State and local governments need to stop subsidizing Chinese companies

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Congress is poised to agree on historic legislation designed to help America compete against China, especially in advanced industries. Yet while Washington is working to help U.S. companies compete with China, state and local governments (and even some federal agencies) are helping Chinese companies compete against us. Indeed, according to the organization Good Jobs First, since 2010 U.S. state and local governments have provided nearly $2 billion in subsidies to Chinese companies investing in the United States.

This is akin to the federal government’s long-standing practice of taxing cigarettes while subsidizing tobacco growers. If Congress wants to advance the U.S. economy in its toe-to-toe competition with China, then lawmakers need to pass legislation prohibiting cities, states, and the federal government from providing any funding to Chinese companies investing in the United States.

Mississippi became the first state with its own economic development program when it launched its Balance Agriculture with Industry program in 1936. Today, every state and many counties and cities have economic development organizations that seek out investment, both domestic and foreign. And as we saw from Intel’s recent decision to build a semiconductor fabrication factory (known as a fab) in Ohio, governors and mayors love nothing more than to cut ribbons and trumpet the investments they have lured to their jurisdictions.

The problem is that governors (and mayors) have very different constituencies than Congress and the president. They just want more jobs for their local voters, and they don’t care whether they give $10 million to a U.S. company to build a factory or $10 million to a Chinese company — either way, they get to cut a ribbon and issue a press release; either way local people have jobs.

Yet when states and cities do that (and sometimes even the federal government through loans, loan guarantees, and grants), they are funding the companies of America’s most important competitor, which is perverse.

This is not to say that states and cities shouldn’t be allowed to engage in what used to be termed “smokestack chasing,” or even to chase foreign-owned companies. Greenfield foreign investment (e.g., building new facilities) is an important source of U.S. economic growth and competitiveness — but only when these investments come from allied nations, not from great power competitors. Why subsidize our competitors, when China provides the largest business subsidies in human history to help its firms dominate global markets?

Beyond economics, another reason why Washington needs to step in is that by investing in states, China is buying political influence.

A recent Chinese “think tank” report underscored this by ranking U.S. governors on how friendly they were to China, stating “Governors can ignore orders from the White House.” It went on to note that state-level officials “enjoy a certain degree of diplomatic independence.” It’s bad enough that China supports its firms’ investments in the United States in order to “buy off” state and local elected officials and have them complain to their federal delegations when Washington threatens tough actions against China; it’s worse that local and state governments are giving those firms cash as well.

It’s time for Congress to do something about this. Lawmakers could start by prohibiting any federal government financial aid from being awarded to firms with more than de minimis Chinese interests. At minimum this should include federal loans and grants, along with state and local assistance tied to federal programs such as the Small Business Administration’s 504 and SBIC loan programs.

In addition, lawmakers should make federal aid contingent upon a state and all its local jurisdictions not providing funding to Chinese companies investing in the United States. States would be free to hand cash or other financial benefits to Chinese companies, but they would do so at the risk of losing funding from Washington.

Even if Congress does not act, presumably the Biden administration could issue an executive order preventing any federal aid from going to Chinese companies in the United States. The administration also might legally be able to make federal economic development assistance contingent upon a commitment from states not to not subsidize Chinese companies for a certain amount of time.

But what about the jobs and local economic growth that will be lost? First, assuming that a future Chinese investment deal does not run afoul of the Committee on Foreign Investment in the United States (CFIUS), there is no reason why a Chinese firm cannot invest in China. In the lion’s share of cases where the Chinese firms are investing to serve the U.S. market, it is likely that the choice to invest in the United States is the strategic one, and the choice of where within the United States is the one influenced by subsidies. Cutting off subsidies is not likely to reduce Chinese investment, but it will reduce direct aid to Chinese-owned companies, helping to level the playing field with American companies. And states and cities can use these funds instead to take other steps to help American companies.

Stopping this self-defeating practice won’t magically turn around the U.S.-China economic competition, but it will help at the margin. That is reason enough to do it.

Robert D. Atkinson (@RobAtkinsonITIF) is president and founder of the Information Technology and Innovation Foundation (ITIF), a leading think tank for science and technology policy.

Tags American business American competitiveness American economy American technology Chinese businesses Chinese economy Chinese influence Chinese technology COMPETES Act Economic development incentive Economic policy Great power competition Subsidies

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