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An Assessment of China's Subsidies to Strategic and Heavyweight

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An Assessment of China's Subsidies to Strategic and Heavyweight An Assessment of China’s Subsidies to Strategic and Heavyweight Industries Submitted to the U.S.-China Economic and Security Review Commission By Capital Trade Incorporated Capital Trade Incorporated 1200 18th St., NW, Suite 601 Washington, DC 20036 202-463-1850 Table of Contents Table of Contents................................................................................................................. i Table of Figures .................................................................................................................iii Executive Summary............................................................................................................ v Introduction......................................................................................................................... 1 Part I: Subsidies in International Trade and the Special Case of China ............................. 6 Introduction..................................................................................................................... 6 Subsidies Defined ........................................................................................................... 7 Subsidy Investigations of the U.S. Department of Commerce ..................................... 12 Subsidy Investigations in Canada and Australia........................................................... 21 International Perspectives ............................................................................................. 23 Other Preferences.......................................................................................................... 27 Part II: Valuation of Chinese Subsidies to Absolute Control and Heavyweight Industries ........................................................................................................................................... 33 Introduction................................................................................................................... 33 Analysis of Strategic Subsidiaries ................................................................................ 33 Armaments................................................................................................................ 33 Power Generation and Distribution .......................................................................... 41 Oil and Petrochemicals ............................................................................................. 45 Telecommunications................................................................................................. 54 Coal........................................................................................................................... 57 Civil Aviation............................................................................................................ 60 Shipping .................................................................................................................... 63 Analysis of Heavyweight Subsidiaries ......................................................................... 65 Machinery ................................................................................................................. 65 Automobiles.............................................................................................................. 68 Information Technology ........................................................................................... 71 Construction.............................................................................................................. 76 Iron and Steel and Nonferrous Metals ...................................................................... 78 Identifiable Patterns of State Support ........................................................................... 85 Upgrade and finance the armaments industry........................................................... 86 Development of strategic sectors.............................................................................. 86 Resource acquisition ................................................................................................. 87 Raising China’s international profile........................................................................ 87 Domestic consolidation and control.......................................................................... 88 Shift production and R&D facilities to China........................................................... 88 Encourage domestic brands ...................................................................................... 95 Part III: Competitive Impact of Chinese Subsidies on U.S. Firms ................................... 98 Introduction................................................................................................................... 98 Economic Effects of Chinese Subsidies ..................................................................... 100 Experiment 1: Reduce subsidy on electricity prices to the aluminum industry in China....................................................................................................................... 101 Experiment 2: Reduce subsidies to capital investment........................................... 103 i Experiment 3: Reduce subsidies to capital investment and reverse changes to capital stock ........................................................................................................................ 110 Recent Trends Chinese State Support......................................................................... 116 Conclusions..................................................................................................................... 118 Appendix 1: Illustrative List of Export Subsidies, Agreement on Subsidies and Countervailing Measures ................................................................................................ 122 Appendix 2: List of China’s Subsidies Reported to the WTO Pursuant to Article XVI:1 of the GATT 1994 and Article 25 of the SCM Agreement................................................. 125 Appendix 3: Calculated CVD rates in U.S. subsidy investigations involving China..... 128 Appendix 4: China CVD rates by program and firm...................................................... 130 Appendix 5: China CVD rates in Canadian investigations............................................. 140 Appendix 6: Summary of GTAP aggregations and experiments.................................... 143 ii Table of Figures Table 1. Strategic and heavyweight industries examined in this report ............................ 4 Table 2. Financial contributions and benefits conferred according to U.S. CVD regulations........................................................................................................................... 8 Table 3. U.S. countervailing duty investigations initiated by the U.S. Department of Commerce, 2006-2008...................................................................................................... 12 Table 4. U.S. countervailing duty subsidy rates as determined by the U.S. Department of Commerce, 2006-2008...................................................................................................... 15 Table 5. Most commonly countervailed programs and average rates in China CVD cases, 2006-2008 ......................................................................................................................... 16 Table 6. Most common types of financial contributions in China CVD cases, 2006-2008 ........................................................................................................................................... 17 Table 7. Chinese subsidy programs oriented toward FIEs and countervailed by the U.S. Department of Commerce, 2006-2008 ............................................................................. 19 Table 8. Canadian countervailing duty investigations initiated by the Canadian Border Services Agency, 2006-2008 ............................................................................................ 22 Table 9. Valuation of subsidies to AviChina, 2007.......................................................... 37 Table 10. Valuation of subsidies to CASIL, 2007............................................................ 41 Table 11. Valuation of subsidies to HPI, 2007 ................................................................. 45 Table 12. Valuation of subsidies to PetroChina, 2007...................................................... 50 Table 13. Valuation of subsidies to BlueChem, 2007 ...................................................... 54 Table 14. Valuation of subsidies to CTC, 2007................................................................ 57 Table 15. Valuation of subsidies to Shenhua, 2007.......................................................... 59 Table 16. Valuation of subsidies to Air China, 2007........................................................ 62 Table 17. Valuation of subsidies to COSCO, 2007 .......................................................... 65 Table 18. Valuation of subsidies to JTM, 2007................................................................ 68 Table 19. Valuation of subsidies to DMG, 2007 .............................................................. 71 Table 20. Valuation of subsidies to CEC, 2007................................................................ 73 Table 21. Valuation of subsidies to IGE, 2007................................................................. 76 Table 22. Valuation of
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