An Assessment of China's Subsidies to Strategic and Heavyweight

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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