The Facts about China's Currency, Chinese Subsidies and American Jobs

October 14, 2011

While America's political leaders emphasize China's currency manipulation as a significant irritant to the ability of American exports to compete internationally, this focus is misleading.  Studies and empirical evidence suggests strongly that a weak yuan is not raising unemployment in the United States (if anything, the correlation seems to be the opposite).  Rather, the true source of Chinese market intervention comes in the form of backhand subsidies that dole preferential treatment out to dozens of state-owned enterprises (SOEs).  This is accomplished through a variety of policies that augment SOEs' ability to compete and sustain otherwise risky business models, says Derek Scissors, a research fellow with the Heritage Foundation.

  • First, because these mega corporations are owned by the state, they face little real risk of default.
  • Second, the central government does not allow fair competition between SOEs and foreign-owned companies, or even domestic private firms.
  • Third, the government subsidizes SOEs in a more traditional sense, giving them access to artificially low interest rates.
  • Finally, the aforementioned currency devaluation, though it does not have adverse impacts on American employment, helps SOEs compete internationally with other, non-American companies.

In recognizing these forms of subsidies, American decision-makers can finally start to be proactive in addressing China's impact on the domestic economy.  This includes a focus on subsidies in bilateral discussions and official appeals to the World Trade Organization, in addition to reactive subsidies if necessary.

Source: Derek Scissors, "The Facts about China's Currency, Chinese Subsidies and American Jobs," Heritage Foundation, October 4, 2011.

For text:

http://www.heritage.org/research/reports/2011/10/the-facts-about-chinas-currency-chinese-subsidies-and-american-jobs

 

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