Source: Automotive News
quote: Government subsidies to produce technologically advanced products and undercut foreign manufacturers have buttressed China's trade prowess. Since 2000, the value of Chinese exports more than quadrupled. In 2009, China surpassed Germany to become the world's largest exporter. In 2010, it overtook Japan to become the second-largest manufacturer, and its foreign-exchange reserves became the largest in the world. Last year, China overtook the U.S. to become the biggest trading nation (as measured by the sum of goods exported and imported). In the Chinese industries we studied -- solar, steel, glass, paper, and auto parts -- labor was between 2% and 7% of production costs, and imported raw materials and energy accounted for most costs. Production mostly came from small companies that possessed no scale economies. Yet, Chinese products routinely sold for 25% to 30% less than those from the U.S. or European Union. We found that Chinese companies could do this only because of subsidies they received from China's central and provincial governments. The subsidies took the form of free or low-cost loans; artificially cheap raw materials, components, energy, and land; and support for R&D and technology acquisitions. Since 2001, when China joined the World Trade Organization, subsidies have annually financed over 20% of the expansion of the country's manufacturing capacity. The state has willingly paid the price of economic inefficiency to accomplish political, social, economic, and diplomatic goals. Huge Chinese subsidies have led to massive excess global capacity, increased exports, and depressed worldwide prices, and have hollowed out other countries' industrial bases.