For those looking for insights on China’s industrial support programs, Shambaugh rattled off a few examples.
“Government Guidance Funds” or “Government Investment Funds” continue to use public resources to make equity investments in industries and activities that Beijing considers important, with very limited transparency. Academic studies estimate these funds have provided more than $1 trillion in capital and guarantees to over 28,000 mostly private companies from 2000 to 2018.
One of these government guidance funds – of which there are over 2,000 at the national and subnational levels – specifically targets the semiconductor sector and is larger than the entire CHIPS & Science Act, Shambaugh said. Other large-scale initiatives, including the “Little Giants” and “Single Champion”, demonstrate that China’s private sector does not solely operate through market forces – but rather benefit from the network of government guidance funds, state-owned banks, and state owned enterprises that act as both financiers and customers to private firms, he said.
“These practices channel China’s vast savings into certain sectors, as directed by Beijing. China’s Made in China 2025 was launched in 2015 to promote certain strategic sectors. China has successfully promoted the exports of and discouraged imports of strategic sectors as defined by the 2015 policy, with notable results,” he said. “Imports have been falling as a share of China’s economy, but even more in strategic sectors. And, while non-strategic sector exports fell as a share of China’s economy, exports in strategic sectors grew.”
China’s export volumes are rising faster than total export values, up 11.5% in dollar terms versus in the first quarter of 2024 compared to the previous year.
“The scale of this support is striking,” Shambaugh said. “China’s industrial subsidies are simply much larger than those of other countries. The Center for Strategic and International Studies concludes that China spends roughly 5 percent of GDP on industrial subsidies, 10 times as much as the United States, Brazil, Germany, and Japan. In sectors like semiconductors, steel, and aluminum, China alone accounts for between 80 and 90% of global subsidies provided to those industries.”
Shambaugh said the renewal of the Section 301 tariffs imposed by the Trump administration was necessary. He said, “We will continue to monitor and respond to China’s use of non-market policies and practices and use the tools at our disposal to secure fair competition.”
Treasury Secretary Janet Yellen also said that tariffs were necessary, but added that they were more necessary in “strategic sectors” – namely semiconductors and in the new clean-energy technologies getting Inflation Reduction Act funding.
But the biggest takeaway from Yellen’s most recent comments regarding Biden’s decision to renew Trump’s tariffs and add new ones on semiconductors, solar and EV cars and batteries, was that the tariffs won’t really lead to inflation.
“I don’t believe American consumers will see any meaningful impact on prices,” she said.
In February, economic analysis by CPA Chief Economist Jeff Ferry showed that tariffs strengthened the U.S. economy and “led to significant reshoring in certain industries.”
Further economic analysis from CPA’s Economics Team shows that the Section 301 tariffs reduced U.S. dependence on China. Additionally, a report by the U.S. International Trade Commission analyzing the effects of Section 232 and Section 301 tariffs on more than $300 billion of U.S. imports found that the tariffs reduced imports from China and effectively stimulated more U.S. production of the tariffed goods, without impacting consumer prices.
Still, Treasury is often loath to protect American industry. Shambaugh’s final remarks made that clear. It would be best, he said, if China fixed its problem and bought what it made rather than flood the world with their goods. That way, the U.S. would not need policies like the CHIPS Act, or tariffs.
“We would prefer China to take action itself to address the macroeconomic and structural forces that are generating the potential for a second China shock,” he said. “China could boost consumption by strengthening its safety net and increasing household incomes. It could support the services sector, not just manufacturing,” he said, then as if providing a clue to what may be the next reason for Washington to restrict China investments and imports, he said they “could reduce harmful and wasteful subsidies.”
Treasury Official Highlights Serious Problem: China Overproduces And Floods Global Markets With Products
China makes too many things. It would be great if they made it for their home market, but they do not. Instead, they massively subsidize their manufacturing companies and overproduce for the world – their main market being the United States.
On July 10, Treasury Department’s Under Secretary for International Affairs, Jay Shambaugh, remarked during a Council on Foreign Relations meeting “few topics are of greater importance today than our economic engagement with China.”
China’s overcapacity has been a topic for years. But this year, a greater number of political leaders in Europe, as well as Treasury Secretary Janet Yellen, have increasingly warned of this problem. There is a growing awareness in the West of the risk that China poses to the global economy.
However, China is still very poor and it has a mediocre consumer market. Its provincial leaders want to benefit from Beijing’s industrial policies outlined in their Five Year Plans, and will overproduce manufactured goods in order to get in on the largesse.
For example, China has over 200 automobile manufacturers. Nearly every province has a native automotive group. There are nearly 90 car brands there, some of them less than 10 years old. By comparison, the U.S. has GM, Ford, Tesla and maybe two EV startups like Rivian and Lucid Motors. China cars and car parts are flooding Europe. The U.S. announced tariffs on China EVs in May, following tariffs imposed for all Chinese made cars under the Section 301 tariffs in 2018. But China-made cars are coming anyway. The Tesla rival Polestar is here, a luxury EV sedan. And GM makes the Buick Envision not in Detroit, but somewhere in China.
“We have to tackle this; we have to protect our industry,” said European Commission President Ursula von der Leyen in May, roughly a week before the Biden administration slapped 100% tariffs on Polestars coming into the U.S., among other China-built EVs.
Still, China’s overcapacity is in far more zones of the economy than the so-called clean tech sector favored by Washington and Brussels these days. Shambaugh knows it.
Although Shambaugh had to temper his language in a room full of free-trade globalists at the Council on Foreign Relations by lumping the rest of the world in with the U.S., he did advise them that the problem was worsening. And Washington had to play defense.
Some takeaways from Shambaugh’s remarks, include China’s weak consumer base and trade imbalances. China has a huge market. They don’t buy goods. So China’s labor market produces those goods for export.
“When China relies on foreign demand for growth, and especially when sectoral trade surpluses grow rapidly, the resultant loss of jobs and reduced wages can create lasting and significant damage to individuals and communities around the world, particularly those with low incomes,” he said, mentioning the China shock – the evaporation of American industrial capacity since China entered the World Trade Organization in 2001.
See CPA’s analysis of the latest round of the China shock, by economist Andrew Rechenberg.
Shambaugh said that from 2008 to 2013, China’s increase in solar panel manufacturing contributed to an 80% drop in international prices and led to bankruptcies and firm closures in the United States and Europe. At the time, despite falling prices caused by the supply glut, Chinese solar companies continued to ramp up production and state governments issued some $18 billion in below-market loans, he said.
“In the steel sector, from 2000 to 2015, China added over eight hundred million tons of steelmaking capacity, and Chinese production volume eclipsed the total volume produced by the rest of the world,” he said. The U.S. imposed Section 232 steel tariffs on the world in 2018 and much of those tariffs remain. Where they have been removed, they were replaced by quotas – which are essentially export limits.
Treasury estimated that China’s overproduction in steel contributed to the loss of nearly 100,000 jobs in the U.S.
For those looking for insights on China’s industrial support programs, Shambaugh rattled off a few examples.
“Government Guidance Funds” or “Government Investment Funds” continue to use public resources to make equity investments in industries and activities that Beijing considers important, with very limited transparency. Academic studies estimate these funds have provided more than $1 trillion in capital and guarantees to over 28,000 mostly private companies from 2000 to 2018.
One of these government guidance funds – of which there are over 2,000 at the national and subnational levels – specifically targets the semiconductor sector and is larger than the entire CHIPS & Science Act, Shambaugh said. Other large-scale initiatives, including the “Little Giants” and “Single Champion”, demonstrate that China’s private sector does not solely operate through market forces – but rather benefit from the network of government guidance funds, state-owned banks, and state owned enterprises that act as both financiers and customers to private firms, he said.
“These practices channel China’s vast savings into certain sectors, as directed by Beijing. China’s Made in China 2025 was launched in 2015 to promote certain strategic sectors. China has successfully promoted the exports of and discouraged imports of strategic sectors as defined by the 2015 policy, with notable results,” he said. “Imports have been falling as a share of China’s economy, but even more in strategic sectors. And, while non-strategic sector exports fell as a share of China’s economy, exports in strategic sectors grew.”
China’s export volumes are rising faster than total export values, up 11.5% in dollar terms versus in the first quarter of 2024 compared to the previous year.
“The scale of this support is striking,” Shambaugh said. “China’s industrial subsidies are simply much larger than those of other countries. The Center for Strategic and International Studies concludes that China spends roughly 5 percent of GDP on industrial subsidies, 10 times as much as the United States, Brazil, Germany, and Japan. In sectors like semiconductors, steel, and aluminum, China alone accounts for between 80 and 90% of global subsidies provided to those industries.”
Shambaugh said the renewal of the Section 301 tariffs imposed by the Trump administration was necessary. He said, “We will continue to monitor and respond to China’s use of non-market policies and practices and use the tools at our disposal to secure fair competition.”
Treasury Secretary Janet Yellen also said that tariffs were necessary, but added that they were more necessary in “strategic sectors” – namely semiconductors and in the new clean-energy technologies getting Inflation Reduction Act funding.
But the biggest takeaway from Yellen’s most recent comments regarding Biden’s decision to renew Trump’s tariffs and add new ones on semiconductors, solar and EV cars and batteries, was that the tariffs won’t really lead to inflation.
“I don’t believe American consumers will see any meaningful impact on prices,” she said.
In February, economic analysis by CPA Chief Economist Jeff Ferry showed that tariffs strengthened the U.S. economy and “led to significant reshoring in certain industries.”
Further economic analysis from CPA’s Economics Team shows that the Section 301 tariffs reduced U.S. dependence on China. Additionally, a report by the U.S. International Trade Commission analyzing the effects of Section 232 and Section 301 tariffs on more than $300 billion of U.S. imports found that the tariffs reduced imports from China and effectively stimulated more U.S. production of the tariffed goods, without impacting consumer prices.
Still, Treasury is often loath to protect American industry. Shambaugh’s final remarks made that clear. It would be best, he said, if China fixed its problem and bought what it made rather than flood the world with their goods. That way, the U.S. would not need policies like the CHIPS Act, or tariffs.
“We would prefer China to take action itself to address the macroeconomic and structural forces that are generating the potential for a second China shock,” he said. “China could boost consumption by strengthening its safety net and increasing household incomes. It could support the services sector, not just manufacturing,” he said, then as if providing a clue to what may be the next reason for Washington to restrict China investments and imports, he said they “could reduce harmful and wasteful subsidies.”
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