via openDemocracy (flickr)

via openDemocracy (flickr)

The U.S. China Economic and Security Review Commission has issued its annual report {giant .pdf}. Robert Borosage of the Campaign for America’s Future hosted a conference call for the Co-Chair of the Commission, Carolyn Bartholomew, and Clyde Presotwitz of the Economic Strategy Institute, who was U.S. Trade Representative under Reagan. The call offered these experts an opportunity to talk about China’s industrial policy.

Prestowitz said something that focused the entire issue for me. He pointed out that labor is not a significant factor in chip manufacture. Why then are so many chip manufacturing facilities located in China? He says it’s because the Chinese wanted these as part of their industrial policy, so they seized the land, built the infrastructure, provided low-cost loans, granted energy and water subsidies, trained a work force, and gave the manufacturers tax breaks. Now they offer more subtle incentives, funding for research and development, refunds of the value added tax and space in industrial parks. As Prestowitz said, the plants are there for financial reasons.

This is Chinese policy. They want to grow their economy by attracting foreign capital and foreign technology. They intend to maintain state control over crucial industries.

China’s overall industrial policy … is characterized by three main parts: (1) the creation of an export-led and foreign investment-led manufacturing sector; (2) an emphasis on fostering the growth of industries such as high-technology products that add maximum value to the Chinese economy; and (3) the creation of jobs sufficient to reliably employ the Chinese workforce, thereby allowing the Chinese Communist Party to maintain control.

Many Chinese subsidies violate the requirements of the World Trade Organization, and the US has sought sanctions, but the Commission says that the WTO rules are meant to deal with narrow issues, not the broad national practices of China. The WTO rules require consultations as well as litigation, and even after a victory, they are able to delay. By the time the US and Canada won a WTO ruling barring favoritism in manufacture of auto parts, many manufacturers had moved production to China, so those jobs were lost.

Don’t think that we will be able to compete with our high tech products. China uses industrial policy to achieve technology transfer. Here’s an example from the call. China had not mastered several crucial issues in the manufacture of jet propulsion blades. Similar techniques are used in giant wind turbines. Under the guise of building wind turbines, the Chinese learned these techniques, and transferred them to other blade uses, such as submarines and jet engines.

If we offered subsidies like that here, the uproar from both sides would be overwhelming. It is an article of faith that the government cannot be involved in picking winners and losers. As a result, we are unable to formulate national plans. Our economy operates on the basis of random and short-term decisions. Each business tries to maximize its own good. No business has to consider the benefits of their decisions on the whole nation. No business has to consider whether its decisions might be harmful to the national interest. No business even considers whether its decisions might be harmful to its own interests in the long run. As a result, we have lost our manufacturing base and have no tools to do better.

It’s apparent we need to deal with this. But how? We can’t even use the phrase “industrial policy” in political discussions with either party. Our government is fractured. We no longer operate under majority rule, as the Senate clearly shows.

Denis Simon, professor at Penn State’s School of International Affairs, testified before the Commission:

China sees the global financial crisis as an affirmation that ‘‘China holds the philosophical high ground, reinforcing its long-held position at home and abroad that unbridled capitalism and a weak state are a sure recipe for serious sociopolitical and economic problems’’ ….

An accurate description of the US after years of corporatist rule: unbridled capitalism and a weak state.