Let’s not join America’s posse against China's SOE subsidies

According to today’s Australian Financial Review, Australia is coming under pressure to “join an international coalition of countries to take on China over its unfair industrial subsidies for state-owned enterprises”. We need to resist this pressure.

There is little doubt that China’s state-owned enterprises or SOEs receive considerable support from the country’s Central Government in Beijing, as well as from Provincial and local governments where operations are based. Support ranges from low-interest loans with favourable repayment terms, to tax breaks and cheap land, as well as direct financial handouts.

Regardless, Australia should resist the temptation to join a US-led international coalition to take on China over these subsidies. There are several reasons we should not sign onto this posse.

First, with Australia-China relations at one of its lowest points since the Whitlam Government recognised the PRC in 1972, we don’t need to further antagonise Beijing, particularly on a matter of little importance to us (see points two and three below). The bilateral relationship currently is at a very low point following calls by the Australian Government for an independent international inquiry into the coronavirus pandemic. The call was soon followed by China’s ambassador to Australia threatening trade retaliation and Beijing imposing tariffs on Australian barley exports, which it claimed were being dumped on China, suspending approval for several beef abattoirs, and warning Chinese students and tourists against travelling to Australia because of alleged increased racist attacks on Asians in Australia. Although Beijing’s bullying and economic coercion must be condemned, Australia didn’t need to provoke Beijing, as I’ve argued previously, by calling for the coronavirus inquiry in a way that singled out Beijing’s mishandling of the outbreak, particularly when we were (and remain) one of the least impacted countries by the pandemic. I'm not saying we should cave in to Beijing's bullying or that we should not call out Beijing where our real interests are at stake; what I am saying is that we need to be smarter about the battles we choose to fight. Going after Beijing for subsidising its industrial SOEs is not something over which we need to pick a fight with China, for the reasons I explain in the next two paragraphs.

Secondly, China’s industrial subsidies do not harm Australia because we do not compete in any major way with China’s manufacturing sector. As Alan Oxley, a former Australian trade negotiator, pointed out to the AFR, Australia’s exports are comprised primarily of resources, agriculture, tourism, and education. Simply put, we are not competing with China’s SOE (and other) manufacturers in world markets, and therefore we are not heavily impacted by its manufacturing subsidies.

Thirdly, Australian consumers are not directly harmed but, in fact, benefit from the import of manufactures made by China’s (subsidised) industrial SOEs. Whether Chinese manufacturers are subsidised or not, cheap imports from China of shoes, textiles, machinery and a range of other products, have benefitted Australian consumers since the 1980s when Australia started removing its own tariff regime that protected our then very uncompetitive manufacturing industries. Indeed, cheap imports of, for example, mechanical components that go into more sophisticated manufactures by domestic companies help those Australian companies to remain competitive on international markets. I'm not saying Australian companies that make sophisticated manufactures here are beneficiaries of China's SOE subsidies as I don't know; but, if they were benefitting from China subsidising its SOE manufacturers, it's no skin off our noses.

Finally, it should be remembered that countries that subsidise their industries do more harm in the long-term to themselves. Subsidising uncompetitive industries and businesses imposes higher costs on their own systems through higher taxes and suppressed consumer spending. Long-term economic growth is thus impacted. In the worst-case scenarios, zombie businesses are being kept on prolonged life-support, a problem Beijing has been grappling with for some years.

We need to get better at picking our fights with Beijing. If its subsidies for SOEs benefit us and do more long-term damage to China's own economy, maybe this is one domestic issue of China’s we should not take an interest in. Surely there are bigger issues in the Australia-China dynamic for us to focus on.