The Blurry Line Between Stimulus and Protectionism

Tomorrow (4 Feb) the State Council and MIIT (Ministry of Industry and Information Technology, 工信部) are planning to announce a plan to revitalize China's equipment manufacturing industry.

The long list of affected industries is expected to include: general machinery, petroleum/petrochemical equipment, electrical appliances, machine tools, agricultural machinery, engineering machinery, heavy equipment, instrumentation, printing machinery, environmental protection machinery, internal combustion engines, hydraulic pneumatic seals, bearings, moldings, etc.

The plan is expected to include six provisions:

• To establish special funds for technological transformation of the equipment manufacturing industry
• To create specialized research projects for major technological equipment
• To strengthen macro control to ensure domestic market demand for equipment and effectively spurring development of the Chinese equipment industry
• To begin construction of projects in transportation, energy and raw materials over the next three years, and give priority to purchase of domestically manufactured equipment (i.e. "buy Chinese")
• To cancel the policy promulgated in 2007 that provided subsidies for imported equipment
• To promote restructuring (联合重组) of enterprises in the equipment industry and increase the degree of financing support

Because the government apparently decided in 2007 that China lacked the necessary equipment to continue its pace of development, subsidies for the purchase of imported equipment were put into place. Now that plenty of examples of high-technology equipment have been imported, the government has now decided that it's time for China to develop (reverse-engineer?) its own equipment.

Fair enough. Foreigners benefited from China's import subsidies for awhile. It's certainly their prerogative to cancel them. And given the "buy American" provision in the stimulus bill that was passed by the U.S. House of Representatives, the "buy Chinese" provision is to be expected. However, given the comprehensive nature of these plans, what we may be seeing here is a significant step back toward the days of industrial planning. (Though some may argue that China never really stepped that far away from planning to begin with.)

Seeing these plans to stimulate the domestic equipment industry, and previously mentioned stimulus plans for the steel, auto and appliance industries, it becomes increasingly difficult to argue that China is doing nothing to stimulate its domestic economy.

However, the much bigger question is: How big does a stimulus plan have to become before it starts to be perceived as protectionist?


Sources: 21st Century Business Herald, Economic Observer