China’s Subsidized Conquest of Trade

Editors note: Amazing that the Wall Street Journal opinion page says that the Western trading regime is not well suited to handle China’s economic system.

U.S. industry fades away as state-owned companies undersell the competition.

[William A. Galston | April 23, 2019 | WSJ]

An understated article in my local paper last week is a window into one of the biggest stories in the global economy. “Senators to Metro: No rail cars from China,” reads the headline. The state-owned China Railway Rolling Stock Corp. has emerged as the leading contender to build up to 800 new railcars for Washington’s Metro system. Senators from both parties charged that CRRC’s control of software updates could provide opportunities for espionage. They’re drafting legislation to prevent transit systems that receive federal funding from doing business with CRRC.

It turns out that Washington is the tip of a rapidly growing iceberg. In the past four years CRRC has won contracts to build cars for systems in Boston, Chicago, Los Angeles and Philadelphia.

The major factor is cost. CRRC’s bid of $1.3 billion for 846 rail cars for the Chicago Transit Authority was $226 million lower than the offer from Canada-based Bombardier—a difference equivalent to 146 more rail cars, a CTA spokesman noted.

Perhaps CRRC is the most efficient producer of subway cars on the planet. But we’ll never know for sure, because as a state-owned entity, it enjoys a host of advantages over private firms, including its ability to draw on cheap Chinese government funds to offer financing at interest rates no competitor can match. This is no accident. Chinese planning documents identify the rolling-stock sector as a key target for global dominance by 2025.

The Chinese advance is one side of the story. The other, at least equally important, is the American retreat. No U.S. company makes subway cars. This issue goes beyond China’s lower wages and costs; France and Canada both have thriving railcar manufacturers. Somehow, with a collective shrug, U.S. manufacturers decided that it wasn’t worth competing.

Subways cars may be a negligible share of the economy. But no one can say that about 5G, the next generation of high-speed wireless communications and one of the world’s largest growth opportunities over the next decade.

In a White House event this month unveiling the administration’s 5G strategy, President Trump declared that “we cannot allow any other country to outcompete the United States.” Yet as Washington Post tech writer Brian Fung points out, very few American firms actually produce the components needed to get a 5G system up and running. Cisco sells switches and routers, but doesn’t compete in the wireless infrastructure at the heart of 5G that will allow cell sites to connect with smartphones and other mobile devices.

Mr. Fung traces the disappearance of Motorola and Lucent, which seemed poised for global leadership three decades ago. As these companies faded, no U.S. firms stepped forward to fill the gap, in part because of increasingly vigorous foreign competition, but also because they couldn’t achieve the economies of scale that Finland’s Nokia and France’s Alcatel enjoyed. While the U.S. let a thousand flowers bloom, encouraging innovation, European companies agreed to establish common standards for wireless communications, eliminating the problem of incompatible technologies that bedeviled U.S. firms.

While Nokia and Alcatel seized market share from fading U.S. competitors, China’s Huawei grew even faster and now enjoys a global market share nearly as large as the combined shares of Nokia and Sweden’s Ericsson. Long underestimated by Western firms, Huawei now enjoys a solid reputation for quality and customer service at highly competitive prices.

As with subway cars, the support of Beijing is a huge part of sustaining China’s rising dominance in wireless. Financial aid from China’s state-owned development bank allows Huawei to provide below-market financing for its products, an offer that has proved irresistible to wireless carriers in Saudi Arabia, Turkey and many other countries.

The U.S. needs a plan to slow the retreat of manufacturing at home and China’s state-subsidized advance. Robust manufacturing, which encourages innovation and provides crucial middle-skill jobs, is in the U.S. national interest—a reality that most American business leaders have ignored for a generation.

It remains to be seen how frontally the current U.S.-China trade negotiations will address the unfair advantage many Chinese firms gain from their special relationship with the state.

The problem is deep and structural. One more example: In September, China will open its new, $12 billion Beijing Daxing International Airport, with facilities that will allow it to match the traffic volumes of the world’s busiest airports.

In the long run, this airport will boost China’s trade and tourism. Right now, it is aiding Chinese industry. As the airport’s project manager notes, “The general contracting is done by ourselves. We didn’t cooperate with international companies. Most of the equipment is domestically made.”

The Western-designed global trade system isn’t well-suited to deal with this Chinese model. The world must press Beijing to reform, and quickly.

Read the original article here.

Get the latest in CPA news, industry analysis, opinion, and updates from Team CPA.