This is getting too hypothetical but the very purpose of the WTO is to remove this sort of tariff on foreign produced goods.

Twofish – There really is no particular reason to think that a Chinese owned company would be more or less friendly to American workers than an American company.

Yes but what about a Chinese-GOVT owned company. A Chinese private citizen may not care about unemployment in Shanghai but the Chinese government sure as hell cares.

There’s nothing in WTO that prevents China from taxing Chinese companies that own factories in the United States. There’s also nothing in the WTO that prevents China from taxing US companies that own factories in China as long as they are taxed at the same rate as domestic factories.

observer: Also taxes by themselves are not going to keep the unemployed masses under control.

Give them unemployment benefits to tie them over, and then use the money that you are making from the overseas factory to start a new business.

observer: In the real world it is much simpler just to shutter the productive foreign factory and keep the jobs in China even if they are unproductive.

The overseas factory is making money. The Chinese factory is not. The incentives are such that you are better off shuttering the local factory, even if you are paying a lump sum of cash. Once you close the overseas factory, then where are you going to get the money to pay your workers?

In any case, you can see the behavior of Chinese companies in China. It went through a rather painful period of industrial restructuring. Also the situation of local versus foreign is relevant in the Chinese situation where many of the factories are owned by provincial governments.

observer: People who work in washing machine factories in the US would be concerned about their jobs. Vendors who supply to these companies would be worried about whether their contracts will be outsourced to Chinese firms.

There really is no particular reason to think that a Chinese owned company would be more or less friendly to American workers than an American company.

In particular, it seems like an enormous waste of money for a Chinese company to buy an American company and then shut down the American factories and move the jobs to China, since they already have factories in China.

http://seattletimes.nwsource.com/html/businesstechnology/2004425504_chinainvest20.html

People who work in washing machine factories in the US would be concerned about their jobs. Vendors who supply to these companies would be worried about whether their contracts will be outsourced to Chinese firms. Communities where these factories are located would be concerned about whether businesses will continue to grow and pay taxes.

… and rapidly run foul of the WTO. Also taxes by themselves are not going to keep the unemployed masses under control. In the real world it is much simpler just to shutter the productive foreign factory and keep the jobs in China even if they are unproductive.

Twofish – I should point out that I’m a believer in markets and letting managers manage. If Wen Jiao-Bao starts micromanaging washing machine factories, he’ll end up running those factories into the ground, they’ll lose sales to better run competitor and the Chinese government will lose money.

This is a false dichotomy. What are the biggest centrally planned organizations in the planet today? Wal-Mart Corporation, UPS, Pepsi-Cola etc, these easily dwarf any Chinese state-owned factory.

You impose a corporate tax on profits of the company that owns the overseas factory. If there is money left over after the taxes, you can have a shareholders meeting and have the company issue a dividend to the state.

You can also negotiate a double taxation treaty with the other country.

(I should point out here that it is crucial for this to work that state be a large shareholder. Otherwise, the company can reincorporate in a tax haven. On the other hand, that’s not a trick that only China can play. If Calipers prevents an American corporation from relocating to Bermuda to avoid paying US tax, that’s a good thing….. Say…..)

http://www.treasurer.ca.gov/news/releases/2002/11182002calpers.pdf

observer: I think you’ll understand Brad’s (and mine) concerns better if you reflect on that a bit more.

I still don’t quite see the problem with respect to Chinese SOE’s. I can see why you wouldn’t want the Chinese government owning Lockheed-Martin or Boeing, but suppose companies ultimately answering to the state council own 75% of the washing machine factories in the US. What is the bad thing here?

I should point out that I’m a believer in markets and letting managers manage. If Wen Jiao-Bao starts micromanaging washing machine factories, he’ll end up running those factories into the ground, they’ll lose sales to better run competitor and the Chinese government will lose money.

But suppose I’m wrong and central planning does work, and in the process of running everything from Beijing we find that the economic structures that Beijing has invented do work. Well thing, shouldn’t the nations of the world adopt them?

Twofish – Wouldn’t it make more sense to shut down the less productive factory, tax the more productive factory, and then use that it pay for the unemployment benefits of the less productive factory?

How do you plan to tax a factory that is located overseas?? I think you’ll understand Brad’s (and mine) concerns better if you reflect on that a bit more.

I’m not sure, and I don’t think anyone in Beijing is quite sure either. It seems to change every three months.

bsetser: presumably it primarily exists as an alternative mechanism for managing the fx china has to accumulate to avoid RMB appreciation

I don’t think that the China Rail or Huijin accquisitions make any sense if that is the primary goal.

observer: Sometimes “strategic” and “commercial” objectives will be complementary, sometimes contradictory.

It really depends on how broadly you look at things. One thing that appears to be the case is that large scale subsidies to industries causes huge problems. China has just gone through two decades of very painfully restructuring its industrial infrastructure, and it will be a while before it tries some things that just don’t work.

observer: For e.g. a state owned investor might prefer to shut down a more productive factory abroad to keep a less productive factory in China. The lost productivity can be made up by not having to pay out unemployment insurance or other jobless benefits.

Wouldn’t it make more sense to shut down the less productive factory, tax the more productive factory, and then use that it pay for the unemployment benefits of the less productive factory? If you don’t structure the incentives to promote productivity, then what happens is that you end up with an non-productive industrial infrastructure that looks like China-1975, which is what people have been trying to move away from.

There are ways of dealing with this problem, one of which is the make the the people who determine what factories get shut down, a different set of people than the people that pay out unemployment.

The problem with CIC using political rather than commercial criteria to do strategic investments is that it just doesn’t work to create world class companies. If you look at the efforts to create parastatals in Latin-America, you end up with these incredible messes, that end up being a drain on the economy.

If it did work, I wouldn’t object to it. If having centralized state-owned companies did succeed in creating powerful competitive companies, and all of the fears of China Inc. taking over the world were valid, then China should go ahead and do it, and then the US should respond by ditching this free market thing and nationalize its industries to compete.

I don’t care what the color of the cat is.

This is a strawman. Sometimes “strategic” and “commercial” objectives will be complementary, sometimes contradictory. When they contradict each other, it is a problem. It is not necessary they have to contradict each other all the time for it to be a problem.

For e.g. a state owned investor might prefer to shut down a more productive factory abroad to keep a less productive factory in China. The lost productivity can be made up by not having to pay out unemployment insurance or other jobless benefits.