From the NY Times:
Aided by at least $43 million in assistance from the government of Massachusetts and an innovative solar energy technology, Evergreen Solar emerged in the last three years as the third-largest maker of solar panels in the United States.
But now the company is closing its main American factory, laying off the 800 workers by the end of March and shifting production to a joint venture with a Chinese company in central China. Evergreen cited the much higher government support available in China.
China’s real advantage lies in the ability of solar panel companies to form partnerships with local governments and then obtain loans at very low interest rates from state-owned banks.
Evergreen, with help from its partners — the Wuhan municipal government and the Hubei provincial government — borrowed two-thirds of the cost of its Wuhan factory from two Chinese banks, at an interest rate that under certain conditions could go as low as 4.8 percent, Mr. El-Hillow said in August. Best of all, no principal payments or interest payments will be due until the end of the loan in 2015.
By contrast, a $21 million grant from Massachusetts covered 5 percent of the cost of the Devens factory, and the company had to borrow the rest from banks, Mr. El-Hillow said.
Banks in the United States were reluctant to provide the rest of the money even at double-digit interest rates, partly because of the financial crisis. “Therein lies the hidden advantage of being in China,” Mr. El-Hillow said.
Location subsidies are complicated, in terms of both the law and the policy. With regard to the law, there is no inherent violation of WTO rules in using location subsidies. However, if there are certain conditions attached (e.g. export) there will be a violation. And there is always the possibility that particular subsidies will cause "adverse effects" to trading partners and violate the rules for that reason. But each measure will differ, so you have to look at the terms and effects of each one individually.
What about the policies? Do these kinds of subsidies cause economic harm, and thus governments should come up with additional rules to deal with them? One obvious point is that there are easily identifiable winners and losers arising from specific competitions for factories. China "won" the solar panel factory described in the article, and the U.S. "lost" it. But what are the implications of that? Are the winners confident that they will continue to win these competitions, and thus think that the existing system (of a lack of rules) should be preserved? Do the losers hope to learn how to compete better so as to win the next round, or would they rather develop international rules that eliminate the competition entirely? Should objective policy-makers in all countries step back from the specific contests and think about whether the system makes sense? Would we all be better off if local, sub-national and national governments focused their competition on strong education and infrastructure programs, instead of competing by giving money to large corporations? Do the winners actually win anything except for the opportunity to provide subsidies until the company leaves for higher subsidies (or for some other reason) elsewhere?