The European Commission accuses the Chinese government of distorting competition with subsidies for electric cars and has launched an investigation into public support for electric cars in China. The President of the European Commission Ursula von der Leyen said in her “State of the Union Address” that global markets were being “flooded with cheaper Chinese electric cars,” posing a possible threat to the European Union’s fledgling and promising electric car industry. The anti-subsidy investigation is therefore intended to determine whether manufacturers of battery electric vehicles (BEV) in China benefit from countervailable—i.e., specific and advantageous to the receiving companies—subsidies and whether these are causing or threatening to cause economic damage to BEV manufacturers in the European Union (EU).

Similar discussions have been held regarding subsidies to Chinese producers of railway rolling stock and of wind turbines. In February 2024, the European Commission had launched an investigation into China Railway Rolling Stock Corporation (CRRC) for allegedly using subsidies to undercut European competitors in a public procurement procedure. With respect to wind turbines, no official anti-subsidy investigation has been launched so far. However, leading EU officials have argued that massive subsidies to Chinese manufacturers are encouraging cheap imports from China into the EU, driving European wind turbine manufacturers to the brink of ruin.

Even though these allegations are to be taken seriously, the data situation is currently highly unsatisfactory and the requirements for legally secure interventions by the European Commission, i.e., the imposition of countervailing duties on Chinese imports, are high. And even if the requirements for legally secure interventions were met, the question still arises as to whether import restrictions would actually be in the long-term interests of the European (and especially the German) industry and consumers.

The central prerequisite for an adequate analysis and adequate policy measures is reliable data on the scale and structure of Chinese subsidies in the areas mentioned. The available data is currently scarce, partly misleading and even contradictory. Tracking Chinese subsidies is a tough and challenging task for researchers because the Chinese subsidy system is highly complex and intransparent.

The current paper assembles data on overall industrial subsidies in China from different sources and provides some new data based on the analysis of the Chinese government’s most recent final reviews of purchase subsidies for new energy vehicles and the annual reports of the most important Chinese companies in the electric car and wind energy sectors.

The data shows that overall industrial subsidies in China are significantly higher than those in large EU/OECD countries. Depending on the type of subsidies covered and the data sources and methods used, the estimates vary greatly between the different studies, however. For 2019, even according to a very conservative estimate, Chinese industrial subsidies amount to about Euro 221 bn or 1.73% of Chinese GDP. Relative to GDP, industrial subsidies in China would thus be at least three to four times higher than in large EU/OECD countries. According to a more encompassing study, the ratio could be as high as nine (relative to company sales). And this does still not include several forms of particularly hard to quantify government support measures which are arguably also of importance particularly in China. The Chinese government heavily subsidizes companies in the fields of electromobility, rolling stock and wind power, and makes the payment of subsidies conditional on production in China. With BYD (electric cars), CRRC (rolling stock) and Mingyang (offshore wind turbines), Chinese companies have got to dominate the Chinese home market for their products and are increasingly penetrating export markets as well. And even as the Chinese central government has recently abolished some of the large demand-side subsidies in these sectors— such as purchase subsidies for BEV or preferential feed-in tariffs in wind power—central and regional governments continue to support these industries through various other forms of direct and indirect subsidies. Direct subsidies to some of the dominant Chinese companies in these sectors, such as BYD for BEV or Mingyang for offshore wind turbines, have even been increased recently, helping these companies in their attempts to expand beyond China and gain a presence in EU markets.

We attempt to quantify Chinese industrial subsidies in Section 2 and discuss the challenges and potential policy response of Chinese industrial subsidies for the EU in Section 3.

DISCUSSION AND POLICY RECOMMENDATIONS

The empirical evidence presented in this paper confirms concerns and allegations raised by many trading partners against China: China strongly subsidizes those manufacturing industries which rank highly on its economic policy agenda, including many green tech industries. Here industrial policies are targeted to win and defend superiority in green technology, to convert superiority into a leading position as global supplier of key manufactured products, and to become independent of foreign technology. This policy has allowed Chinese green manufacturing industries to scale up rapidly and to start dominating the Chinese home market and increasingly also foreign markets. This is true, e.g., for solar panels or batteries for EVs, where Chinese companies have dominated the EU markets for several years now. And it is increasingly true also for BEV and wind turbines where Chinese companies are only just starting to penetrate EU markets.

The very comprehensive and opaque Chinese subsidy system blurs the difference between domestic subsidies which do not distort trade and subsidies intended to help domestic companies to conquer export markets and thus are trade distortive. Two trading partners stand out, here, as the most important export markets for China, the US and the EU. Each of the two has its own agenda when it comes to dealing with China. The US has set the agenda with a plethora of legislative acts to enforce the “produce in America” strategy. The Inflation Reduction Act is the quantitatively largest one and supports the rise of local content in US non-fossil manufacturing through producer and consumer tax credits. In addition, BEV imported from China face a hefty import tariff of 27.5%. Hence, a trade and tech war with China trying to decouple the country from state-of-the-art IT technology is envisaged by the US through, e.g. restricting high tech exports to China and screening US foreign direct investment in China on risks of losing technology superiority.

So far, the EU has no trade or tech war on its agenda. The European Commission has made clear, however, that is prepared to take stronger actions against subsidized imports from China. In line with this, it has officially launched an anti-subsidy investigation into the import of BEV from China in October 2023. And in February 2024, it had launched an investigation into Chinese rolling stock manufacturer CRRC for allegedly using subsidies to undercut European competitors in a public procurement procedure in Bulgaria, applying for the first time the EU’s newly enacted “Foreign Subsidies Regulation”. In the BEV case, the European Commission argues to have found sufficient evidence demonstrating that imports of BEV from China benefit from subsidies that allow them to rapidly increase their market share in the EU thus posing an imminent threat of injury to the EU domestic industry and de-motivating domestic investment into badly needed full electrification. If these allegations are confirmed in the investigation, the EU could impose retroactive countervailing tariffs against BEV from China. 

Pros and cons of an EU intervention

Seen from the textbook lens, there is a strong case against the introduction of such tariffs (restrictions) on subsidized imports. This is substantiated by the view that subsidies are ‘gifts of the donor’ which raise the real income of recipients of gifts (the European consumers) while strengthening their comparative advantages in other non-subsidized sectors. An increase of tariffs/import restrictions on BEV or other imports of green technology products from China would likely lead at least in the short term to higher costs for green technology products in the EU and could make the green transition of the EU economy more expensive and also slow it down. This applies even more to import restrictions on those green technology products for which the EU industry currently has too little capacity to meet the increasing domestic demand such as EV batteries or wind turbines.

Yet, the textbook lens may neglect a dynamic perspective including geopolitical externalities, path dependencies, and the issue of technology control in key industries. Battery cell technology, for example, is not only one of the key technologies in the energy transition, but also qualifies as a general purpose technology (GPT). Early mover advantages and spillovers into related sectors (aviation, underwater shipbuilding, medicine) could make it beneficial to push such technologies and to avoid one-sided dependencies on systemic competitors like China. From a geoeconomic perspective, import restrictions reducing the (increase in) imports from China of products vital for the green transition may, in addition, be considered a welcome contribution to reducing the EU’s reliance on China (‘de-risking’). Or it may even be considered necessary for strengthening national security given the espionage or sabotage risks which are currently being put up against the imports of wind turbines or connected cars (BEV) from China especially in the US.

On the other hand, we also need to consider that the EU has much higher stakes in the Chinese economy than the US as witnessed by the much higher share of EU investment in China and the far greater reliance on imports from China of the EU as compared to the US. Due to China’s strong position as a production base for European firms and as a source of many critical products for the EU market, its retaliatory power against the EU is higher than against the US.33 Hence, the costs for EU industries and consumers of import restrictions on subsidized Chinese goods could increase considerably if the Chinese government were to respond to with countermeasures such as export restrictions on inputs on which the (green tech) industries in the EU are heavily reliant, such as refined rare earths. Such export restrictions would harm the EU industry not just on the internal EU market but also with respect to its exports to China or third-country markets. And export restrictions on necessary inputs are just one of a myriad of possible countermeasures through which China could harm EU companies in the industry directly affected by EU measures or indeed any other EU companies trading with or producing in China. This is likely one reason for why German automobile manufacturers which are heavily engaged in trading, production and R&D in China are rather skeptical about the EU’s investigation into BEV imports from China. 

But even without considering possible Chinese retaliatory measures it is far from clear, whether and to what extent EU industry would actually benefit from restrictions on Chinese imports. Take again the case of EU import duties on BEV from China, for example. First, these tariffs would also affect imports of BEV manufactured by European (German) companies in China.

Second, the (direct) effect of EU import tariffs on BEV from China would be restricted to the EU market, only. On third country markets (and in China itself) BEV produced in the EU would still have to compete against subsidized BEV from China without countervailing duties. Third, the effects of import restrictions and thus less intense competition on EU industries’ incentives to invest in R&D and in cost efficient production facilities are ambiguous (from a theoretical point of view).

From a purely industrial economics point of view tariff protection or subsidies for the EU industry could be justified if subsidized imports from China would hinder the EU industry to scale up and achieve the economies of scale necessary to compete internationally. In our view, it seems likely, however, that the industry will be able to substantially increase production in the EU despite increasing Chinese imports. Given the strong increase in demand and the comparatively high transport costs for BEV (or for other heavy and large green energy products such as wind turbines) we would expect that manufacturers will expand production near consumers to reduce shipping costs, as technologies mature. At least in the medium term we would thus expect companies producing in Europe to have a substantial advantage in serving EU customers (the more so as import tariffs for BEV into the EU now stand at 10% even without additional countervailing duties). We would thus also expect Chinese BEV manufacturers to build up production capacities in Europe to serve the EU market (as we have already observed for Chinese producers of EV batteries).

What should the EU do?

In our view, there is a case in favor of driving forward the current EU proceeding against BEV imports from China, and to use the information obtained in this proceeding and the pending decision to enter into negotiations with the Chinese government and to try to persuade it to abolish some the Chinese support measures that are particularly harmful to the EU industry. Given the current weak macroeconomic situation in China, the focus of China’s government on its political conflicts with the US and, at the same time, the relative strength of China’s green product industries, we believe that there is currently a realistic chance for such negotiation to be successful.

To read the abstract published by the Kiel Institute for the World Economy, click here.

To read the full policy brief, click here.

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China wants to become a science, technology, and manufacturing superpower by upgrading and modernizing its industrial base and concentrating the nation’s innovation resources around strategic priorities. However, it is difficult for the state to integrate innovation resources because of the gap separating universities and research organizations from industry, which impedes the translation of scientific output into technological prowess. By contrast, Beijing has been much more successful at directing industrial development. As a result, achieving a modernized industrial base is now the dominant framework for Chinese policymakers as they pursue technological self-reliance.

The post Whole-of-Nation Innovation: Does China’s Socialist System Give It an Edge in Science and Technology? appeared first on WITA.

The introduction of cheap Chinese autos – which are so inexpensive because they are backed with the power and funding of the Chinese government – to the American market could end up being an extinction-level event for the U.S. auto sector, whose centrality in the national economy is unimpeachable.

The U.S. auto sector accounts for 3% of America’s GDP. It is annually responsible for tens of billions of dollars of annual research and development spending. It supports an entire ecosystem of manufacturers, from steelmaking to semiconductor fabrication. And for nearly a century, it has provided reliable, well-compensated employment for millions of American workers of various levels of educational attainment, making it a pillar of the American middle class. As such, the U.S. auto industry’s health has been the years-long focus of U.S. trade policy, and a more recent focus of U.S. industrial policy. This includes longstanding tariffs on imported light trucks, and more recent rules of origin (ROO) content requirements for vehicle imports from Mexico and Canada, as well as clean vehicle consumer tax credits that reward domestic production as U.S. automakers undertake an industry-wide pivot to the manufacture of EVs.

The U.S. auto sector and its extensive domestic supply chain, however, face a growing threat from Chinese competitors, buoyed by the Chinese state. While direct imports of Made in China automobiles have until now been extremely limited, China’s auto sector is hardly the uncompetitive laggard of decades past. Thanks to the Chinese Communist Party’s (CCP) industrial planning and generous assistance that began in the wake of the 2009 financial crisis, its state-owned and state-supported manufacturers are poised to dominate the burgeoning global EV market. China is estimated to have spent tens of billions of dollars to create an auto sector ready to take advantage of the clean energy shift, with support including tax breaks, favorable lines of credit, land use agreements, extremely limited import competition, and often direct subsidization. Chinese automakers have also benefited from mandatory joint ventures with and forced technology transfers from foreign firms seeking to gain access to the vast Chinese auto market. And, most egregiously, they benefit from the use of forced labor in their supply chains.

The state support has paid off. The Chinese auto industry’s growth has been exponential. The country became the world’s leading auto exporter in 2023, selling cars in Europe, Australia, Africa, Mexico and Southeast Asia, and Chinese automakers lead the world in EV production and sales by wide margins. China’s technological lead and its extensive supply chains, particularly for critical battery raw materials and components, are deep and secure because of its defined and deliberate industrial policies. Beijing has prioritized reducing dependencies on other countries, which in turn makes the world increasingly dependent on its own supply chains.

The CCP’s objective is no secret: Global market dominance, made explicit in economic blueprints like Made In China 2025 and China’s most recent Five Year Plan. And the results of China’s industrial bets – mammoth entities like BYD, SAIC Motor and battery maker CATL – are this effort’s champions. They are expanding rapidly, without consideration to supply and demand and basic market forces, so much that the Chinese auto sector is estimated to have a production overcapacity of millions of vehicles per year. That overcapacity is now facing outward, in search of new markets to soak up the largesse.

China’s automakers currently face significant barriers to entry into some western markets, including the United States. The European Union in 2023 began an investigation into the raft of subsidies that underpin Chinese auto exports’ competitiveness, while U.S. tariffs have successfully kept these cars, electric or otherwise, off American highways.

But Chinese automakers are not idle. BYD, which became the world’s largest EV manufacturer in 2023, is building a factory in the heart of the European Union and is among half a dozen Chinese companies preparing to manufacture in Thailand, thereby gaining access to nearby markets through regional trade pacts.

More alarming, however, are Chinese firms’ heavy spending on plants in Mexico, through which they can access the United States by way of the more favorable tariffs under the United States-Mexico-Canada Agreement (USMCA). This strategy is, in effect, an effort to gain backdoor access to American consumers by circumventing existing policies that are keeping China’s autos out of the U.S. market.

This is an auto industry backed by the Chinese state. It has invested heavily in foreign markets in order to access more of them. And there is cause for alarm that Chinese vehicles and parts will only increase their access to the U.S. market, overcoming existing tariffs and evading existing trade enforcement measures, to directly challenge domestic automakers and threaten the jobs of millions of American manufacturing workers.

The United States must adopt a proactive and evolving strategy to stymie the CCP’s penetration. Washington should raise tariffs further on Made in China vehicles, tighten and fully enforce the USMCA’s ROO so they are not allowed to leak in, and exclude from the pact’s preferential treatment components and vehicles made by companies headquartered in non-market economies like China. Washington must strictly enforce its own industrial policies, like the clean vehicle tax credits included in the Inflation Reduction Act, so that upstream content and raw materials from China do not benefit. Washington also must fully implement and enforce the Uyghur Forced Labor Prevention Act to keep goods and inputs produced in the Chinese police state of Xinjiang and by other oppressed minority ethnic groups out of the U.S. market, so that none of this content reaches American consumers.

The threat posed to the American auto industry by heavily subsidized Chinese imports is significant, and the level of its severity will depend greatly on how federal policymakers respond to it. A dedicated and concerted effort to turn those imports back requires greatly strengthened trade enforcement and fully implementing existing domestic industrial policies. This effort should be undertaken immediately; there is no time to lose.

To read the introduction and takeaways as it is posted on Alliance for American Manufacturing’s website, click here.

To read the full report published by Alliance for American Manufacturing, click here.

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The report examines the growing reliance of the United States on using domestic subsidies to address global challenges: “the [Joe] Biden administration has maintained and expanded on the [Donald] Trump administration’s tariff policy, defended at the time as helping the United States compete globally against a rising China, by introducing major new subsidy programs. Importantly, the primary motivation for those efforts falls into two buckets—to counter China and to fight climate change.” That adoption of industrial policy “has prompted cries from across the globe that the United States is fostering unfair competition and breaking the rules it helped shape as part of the World Trade Organization (WTO).”

In the aftermath of simultaneous political and economic crises, “the perception of countries’ urgent need to build up their resiliency in critical goods and services, coupled with the existential threat of climate change, means that moving toward industrial policies and increasing subsidies is warranted and indeed essential,” Hillman and Manak write. “However, the urgency of the problems does not mean abandoning well-founded concerns that industrial policy—done wrong—can stifle innovation, create substantial inefficiencies, exacerbate the concentration of corporate power, waste precious taxpayer funds, and fuel crony capitalism.”

The authors outline the deficiencies of the current international rules governing subsidies and provide recommendations. In particular, Hillman and Manak highlight the failure of many WTO members to report their subsidies, the ineffective remedies available, and the lack of special recognition by WTO rules of beneficial subsidies aimed at tackling climate or public health challenges, among other issues.

To lead the charge on reforming the WTO rules, the authors propose that the United States should

• “revisit what constitutes good and bad subsidies and propose limiting overall subsidy levels while carving out areas in the common international interest”;
• “encourage countries to disclose their subsidies, both by using the incentive of a ‘safe harbor’ for subsidies that have been properly notified and enforcing penalties for those that consistently fail to make timely notifications of their subsidies”; and
• “strengthen the penalties for noncompliance with international subsidies rules.”

“At its core, one of the WTO’s critical roles is to help its members draw the line between protectionist measures and sound industrial policies, while ensuring that wherever that line is drawn, it does not unduly privilege some or harm others,” Hillman and Manak conclude. “To do that in the face of rising industrial policies across the globe, the WTO needs an updated toolbox.”

Jennifer Hillman is the Senior Fellow for Trade and International Political Economy and Inu Manak is the Fellow for Trade Policy at the Council on Foreign Relations.

To read the full Council Special Report, please click here.

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Today, the trade landscape looks like a battlefield. Protectionist policies are on the rise. Global trade governance has been derailed. The two largest economies in the world remain locked in the most significant trade war in 90 years, while smaller trade spats are breaking out across the globe. We are approaching an inflection point. If we hope to continue to derive transformative benefit in the decades to come, trade relationships will need to be reimagined.

In this essay, Hinrich Foundation Senior Research Fellow Stephen Olson notes that hardheaded pragmatism should point us towards a greater emphasis on broad based mutual benefit in our trade relationships. It would be counterproductive to have idealized expectations about a “Kumbaya moment”, but resorting to protectionism and the ‘blame game’ will do little to secure a sustainable future for workers, consumers, companies, and economies.

To read the full report from The Hinrich Foundation, please click here. 

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The post Questioning Industrial Policy: Why Government Manufacturing Plans Are Ineffective and Unnecessary appeared first on WITA.

While the U.S-China phase one trade deal tackled some important sources of bilateral tension and aimed to boost Chinese purchases of U.S. goods and services, it was silent on industrial subsidies and related matters, leaving them for the next phase of negotiations, the fate of which is now in question. U.S. concerns on these matters are shared by other trading partners including the European Union (EU) and Japan. Yet despite widespread disapproval of such practices, building new global rules to combat subsidies has proven challenging. This is due to several factors, ranging from gridlock at the WTO, differences of views among like-minded countries on the required level of ambition, and uncertainty as to how best to approach the enormous complexities in China’s subsidies and related policies.

The Organization for Economic Cooperation and Development (OECD) has sought to unpack this complexity, conducting recent studies of Chinese subsidies in two key sectors: aluminum and semiconductors. Both studies illustrate how Chinese subsidies are not simple cash handouts from the state to protected firms so that they can sell at favorable and distorting prices. The OECD finds subsidies can take various forms, including downstream or upstream help that trickles up or down to the firm that’s intended to benefit. They can take the form of favorable equity or debt purchases or bonds provided at below-market rates. And with interconnected global value chains, subsidies can effectively be granted covertly, intended to benefit one firm that might be several links away along the chain.

In China, the problem is compounded by an opaque “party-state” structure that obscures not only the recipients of subsidies, but also the source. According to Mark Wu, a Harvard Law School professor who previously served as the Director for Intellectual Property in the Office of the U.S. Trade Representative, subsidies not only flow directly from government bodies in Beijing, but also indirectly through informal responses to directives — sometimes even left unsaid, but understood — from the Chinese Communist Party.

Against this backdrop, the Asia Society Policy Institute (ASPI) convened two roundtables in the fall of 2019 and the spring of 2020 to discuss how best to build a new rules-based infrastructure that might combat such subsidies and prevent trade-distorting results such as unfair competition, market access barriers, and, above all, overcapacity in global markets. Experts from the private sector, think tanks, governments, and academia weighed in with possible solutions, which included:

1. Negotiating new rules in the WTO;
2. Using the WTO dispute settlement system, despite its often-discussed flaws;
3. Forming ad hoc rules-based approaches, where possible, like the U.S-EU-Japan trilateral initiative;
4. Plurilateral negotiations conducted on a sector-by-sector basis;
5. Forming coalitions of like-minded trading partners to establish an alternative model, much in the way that the Trans-Pacific Partnership (TPP) was framed.

During the roundtables, most experts agreed that there is no silver bullet that solves the subsidy and related issues on its own. And most agree that, left unaddressed, the problem is likely to deepen. The COVID-19 pandemic might even exacerbate it by leading to more state involvement in economies around the world and making it hard to discipline Beijing’s practices. Recognizing all of these real challenges that the international trade community faces, the roundtables reached the following key conclusions:

1. Transparency on the scope, level, and nature of industrial subsidies is vital;
2. Efforts to publicize the ongoing work in these areas, particularly that being done by the OECD, should accelerate;
3. Turning research into tangible new policies is a key step; and
4. Persuading China to agree to updated rules will be necessary, given that China is a singular contributor to overcapacity.

Wendy Cutler joined the Asia Society Policy Institute (ASPI) as Vice President in November 2015. She also serves as Managing Director of the Washington, D.C. Office.

To read the original brief, click here.

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