Today at the World Economic Forum in Davos (don’t worry I’m not there, just watching from a safe distance) the EU trade commissioner Cecilia Malmström said that she had “some grave concerns on China [which is] massively subsidising state-owned companies.”
She’s right to have these concerns, but just as charity begins at home so does tough-love. While we’re looking at reforming China, she might want to have a quick word with some EU member states.
Finland is a particularly bad example of this. According to OECD data for 2014, the Finnish State was, in 2012, an owner in companies and unincorporated state enterprises with a combined value of approximately 53 per cent in relation to GDP. These include internationally trading companies such as steel producer Outokumpu (where the government owns 27.3%), aerospace engineers Patria (50.1% state owned), and energy producers Fortum (52.43%). Finland’s government is even going backward, purchasing stakes in companies Gasum and Fingrid that will bring them back under majority state control (50.1%). France is not much better with the state maintaining stakes in international companies such as Areva (where they control 86.52%), Air France-KLM (17.58%), and Airbus Group (10.94%).
That last one is particularly interesting. One of the largest and most troubling of the internationally subsidised industries is aircraft. Government subsidy and intervention on behalf of aerospace giants has left them dependent and left us all at risk of escalation into broader trade wars. So it was in the dispute between Bombardier and Boeing, and so it is with Airbus. In 2011 the WTO ruled that Airbus had received $18 billion of illegal subsidies. In 2016 the WTO found that not only had they failed to deal with action against $17 billion worth of those subsidies provided to Airbus, but that an additional $5 billion in illegal launch aid had subsequently been provided to support the building of the A350.
This is billions of taxpayer money from across Spain, France, Germany and elsewhere in the EU. Taxpayers are coerced into gambling on the success of subsidized commercial projects (like the A380 whose production is currently being pared down). And this kind of intervention only leads to rent-seeking in order to obtain more and more subsidy, while disguising the full cost of goods and services.
So far, so academic. But one of the key reasons to get governments out of the industry worldwide comes from a new entrant and another government entering the fray. In May of last year the C919, a new jetliner produced by China’s state-owned COMAC, saw its first flight. Now it is fully commercial it will be in competition with aerospace producers in the US and EU. With subsidies being provided by the EU it will be hard to argue with a straight face that the Chinese state shouldn’t be able to use its political clout to force through contracts, that it shouldn’t use public funds to prop up the company or unduly support the company. In other words, even more rent seeking, and capital tied up beyond what’s needed in the jet manufacturing industry
But shouldn’t we support these ‘strategically important sectors’? Well, whenever money is lent, there is a risk it won’t be paid back. Government money is either crowding out the private sector or it is supporting lending that private-sector lenders judge too risky. There is one good thing I can say about foreign subsidy. That is, that it is keeping our import costs low on the back of their taxpayers. Unfortunately, as talk of trade wars at Davos shows, they encourage what my old colleague Sam Bowman described as a form of a kind of subsidy alcoholism, where our own government and lobbies move to protect industry after industry from pernicious foreign actions. That is where the real rot sets in. And that is why it is so important to stamp out the practice early on where we can.
The EU’s trade commissioner works across borders, with a mandate to free-up trade and secure efficient markets. It’s her job to ensure the EU is on a level playing field. That has to start at home. She should tell member states to cease their subsidies.