If China removed its export subsidies consumers around the world would see their real income fall by 1% – but China’s national income would rise by 3%, according to research presented at the Royal Economic Society’s 2013 annual conference by Fabrice Defever and Alejandro Riaño of the University of Nottingham. Their study argues that a key, under-appreciated factor behind China’s economic growth is the wide range of government incentives aimed at encouraging Chinese firms to produce almost exclusively for the foreign market, something the authors call ‘pure exporter subsidies’.
These subsidies usually take the form of tax rebates that are conditional on a firm exporting all or most of its production. For example, until 2008, foreign-owned firms located in China and exporting more than 70% of their production enjoyed a 50% reduction in their corporate income tax rate, which could have been further decreased by locating in one of the numerous special economic zones.
The research finds that a direct consequence of these exporter subsidies is that one-third of Chinese manufacturing exporters sell more than 90% of their produce abroad – compared with just 1% of US exporters. The analysis suggests that to support such a large number of pure exporters, China’s total spending on these subsidies could be as much as 1.5% of GDP. Their findings were that China stands to gain 3% in real income if it decides to stop using this type of trade policy. But as imports from China would become more expensive without these subsidies, consumers in the rest of the world would experience a 1% loss in real income.
Source: Romesh Vaitilingam, Media via RES Office