited under (World Trade Organization) rules,” Froman said. “This is a win for Americans employed in seven diverse sectors that run the gamut from agriculture to textiles to medical products, who will benefit from a more level playing field on which to compete.”

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However, this is not the first time that China government promised to cut its steel output. Unfortunately, the pledges did not work. Eliminating the steel subsidies could be a real action to solve the overcapacity problem in the perspective of policy. However, the traditional steel companies who rely on the low cost to survive would face the shutdown risk. How to achieve a good transition within the industry and how to protect the employers’ interest are urgent questions the government need to think about.

Overall, the cut of subsidies in these seven industries could balance the supply and demand in the world market. U.S. companies who compete with China will find a new growth change, but the companies who import the low-cost material from China could lose the cost advantages. For China, the companies may face more challenges than opportunities. But what China is really worried about should be how to change their business model and industry structure to adapt the WTO rules.

 

 

Reference

[1]http://www.wsj.com/articles/china-halts-export-subsidy-program-u-s-says-1460643214

[2]http://www.reuters.com/article/us-usa-china-trade-idUSKCN0XB1UQ

[3]http://www.nwitimes.com/business/steel/china-to-end-subsidies-on-steel-exports/article_daa99ef9-1231-5d32-a40e-4bb8f0a1783f.html

[4]http://www.ft.com/intl/cms/s/0/6f7c50de-b210-11e4-b380-00144feab7de.html#axzz45qq32QRa

[5]http://thehill.com/policy/finance/232428-us-launches-trade-case-against-chinas-export-subsidies

[6]http://www.hoosieragtoday.com/chinas-excessive-wheat-subsidies-and-other-policies-increase-u-s-farm-losses/

[7]http://www.chestertontribune.com/Business/usw_and_visclosky_say_china_pled.htm

 

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4 Responses to Cutting the Subsidies: Good or Bad?

  1. I agree with your opinions about the influences of reducing the subsidies on China’s exports and U.S domestic industry. First, from a global perspective, the action of reducing subsidies would ease the overproduction of China and balance the world demand and supply since China is a large country and its change in output can affect the world.
    More specifically, cutting subsidies may have a negative effect on China’s export industry because they would lose their competitiveness on price. However, reducing subsidies would probably not encourage US overall domestic industry. It has dual effect on different industries. The industry such as agriculture and steel in US may be more competitive and increase their exports with a decline of China’s exports. On the other hand, the producers in the US that import the raw materials from China might find their cost of production is rising, which would eventually discourages their output.

  2. mingshenthomas says:

    I personally am an advocate of free trade, and subsidies to me means inefficient use of resources. Subtracting these subsidies is good news for both China and exporters out of China, although bad news for the use-to-be-subsidized industries, because of a better use (probably) of resources and a better competitive environment in the market place, which actually makes everyone better off. Also, this is a chance for China to start restructuring the economy as China is loosing its comparative advantage in cheap labor.

  3. yiming si says:

    The write pointed out that reducing the subsidies of Chinese manufactures can bring down China’s out pout and totally change the world’s trade balance since China is a large country and will influence the whole world market. In theory, subsidies will bring inefficiency in the free market and cutting it means we could better off as a whole. I believe it’s a good thing/

  4. yiming si says:

    The write pointed out that reducing the subsidies of Chinese manufactures can bring down China’s out pout and totally change the world’s trade balance since China is a large country and will influence the whole world market. In theory, subsidies will bring inefficiency in the free market and cutting it means we could better off as a whole. I believe it’s a good thing.

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