How China competes

By Benjamin A Shobert

It has long been widely accepted that the key to China’s global competitiveness is its ability to leverage wide swaths of low-priced labor and drive these new workers into labor-intensive manufacturing sectors of the global economy.

While this is certainly true, China is proving that its ability to compete globally is also because its export strategy is built on a more aggressive and coordinated export assistance model than that of its United States or European competitors. The fact that China’s approach also benefits from being conceptualized, driven, and managed by the central government stands in stark contrast to Western approaches, which typically take a dim view of the comparable sort of public-private partnership that would be necessary to compete with China in a similar fashion.

In February, immediately following meetings with Chinese Vice President Xi Jinping, US President Barack Obama announced a trade assistance plan designed to help American manufacturers that must compete globally against Chinese companies that benefit from China’s export assistance model.

Already, General Electric has made use of American government-sponsored financing to compete against Chinese locomotive manufacturers in a competitive bid for business in Pakistan. The administration’s approach was designed to "counter foreign non-competitive official financing that fails to observe international discipline" like those embodied in Organization for Economic Co-operation and Development guidelines which American, trade representatives and business leaders have long maintained China violates.

These purported violations usually take the form of heavy subsidies provided by China’s central government for key industries; however, the more subtle but none-the-less equally impactful aspect of China’s export model is how it coordinates the actions of state-owned enterprises (SOEs), government sponsored infrastructure spending in the export markets, and lucrative financing.

Originally formulated as part of China’s increasingly sophisticated natural resource extraction strategy in other emerging economies, the approach is proving to have value as a mechanism for driving export growth from China into many of these same markets.

In late March, Professor David Shinn from the Elliott School of International Affairs at George Washington University testified at the House Subcommittee on Africa, Global Health and Human Rights of the profound differences between the way America and China competed in Africa.

He made note that "The most important difference between the United States and China is the very structure of the American and Chinese governments in the way their respective systems engage in Africa." Where privately owned American companies compete, they receive what Professor Shinn called "limited involvement by the US government."

In contrast to this, Chinese firms receive much more direct and indirect assistance. As Professor Shinn testified, "The very nature of the different US governmental and economic systems gives a huge advantage to Chinese SOEs and those, such as [telecommunications equipment company] Huawei, that have a special relationship with the government of China."

These advantages include "government loans and tied contracts … After the SOE is engaged in the project, there are additional advantages that African countries have learned to appreciate."

Shinn also made note of one African leader who shared candidly with him that "Whenever there is a problem such as a delay in construction or a quality issue I just call the Chinese ambassador and he sees that the matter is taken care of. If this were an American or Germany company, I would be in court for years."

For all those critical of China’s export model, it is important to keep in mind that much of what has made China successful in its export markets, in particular those within developing economies like those spread across Africa and Latin America, is that China has made it easy to do business with its businesses.

As companies like Huawei outcompete their American and European competitors, it has become increasingly obvious that much of what has made China successful is the combination of state-sponsorship and paying more attention to the needs of its customers in markets where developed nations have historically been willing to overlook.

These advantages not withstanding, China’s export success does rely heavily on major subsidies that accrue to both state and privately owned companies across the country. The Congressional US-China Economic and Security Review Commission (USCC) recently published a staff research analysis of China’s export assistance model. The report focused on the main policy response that the American Congress has at its disposal: reinvigorating the role of the Export-Import Bank (Ex-Im Bank) as a means for assisting US manufacturing and service companies.

Historically perceived as a successful and necessary means of supporting American businesses by providing financing in cases where traditional lending was not available or simply too expensive, the reauthorization of the Ex-Im Bank in late May was anything but certain.

Fiscal conservatives like Senator Mike Lee (Republican - Utah) opposed the renewal on the grounds that it represents another form of corporate welfare that America can no longer afford. Even with the support of pro-business and traditionally conservative lobbies such as the Economic Policy Institute, the National Association of Manufacturers and the US Chamber of Commerce, the ideological commitment of many members in the American Congress against any government sponsorship of economic activities could have derailed the Ex-Im Bank’s renewal.

That many of these same politicians would be equally critical of China’s state-sponsorship without providing American business with even the most paltry of government assistance is one of the many internal contradictions unresolved within the modern ultra-conservative movement.

As the USCC report makes note of, "The Ex-Im Bank’s total credit limit is $100 billion, meaning its outstanding aggregate amount of loans, guarantees, and insurance cannot exceed $100 billion at any one time. With roughly $90 billion in outstanding loan guarantees, the bank’s current legal ability to extend additional loans is far too limited to compete with the government of China."

Considering that Huawei has received what the Information Technology and Innovation Foundation (ITIF) identified as $30 billion in credit from what the USCC identified as the "government-owned China Development Bank", it is obvious that China is much more serious and generous in providing meaningful assistance to its industries than any Western government has been.

When all state-sponsored lending and financial subsidies like those comparable to what the Ex-Im Bank can offer are taken into account, estimates are that China can make loans in one year that equal the total amount the Ex-Im Bank is chartered to offer in total at any one time.

Both China and the US understand this divergence is not sustainable, and the matter has become a priority during the Strategic and Economic Dialogue (S&ED) between the two countries. However, even if a successful outcome to these exchanges is finalized by the agreed-upon 2014 deadline, it remains unclear how effective this would be in limiting subsidies or helping American companies compete unless the overall amount of resources at the disposal of the Ex-Im Bank does not dramatically increase.

The USCC report states that "Even if a higher degree of Chinese transparency is achieved, US budget constraints would remain. Ex-Im’s $180 million budget for matching non-competitive financing is pocket change compared to estimated Chinese subsidies." The report ends with the troubling observation, "Some in Congress argue that the United States should not engage in a competition that would have US taxpayers subsidizing foreign consumers in this manner."

With so many in congress confident in what American policy makers should not do, it has become increasingly difficult for a picture of what to do in order to compete against China to emerge. Absent clarity on America’s own competitive alternative, it is difficult to see how any change on China’s part relative to its own export model would meaningfully change the prospects of either its domestic producers or their international competitors.

Benjamin A Shobert is the Managing Director of Rubicon Strategy Group, a consulting firm specialized in strategy analysis for companies looking to enter emerging economies. He is the author of the upcoming book Blame China and can be followed at www.CrossTheRubiconBlog.com.

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