Tag Archives: subsidies

09.19.2012 | Playing Chicken With China?

Yesterday’s headlines about the US taking China to the World Trade Organization (WTO) for unfair auto and auto parts subsidies took me to chicken feet and The Economist’s Sinodependency Index. Knowing the major firms that depend on China for revenue might help us further assess our relationship.

Approximately 20 years ago, chicken paws, used primarily for animal feed, were worthless. Now though, with Perdue producing more than a billion chicken feet a year, paw exports annually return $40 million in revenue. The reason is China.

A delicacy in China, chicken feet are a perfect U.S. export. US chickens are fat and juicy because we grow big chickens. In addition, their “natural scarcity” (only 2 per chicken) bestows some prestige on diners who order them.

Similarly, Intel, Apple, IBM and GE generate considerable revenue from China. Called a Sinodependency Index, The Economist displayed the relative revenue dependence on China of 135 firms in the S&P 500. Their goal was to show the extent to which China has woven its presence within the fabric of world trade.

Although some of their statistics were rough because of each firm’s revenue breakdown, The Economist believed that their Index conveyed the information effectively. In a copy of their chart below (interactive with percents if you visit their site here), you can see their color coding for industry and size coding for how a firm’s revenue compared to the other 134 in the index. The top 10 in their list, in size order, are: Intel, Apple, IBM, GE, Caterpillar, Procter & Gamble, Johnson & Johnson, Yum Brands, Philip Morris, Boeing.

As economists, we could not conclude without mentioning comparative advantage. First explained by 19th century economist David Ricardo, comparative advantage says that worldwide productivity increases when nations specialize and export the good or service for which they sacrifice the least to make. But, what to do when a nation employs unfair trade practices like subsidizing their exports to make them cheaper and adding duties to imports to make them more expensive?

My Sources and Resources: A wonderful podcast and post from Freakonomics was the source of my chicken feet facts while you can look directly at The Economist’s Sinodependency chart, their article and a link to the math behind the Index here. For more on the current trade dispute in the World Trade Organization (WTO), here is one article from Bloomberg. And here, this EconLife post presents more on a past trade dispute with China that involved chicken paws and is the source of 2 sentences in this entry.

Trade Dependency on China From the Economist

135 Firms From S&P 500: Revenue From China from the Economist

Posted by: adminEcon
Tags: apple, Bloomberg, chicken paws, China, comparative advantage, David Ricardo, duties, Freakonomics, GE, IBM, Intel, J&J, opportunity cost, S&P 500, Sinodependency Index, subsidies, tariffs, The Economist, trade disputes, unfair trade practices, world trade, World Trade Organization (WTO)
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02.24.2012 | Chinese State-Run Firms

Where would your cell phone, your car, your gasoline, your savings account and the TV station you watch all have one thing in common?

China.

Called state capitalism, 45% of the Chinese economy is owned or controlled by the government. With 655 million wireless subscribers, China Mobile, a government controlled firm, is the largest telecommunications firm in the world. You could be driving a General Motors car but in China, General Motors is a minority owner of joint ventures with car companies controlled by the government. Similarly, the Sinopec Group, yes, controlled by the Chinese government and the 5th largest firm in the world would have provided your gasoline.

You see where this is going. And it does not stop with the 121 very large SOEs (state owned enterprises) and state controlled enterprises. Beyond that hundreds of thousands of businesses receive favorable treatment from the Chinese government through “preferential access to capital and forced technology transfer from foreign firms.” For more of a complete discussion, you can listen to NPR’s Planet Money podcast or read this excellent U.S. government report on China.

Our bottom line? Next week a report written by the World Bank and “government insiders” will look at the sustainability of China’s state capitalism and conclude that to continue its vibrant growth, it has to change. More next week on the report.

The Economic Lesson

First explained by economic thinker David Ricardo, comparative advantage optimizes worldwide efficiency when each nation produces goods and services for which it has a low opportunity cost. Chinese subsidies provided through state capitalism distort the beneficial impact of comparative advantage.

An Economic Question: On a traditional supply/demand graph, illustrate the impact of a government subsidy to a manufacturing firm.

Posted by: adminEcon
Tags: China, China Mobile, comparative advantage, David Ricardo, economic growth, opportunity cost, Sinopec Group, state capitalism, subsidies, supply
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02.06.2012 | High and Low Energy Markets

Let’s rewind to 2008 for a moment. At $13 per thousand cubic feet, the price of natural gas was soaring. Close to $91 a barrel, the price of oil was exceeding recent highs. Selling for more than $200 per kilogram, even the price of the silicon used to manufacture solar panels was very expensive.

At the U.S. Department of Energy, people were saying that we had better figure out some better alternatives. Soon, primarily for solar projects, billions dollars of loan guarantees and subsidies poured from federal coffers to support new clean tech energy production.

And then, everything changed. New technology emerged for natural gas production and its price declined from $13 to less than $3 per thousand cubic feet. The recession diminished the demand for oil and its price plummeted. Meanwhile, the solar panel world was radically changing. Attracting new producers, high silicon prices soon plunged when the supply side of the market was deluged.

Our bottom line: The power of the market.

This Wired article tells the whole story.

The Economic Lesson

During the 18th century and part of the 19th century, energy and illumination were all about whale oil. Comparable perhaps to Exxon Supreme or Gulf Premium, oil from the sperm whale was considered the best. Originating in the large cavity of the sperm whale’s head, the spermaceti produced the highest quality whale oil to light the home and use in the factory.

Always, though, the march of creative destruction continued as new resources emerged. Oil wells in Pennsylvania, Thomas Edison and electricity, new uses for coal…wind, solar, coal, nuclear, petroleum, natural gas. And consistently, the market has selected the “winner.”

An Economic Question: Knowing “the power of the market,” how much through subsidies, taxes, and grants should government encourage the trajectory of our energy usage?

Posted by: adminEcon
Tags: energy, loan guarantees, natural gas, oil, solar panels, subsidies, whale oil
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01.11.2012 | Slippery Subsidies

By Mira Korber, guest blogger, Kent Place School alumna, Yale student, and recent traveler to Buenos Aires, Argentina.

Venture down any avenue in Buenos Aires and you will certainly see tremendous lines coiling around the sidewalks as daily commuters await the infamous “colectivo,” or Argentine public transport city bus. Wait a while, then a while longer, and perhaps your bus will arrive quickly, perhaps not. But in the end, it’s worth the wait as your ride is so cheap, you can put up with a little unpredictibility.

Climb aboard and spend only between 1.10 and 1.25 pesos for a ride anywhere in the city of Buenos Aires. But now, it’s going to cost you a few more “monedas” (coins).

To ameliorate their massive national debt, the Argentine government has no choice but to cut back on national spending, some of which is dedicated to subsidizing the “colectivo” system.

Subway fares have already increased by 127% — to 2.50 pesos (.58 US cents) and colectivos could raise their 2012 rates by as much as 3 pesos. Additionally, the considerable water, gas, and electric subsidies are on their way out; 260,000 Buenos Aires residents living in affluent neighborhoods have lost all government assistance.

In 2011, the government doled out almost 69 billion pesos (approx. $16.4 billion USD) in subsidies, the largest recipients being energy (60.4%) and transportation (27.9%). A remaining 31.9 billion pesos went towards social welfare programs.

Try out these interactive subsidy graphics at LaNación.com, one of Argentina’s most prominent newspapers; you can find month-to-month costs of subsidizing buses. And here, you can find an interactive map of public transport prices around the world as well as an animated representation of the elements fueling each bus, the “colectivo porteño.” (NB. “recorrido” = route, “usuario” = user, “boleto” = ticket, “subsidio” = subsidy.)

Read here about why such extensive subsidies were implemented in the first place, and how the proposed 2012 subsidy cuts will only comprise 4.8 billion of privately estimated expenditure of 70 billion.

The Economic Lesson

Government subsidies exist to (1) help boost industries, (2) encourage businesses to hire more employees, and (3) ease living costs for a country’s residents. By keeping prices artificially low, Argentina experienced tremendous growth in the years following economic crisis in 2001-2002. In 2011, the Argentine GDP measured up at 8.3% (see bottom of article). But now, due to subsidy lifts that will turn up the heat on already-high inflation (privately estimated around 25%), the economy’s 2012 GDP is projected to be only 2-3%.

Posted by: adminEcon
Tags: " subsidy, Argentina, buses, government spending, public transport, subsidies, utilities
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09.02.2011 | Solar Panel Problems

We could call it a double pay-off. Subsidized by stimulus spending, Solyndra could create jobs and develop “green” technology. But it did not work out that way.

According to the Washington Post and the NY Times, solar panel maker Solyndra got a $527 million stimulus-related loan from the US Treasury and an Energy Department loan guarantee. With total sales near $250 million at the end of 2010, the firm employed about 1000 people. Now though, they need bankruptcy protection and are stopping production.

Inexplicably, a Department of Energy representative said, “The project that we supported succeeded. The facility was producing the product it said it would produce, and consumers were buying the product.”

Here, an econlife post looks at how government is subsidizing electric car manufacture.

And here is another post on solar panels.

The Economic Lesson

When government subsidizes business, it affects the supply curve. Upward sloping, the supply curve shifts to the right because money from government cheapens the cost of production. As a result, it crosses the downward sloping demand curve at a lower point, and equilibrium price drops.

Even with the subsidy and supply shifting to the right, U.S. made solar panels are more expensive than China’s.

An Economic Question: Do you believe that the US government should subsidize an industry and a technology that it wants to encourage or should it let the market system make the decision?

Posted by: adminEcon
Tags: bankruptcy, China, Department of Energy, solar panels, subsidies
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